From an insurance perspective, multiple dealership groups are usually managed in one of three ways. First is a unified approach where all dealerships are included on one set of policies with consistent coverage. In some cases it is necessary to provide separate policies for different states with a common expiration. Alternately, the dealerships are insured by the same insurer with consistent coverage and expiration dates but each carries separate policies. The third choice is that each dealership (or sub-groups of dealerships) acts as a separate buying entity, procuring its own insurance policies. This scenario often leads to inconsistent coverage, coverage gaps, duplicate coverage, higher premiums, increased management time (headaches) and supervision.
The unified model is the easiest to manage, offering fewer policies, greater consistency of coverage and a smaller time commitment. A single insurance bid process also creates the most competitive insurance environment and the greatest financial economies of scale.
When dealerships are located in multiple states, it may pay to consider regional insurers for some dealerships. Regional carriers can be more competitive than their national counterparts. Regardless of the model chosen, remains important to maintain a single expiration date and to keep coverage as consistent as possible so each year the choice can be made whether or not to combine or separate policies.
Deductibles and limits in coverages such as E&O and Employee Practices Liability rank as the most common inconsistencies when separate policies are issued. However, on occasion we do find coverage missing on one store that management intended for all stores. More policies create a greater chance for coverage gaps or inconsistencies. In addition, premium may be wasted by purchasing multiple umbrellas and other overlapping policies.
When using the unified approach, management must consider coverage and deductible options as well as allocation of premiums. It is often tempting when looking at a single large policy to assume that large deductibles or retentions are the most cost-effective approach. Sometimes it is, and other times not. Deductible choice is always an economic decision (premium savings vs. risk assumed) and never a philosophical one.
There are other areas where consistency problems can arise, such as physical damage deductibles, what percentages of retail are paid for inventory repair work, and crime limits. Consistency leads to a greater understanding of the total insurance program.
A less obvious problem centers on the fact that policy coverage language may be similar, but there can be significant differences. Take as an example, “Employment-Related Practices” coverage. The coverage language and deductibles can be very different. Some polices are issued on a claims-made basis while others are occurrence based. Some provide coverage for class-action suits while others exclude them. These are just a few of the potential pitfalls of inconsistent policies.
Large deductibles can be used as a way to keep each dealership’s management focused on loss control. However, to effectively achieve this goal, management should consider a premium allocation model that rewards dealerships with good losses and penalizes those with poor losses. The model must be fair and not be overly punitive.
As an example, assume that all building coverage is written on an aggregate blanket basis with a $50,000 deductible. At one dealership, a small $100,000 building is struck by lightning and burns to the ground. Is it fair to saddle the one dealership manager with the added expense of a $50,000 deductible on a $100,000 building? Certainly, if the dealership was insured on a stand-alone basis, a $50,000 deductible on a $100,000 building would never have been considered. The
same problem can occur with inconsistencies or gaps in coverage from dealership to dealership.
How should the multi-store dealer allocate premiums between dealerships? Of course, there are no hard and fast rules. Some dealers allocate strictly by exposure, such as by number of employees or inventory size. However, I would like to offer another alternative that will reward those dealerships in the group with good loss experience while getting the attention of those with poor losses.
Any allocation percentage will work, but a good rule of thumb is to allocate 60% of the premium based on exposure, and the remaining 40% on two or three year’s average losses. It is also a good idea to limit individual losses in the formula to $50,000 or $100,000. That way, a single loss wouldn’t eliminate bonus possibilities because of an unrealistic amount of premium allocated to a single store. Additionally, consider excluding acts of God, and only count the losses within management’s control. This allocation model provides each store’s management with a financial incentive to keep their losses down.
For simple demonstration purposes, this example is based on four stores of equal size (exposure) with a combined $400,000 in premiums. Their losses are as they appear below:
If the premiums were allocated based on exposure alone, each dealership would pay $100,000. By using a loss sensitive allocation model the dealerships that are successful at keeping losses down benefit by lowering their insurance expense, thus increasing profit. In this example
Dealership 4 pays $74,000, taking $25,600 in savings to the bottom line, while Dealership 2 takes on $28,800 of additional expenses due to excessive losses.
A loss sensitive premium allocation model like the one above will help to keep each dealership’s management focused on loss control. Ultimately, lower losses will mean lower premiums for the entire group.
Roger Beery is president of Austin Consulting Group, Inc., a firm that specializes in helping dealers cut their insurance costs and maintain optimum coverage by bidding their policies. You can reach Roger at: [email protected].
Call out: The unified model is the easiest to manage, offering fewer policies, greater consistency of coverage and a smaller time commitment.
