Reduce Risk, Stay in Touch to Cut Costs

Matt Blumenfeld
December 31, 2008 | COMMENTS

Add insurance premiums to the list of things that are only going to get more expensive, which is why Credit Union Journal asked several insurance experts to share strategies credit unions can use to help keep the cost of insurance down.

As the economy continues to struggle, even the most conservative portfolios are deemed riskier than in years past, forcing insurance companies to raise their rates to compensate from higher reinsurance rates. SWBC Credit Union bond operations manager Jeanne Reddrick sees the end of a soft insurance market and the start of a fairly significant hard market—meaning higher premiums as the likelihood of investment portfolio declines and loan defaults rises.

"Credit unions need to go back and graph out their past five to seven years' premiums to realize the benefit from the soft market," Reddrick said when asked how credit unions should plan for the future.

"A lot of us are having to react to economic circumstances that we have no control over," added Nick Grant, CEO of SWBC's Property & Casualty Division, noting many insurance companies' long-term investments have been shellacked. "That is what will drive us into a hard market and increase premiums."

Grant pointed to the high-profile case of AIG and its investment arm, which has become a virtual black hole for federal bailout dollars. Despite the company's efforts to pare down its investment side and return to its insurance roots, Grant sees rate hikes in the future for clients of AIG and other companies that heavily invested in now worthless mortgage securities.

"They could easily increase their rates significantly but they can't it do it to the extent that they will underwrite good clients away," he said, adding clients should not be worried that insurance firms hit hard in the current crisis could eventually collapse and not be able to pay claims. "Their claims-paying ability is as strong as it has been."

The Good News

The good news, Reddrick pointed out, is that credit unions will not be smashed the way banks will, especially those with exposure to toxic assets.

"The pricing for the insurance itself may be out of the control of the credit union, but there are things that credit unions themselves can absolutely do to put themselves in a best position from a pricing standpoint," she said.

Credit unions can accept higher deductibles, implement better loss control and reduce risk to cut down on their premiums. In a time where economic circumstances appear to be changing week to week, Grant urged credit unions to establish good lines of communication with their insurers and keep them in the loop about what strategies they are implementing that could cut their premiums.

"The days of just talking to your agent two weeks before your renewal are over," he said. We can no longer address a credit union's insurance needs in a matter of days. We need to be actively involved. When the carrier is aware of the measures (a credit union) is taking, it is going to translate into savings."

Those insurance agents are also frequently able to provide risk management analysis, something CUNA Mutual Group has always provided its customers, noted senior vice president Jack Goodwin. The venerable 73-year-old financial services provider plans to touch 14,000 credit unions by the end of the year through analysis training, risk management calls and other ways to demonstrate what the firm offers to credit unions for the cost of those premiums.

"This is a people business and the more we can get out in front the more we can show our value," he said.

As the economy changes and credit union practices evolve, using agents or other third parties to scour the books and custom fit a policy to each credit union helps cut costs and ensure those institutions are properly covered, the experts agreed.

"You need to reach out as a credit union to someone that will come in with a fresh look. Agents that are adept at that can come in and do that at no charge," said Grant.

"Sometimes when programs that were written 35 years ago, the only things that changed are the bond requirements," Reddrick added. "Then credit unions take a loss that is not covered because they weren't in communication."

This article appeared at www.cujournal.com and is reprinted with permission.