How to evaluate your company in preparing for insurance planning.
If you want to save money, don't leave insurance planning to the agents
Buying insurance is an onerous task. It's about as gratifying as putting on an extra pair of socks in the winter. Worse still, it's costly, taking precious dollars away from the bottom line to prepare for catastrophes that may well never happen. No wonder many chief executives forgo the issue of insurance planning entirely and choose instead to rely on the recommendations of their local insurance agents.
Ron Lockhart is an exception. He's an owner-manager who strategizes about insurance protection for his $15-million packaging company, Julian B. Slevin Co., with the same thoughtfulness he directs toward product quality, customer relations, and, yes, his bottom line.
The Upper Darby, Pa., company, which Lockhart bought from his wife's family in 1986, manufactures paperboard containers for beer bottles -- and it has more financial exposure than a glass of beer has bubbles. The containers are printed, cut, and glued by massive -- and potentially dangerous -- machinery; the printing process uses hazardous solvents; and the company depends on one major client, Anheuser-Busch Cos. for a large part of its business. Lockhart also needs an insurance umbrella in case a defective product or disgruntled customer lands him in court. Despite the temptation to insure everything in sight, he also wants to keep his annual bill to a minimum, to free up cash for new-product and customer development.
Insurance planning at Julian B. Slevin begins on the production floor, a good rule of thumb for most businesses. Focus first on the product -- whether goods or services -- and identify risks in ever-widening circles of design, production, performance, workplace hazards, customer liabilities, and so on. In Slevin's case, there are potential problems throughout the factory, where 120 workers assemble cartons over three eight-hour shifts. Insurance bills could be enormous.
But Lockhart first looks at the cost-effectiveness of noninsurance solutions. For example, he keeps his supply of on-site hazardous solvents to a minimum -- only three tanks' worth -- and stores them underground to reduce the likelihood of explosion. Since he believes that "what could put us out of business would be a fire -- which could be very bad and very fast, given those solvents," the production floor is protected by an elaborate sprinkler system. "There's nothing our company could gain by collecting insurance after a fire," Lockhart says. "If we couldn't do business for a year, we'd lose our accounts and be virtually out of business." So the sprinkler system is only the beginning. Lockhart has instructed his production-floor supervisors to watch out for employees who, for example, pour too much ink into ink-machine sumps; those overflows would quickly ignite in a flash fire. In addition, workers are permitted to smoke only in a small, isolated area. As a result of these measures, Lockhart's fire-insurance bill is quite reasonable, given his line of business, at about $40,000 a year.
Machinery, which includes two 100-foot-long rotogravure printers, is another hazard. Twenty thousand paperboard units pass through each printer every hour, 24 hours a day, five days a week, and Lockhart is painfully aware that the slightest malfunction or lapse of attention by workers could mean trouble. "One of my own supervisors in the glue room lost a finger in one of the machines," he recalls, shaking his head. "The irony is, you can't make a machine completely safe, no matter what you do." Instead, Lockhart concentrates on the workers, enforcing safety standards "to the hilt."
Again, the results are good. Slevin's safety record is so impressive that the company recently qualified for a discount on its workers' compensation insurance. Like other organizations that pay more than $1,500 in annual workers' comp bills, Slevin is subject to an "experience rating," based on its past three years' performance compared with similar companies in the state. (If you're interested in learning about your own industry standards and how to qualify for discounts, you should contact your state's workers' compensation bureau.)
Lockhart's first goal -- to control as many risks as he can through noninsurance measures -- is a good one for any cost-conscious manager. Solutions, of course, will vary by company just as the problems do. Service firms, for example, do not have Lockhart's headaches over machinery and chemicals; instead, executives might consider certain types of hold-harmless agreements to limit their professional liabilities.
When it comes time to shop for insurance, Lockhart's concerns, again, should be those of every manager: how do you find high-quality, cost-effective insurance? Until recently, Lockhart did his insurance shopping the same way his father-in-law had done it, by calling a few local carriers and buying directly from them. But last year, he and his chief financial officer, Mike Dooley, decided there had to be a better way to save money. "I had gotten a mailing from a local insurance broker that included a list of corporate clients," says Dooley, an accountant. "I checked them out with some of their clients and then decided to test their marketing claims by asking for their best quote on a property-insurance policy we were thinking about buying." The broker came in with a price that was 50% less than Slevin's existing carrier's, and Dooley and Lockhart decided to make the switch. "It was purely a matter of dollars and cents," recalls Dooley. "We didn't want to spend a dime more than we had to."
Dooley and Lockhart did not bother to check out the financial health of the carrier. Although it worked out in their case, that can be a risky oversight, since price cutting among property casualty insurers has led to some defaults and lax coverage. It's a good idea to check out the ratings of all potential insurers with Best's Insurance Reports, a rating service you'll find at your local library. Another good idea: every few years check your brokerage's quotes against two or three others.
One highly effective way for Lockhart to cut insurance costs was to raise his deductibles. "We used to have only a $5,000 deductible on our fire insurance," he says. "Now, we've raised the deductible to $25,000, which is what I'd consider a threshold of pain for the company, but not life threatening."
CFO Dooley uses Slevin's insurance broker as an information resource, calling him about once a week, often to check out the risk-control ideas Lockhart keeps tinkering with. "I just called our broker today," he laughs, "because Ron is considering adding a backup unit to our CO2 fire-protection system." Lockhart already knows that the backup makes shop-floor sense: it would not only add an extra layer of protection but would also enable the company to resume production more quickly after a flash fire. If the addition will also help cut insurance bills, as the broker expects it will, Lockhart will give his OK.
