Just because you understand the total cost of risk doesn’t mean that your clients and prospects do. There are several things you need to do to educate them on; some of the basics, so that you can have a business conversation instead of an insurance sales conversation.
The total cost of risk is not a difficult concept to explain, but too many times, agents don’t take the time to explain it. You don’t have to go into the weeds and give them the CRM designation version, but there are three or four things that you need to be talking about with your clients as you have the total cost of risk conversation. Things that go into the total cost of risk are a large number more significant than merely what the insurance premium dictates. That’s where you lose people; they don’t get that.
One of the first things that I always like to talk to my prospects about concerning the total cost of risk is indirect claims costs. I know you’ve heard me talk about it before, so I’m not going to go into great detail here. Still, it’s essential to understand that the Bureau of Labor Statistics says that indirect costs of claims range anywhere between 2 and 20 times the direct costs across all industries.
If you’ve used the number two when you go in to speak with the prospect, it’s tough for them to argue with you because that’s what every best in class company is doing. To be clear, if a company has $200,000 in losses, it is a safe assumption that they had $400,000 of indirect costs associated with those claims. Sometimes those are called soft costs, and they’re not necessarily the easiest thing to track.
Examples of soft costs would be: Â overtime paid out because you had to have things done and were short-staffed, or it could be loss of rents if you have a hotel and you don’t get all of your rooms cleaned and able to be turned over in time for a new guest to rent that room. It could be a loss of market share if you’re a manufacturing facility and part of your facility was down due to accident investigation. You didn’t get your product to the retail location in time, and as a result, you lost shelf space that you’ll never get back. I can go on and on and on. But soft costs are significant, and it’s something everybody has, and few contemplate.
The second thing that I like to talk about is deductibles. How many claims got paid out inside the deductible layer? Did the client consider this when factoring their total cost of risk and what they’re paying for their insurance? If a client has a $5,000 deductible and they have 10, $4,000 claims, you would need to add $40,000 into the total cost of risk because they bankrolled those claims. Clients don’t think about that stuff. So if you go in and you offer them a guaranteed cost option with no deductible on their general liability, for example, and it’s $20,000 more in premium, it’s a better deal for them because they spent $40,000 out of pocket last year on claims. After all, they had the deductible. It can also work the other way. You could show them that a deductible option will save them enough money that it makes sense for them to self-insure inside that deductible layer.
The third one I want to talk about is very practical, and it’s one that a lot of you have probably run into, and may or may not ever have even recognized. I am talking about the claims paid out of pocket that do not get tracked inside of a deductible layer. Perhaps there is not a deductible, yet claims get paid out of pocket. I see this a lot with contractors, plumbing companies in particular. They want to try and fix everything, they want to settle things out of pocket, and as it turns out, they end up spending way more money than they should.
I went into a prospect one time that was a plumbing company, and as I looked at the loss runs, I noticed there were no claims at all anywhere on the loss runs that were under $5,000. I asked the owner of the company what was going on, and he very proudly puffed his chest out and said, “Oh, well, I take care of anything under $5,000 out of pocket.” And my initial reaction in my mind was okay, Einstein, great job. You have a $5,000 deductible, but you’re not getting credit for it on your program.
If you have these people that are doing things, paying out of pocket or whatever else, talk to them about a deductible option, and make it official. You’re operating like you have one, you’re just not getting the premium credit for it. And guess what? You’re paying out of pocket. If you had a deductible and you filed the claim through the carrier, and they bill you for that deductible, you’re at least getting their contracted rates with the service providers, which in many cases is much better than what you’re going to get on your own.
I could go on for days about the total cost of risk and all of the components associated, but I wanted to give you three good ones today that you can take out in the field with you and use, and make a difference when you’re meeting with prospects. If you can start learning about the total cost of risk and how to articulate components of it to your prospects, you’re going to have a conversation with them they’ve never heard before; you’re gonna kill it in commercial insurance.
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