Stalking insurance savings.

• Author: Richardson, Jeffrey

Careful analysis of coverage, risk and company practices can control insurance costs.

Karl Forsyth, owner of dB Music Inc. of Anchorage, says he comes from a musical family, but learned about operating a music-related business the hard way. That goes double for learning to manage his business insurance.

Forsyth's store has been selling musical instruments and sundries for 15 years. Until a couple of years ago, the store averaged two to four break-ins a year, so-called "smash-and-grab" incidents, with broken glass and alarms sounding.

"I was tearing my hair out," Forsyth remembers. "There were several times when I didn't submit claims because I saw what it was doing to my rates."

But with stolen items averaging $700 to $1,000 each, Forsyth couldn't afford not to file. To make matters worse, his policy didn't cover the inevitably broken glass.

His alarm system? "It always worked great; the police were usually there within two minutes. But a smash-and-grab is very easy to accomplish, even with the best alarm system, because they're out of there in 30 seconds," Forsyth explains.

Finally, the store was hit four times in one month, and his insurance company canceled the store's coverage. Forsyth installed bars on the windows and obtained new coverage from another broker. Noting the price of premiums significantly affects his profit margin, Forsyth says insurance is his third highest cost of doing business, after payroll and rent, and ahead of advertising, depreciation and operating supplies.

Aspects of Forsyth's story are played out in large and small businesses all over the state. For many business owners and managers, the world of insurance seems complex and full of unintelligible jargon. It is common, especially for small proprietors who can't afford trained insurance staff, to feel that they are at the mercy of agents and brokers.

Reinforcing that belief is the reality that insurance products constantly change and premiums rise. All this leads to a sense on the part of many business people that they have little or no effective control over their insurance strategies and costs.

Smart Shopping. The apparent complexity of insurance buying derives largely from market factors that do indeed change rapidly and often for reasons for from the doorstep of any one business. Rising premiums are no figment of the business person's imagination, especially in the area of workers' compensation. According to brokers, the cost of premiums in Alaska for many types of insurance needed by businesses is expected to continue to increase.

Fortunately, managers can adopt strategies to provide businesses with the cost-effective insurance they really need. The first step is to understand how insurance policies are written.

Every business is exposed to some risk of damage or losses to its income or assets from various causes. Insurance companies assess the risk of a given business by examining the history of losses experienced by similar businesses, as well as by the individual firm seeking protection. This provides the basis for calculating how much of the cumulative risk insurance carriers are willing to assume. Insurance carriers collect premiums from many companies to finance the coverage of losses that are actually incurred by relatively few, thereby spreading the risk and reducing the exposure of each individual client.

Most businesses need to consider three types of insurance. Property insurance, for real or personal property, includes the coverage typically associated with flood, fire and other calamities. Property insurance protects the business from losses to buildings, inventory and equipment. It is the...