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Brokers Must Learn About Business Risk
By Rob Ekern
National Underwriter, April 26, 1999
©C. R. Ekern & Company, 1999

In the past 18 months there has been a new generation of insurance products that have quietly but forcefully made their presence felt. These products are tremendous examples of a marketplace responding to a need. Brokers and Agents who ignore these new products, will do so at their peril. I am speaking of Business Risk Insurance Programs, the next generation of risk financing.

Lets stop for a minute and explain what Business Risk Insurance is all about. First of all, forget for the moment the traditional property/liability insurance products. Does a business face other risks than fire, liability, theft, etc.? Of course they do. Some examples of these other risk are receivable collection, currency fluctuation, intellectual property, warranty premiums, weather, and many others. The insurance industry is developing products to address these risks. In many cases these products have existed for many years but are now being repackaged in a form that appeals to a broader range of brokers and buyers.

There are 3 major reasons why these products are rapidly emerging. A Consultative Broker should be aware of all three of these reasons:

1. There is a tremendous amount of Global Insurance capacity chasing too little property/casualty premium. Many of these players have determined that they cannot grow significantly in the current suicidal pricing and commodity environment. Therefore, they are investing assets and effort in developing these new products.

2. Major brokers are using these products and techniques to differentiate themselves outside of the commodity and developing new clients. By staying on the cutting edge of these products they are bringing clients and prospects new ideas. After helping a client address these special risks, they provide the property/casualty insurance as an adjunct.

3. Purchasers of Risk Financing products are fueling the demand. As many of these firms evolve, they are facing new risks which create potential problems for the firm, its employees, or stockholders. The common thread of most Business Risk Insurance Products are the impact the risk has on a firm's balance sheet. (A subject near and dear to most CFO's hearts!)

Oh I can hear some of you now . . . "This stuff is only for the largest of accounts. My commercial accounts have no interest in this." You might say it, and you would be wrong. Remember back 10 to 15 years ago when Directors and Officers liability was introduced. Many people said the same thing. Since that time Executive Risk Products (D&O, EPL, and K& R) have gone main street. Unfamiliarity with these products cost more than one broker their largest account.

Here are the steps for a Consultative Broker to develop expertise and be of value to your Commercial Clients who may have Business Risk exposure. You will want to be the one who does this, as your competition certainly will. These techniques also work extremely well when prospecting for new clients. They allow you to differentiate yourself spectacularly.

1. Thoroughly understand the balance sheet and financial operations of your client/prospect. The balance sheet will provide a Consultative Broker many keys to understanding a firm's business risks. For instance some of the things it will pinpoint are; Credit Risks, Currency Risks, Intellectual Property Lawsuit Protection, or third-party dependencies.

2. Think in terms of "total cost of risk". Include more than insurance premiums, losses, and pre or post lost costs. Cost of risk must also include potential balance sheet losses from other business risks and the impact they will have on the value of a company.

3. Be prepared to demonstrate the impact of a Business Risk program on the balance sheet. Remember that a $1 cost of risk multiplies itself 15 times in the capitalization value of a publicly traded company. This is a huge issue when demonstrating how the removal of risk will impact stockholders value!

4. Stay current. The marketplace is changing constantly with the development of new products. Just as your firm is expected to stay current with PC issues, you must do the same with Business Risk.

5. Make Business Risk part of your prospecting and current client efforts. This will protect your current clients from other brokers, and will enhance your reputation as a consultative organization. In particular it allows new producers with an avenue of production that is relatively untapped.

Business Risk Insurance is an important new development that Consultative Brokers must embrace and become familiar with. As it continues to go mainstream, this new way of addressing risk is becoming an important part of a firm's total cost of risk. Brokers and Agents who intend to serve their clients and grow should make Business Risk issues a part of their future.

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