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Risk Management Bulletin


By June 1, 2008No Comments

Although multi-year insurance contracts aren’t new, they’ve been garnering much interest lately as a way to lock in current beneficial terms, conditions, and pricing, together with more efficient use of policy limits. Entering into a multi-year policy can help build long-term relationships with your insurer and us, your agent, because long-term commitments tend to be mutually beneficial, providing better services than offered by a single-year policy or a three-year cancelable policy.

Many insureds are considering multi-year programs, believing that the soft insurance market is about to end. But can you be guaranteed that coverage or price will not change? Does committing to a multi-year deal really make sense? Here’s what you should know before you decide.

Protecting your company against catastrophic loss comes first. Whether this comes from a traditional or multi-year policy is irrelevant as long as it makes financial sense. Here are some pointers to follow when conducting your own analysis:

  • Read any multi-year policy carefully to understand whether the policy is non-cancelable or whether one or both parties can sever the commitment if the relationship sours. Truly non-cancelable policies are rare and can be a double-edged sword.
  • If the premium isn’t written on a flat-rate basis, make sure you understand how and when premium adjustments are to be made. Keep in mind that even guaranteed-cost policies are usually adjustable, depending on loss ratio or other criteria.
  • Make sure you have some experience with the insurer with whom you’re considering the long-term relationship. Nothing is worse than getting locked into a commitment you later wish you had avoided.
  • Factor in cash-flow considerations against your company’s internal rate of return. Lost opportunity costs associated with a large up-front or deposit premium might offset apparent savings.
  • Consider the nature of your risks. Have they been steady over time or subject to change? If your company experiences numerous and rapid changes, you might find yourself hamstrung if new coverages or features are needed and your insurer is unable or unwilling to provide them. Even companies with a stable risk profile can be affected by sudden changes in the law that require enhanced coverage.

Deciding if multi-year policies make sense for your business requires careful consideration of all these points. True guaranteed-rate, multi-year polices that are non-cancelable might provide a number of benefits over traditional annual policies — but keep in mind that in some instances, so-called multi-year coverage might be little more than a marketing gimmick. Give our office a call. One of our professionals would be happy to help you.