The True Cost of Dealership Insurance
“Insurance is a costly, but necessary evil for my dealership business.”
While this statement is somewhat true, you, the customer, may be able to influence your costs through aspects of dealership insurance that you are presently unaware of. I am launching this column in an effort to explore and explain some of those aspects, and to highlight the importance of risk control to your operations and ultimately to your bottom line.
I have been in the insurance risk control sector, working specifically with dealerships in Canada, for the last 13 years. My experience has landed me in more than 2,400 dealerships of all brands from Newfoundland to the Yukon, where I represented both garage insurers and a number of floorplan insurance providers.
I am now pleased to be heading up the risk control efforts for an exciting insurance offering to dealers through Marsh Canada Limited. The topic of discussion for my first column is the true or total cost of risk and insurance to dealerships.
Calculating or consolidating the total annual cost of insurance to a dealership is not an easy task as there are many factors at play. Studies have shown that the actual insurance premium paid by a dealership may only truly account for 50 to 60 per cent of a year’s total insurance costs to that business.
Where there is risk, there is opportunity for unpredictable and unforeseen costs – and costs can add up quickly.
We estimate that the average Canadian dealership will self-insure $20,000 to $25,000 in losses per year. This is in addition to the cost of their annual insurance premiums.
While many dealer principals may initially dismiss this number as overstated, a little time to reflect and calculate will often result in an admission that the cost may even be higher.
Doing the Math
The total cost of your annual insurance obviously takes into consideration premiums and deductibles, but dealers also need to account for labour costs, time losses and self-insured losses.
In the event of a loss beyond insurance, you may also experience loss of productivity, loss of business opportunities, costs for temporary staffing or overtime, image or reputation damage, loss of staff and customer loss or dissatisfaction.
From a risk control point of view, it is important that dealers get the whole picture and consider all costs associated with a loss. For example, if you consider the cost of a claim and the external factors indicated above, you will note that the actual claim cost can be as much as 18 per cent or more, than the claimed or insured amount. This does not even account for the potential premium increases due to a loss. Herein lies the opportunity to illustrate the value of effective risk control and the rationale behind avoiding or mitigating each single loss.
Dealership insurance losses are on the rise across the country. And at the risk of leaving you hanging, I have to note that investigating this trend is a broad study and will be reviewed further in future columns.
What I can tell you is that in insurance, there is a direct correlation between cause and effect; the higher the loss ratio (or higher the claims frequency), the higher insurance costs will trend.
Insurance premiums and deductibles are set as direct results of values, claims data, experience and frequency. The bottom line for dealerships is that insurance is an annual expense that you, as the customer, can help to control, reduce or regulate.
A dealership with good risk control efforts can reasonably expect stable insurance premiums even in uncertain times.
Insurance companies should use actual claims experience, loss analytics and industry-specific experts to deliver meaningful risk control opportunities to their clients.
By making improvements in your operations, often at little or no cost, you can minimize the potential for loss, and there will be a greater chance of cost savings to follow. I suggest working with your insurance provider and risk control team to help you find ways to reduce your risk, which, in turn, can lead to reduced premiums. Your insurance policy should be protected as it is an integral, important, and often overlooked part of your business’ bottom-line.
In future months, we will explore more specific topics including trending thefts, weather-related claims, vehicle accidents, liability losses, building security, lot protection, fire protection, major losses, business interruption, environmental losses, internal controls and so on. I also encourage your suggestions and ideas for future topics as well.