When talking to an owner of a propane company, there is one question that we often hear in the insurance business: “Why does my insurance company continue to raise my premiums?” That question opens the door to a discussion about what an insurance business is — a company that is formed to take the risks and pay the claims for a large group of people. The principle behind insurance is the “law of large numbers.” If large numbers of the insured pay their premiums, then if one person has a claim, the claim is covered using the pool of money paid into by everyone else.
Risk & Loss
The problem comes from the number of risks the premium-paying customers are faced with, as well as the size of the losses. In today’s marketplace, propane marketers face numerous risks. This means everyone shares the risks from the losses. Propane is a needed resource in today’s energy market, and the industry must follow many rules and regulations to keep the public safe. But insurance companies must also meet numerous legal standards.
State and federal laws require each insurance company to comply with the financial requirements of having enough surplus funds to meet the claims of their policy holders. This requires the insurance companies to maintain at least a 25% surplus for every dollar of premium they write.
That is the reason most insurance companies maintain a loss prevention department. They visit their policyholders, trying to determine the risk factors to properly rate the exposure. The problem today is that no one knows where Mother Nature is going to strike next with hurricanes, tornados, wind, hail, fire, floods and earthquakes. The losses for the first half of 2023 have been in the billions of dollars.
Nuclear Jury Awards
In addition to experiencing the pain points of rising auto repair costs, delays, inflation and lack of trained employees, insurance companies also face an increased risk of nuclear jury awards — verdicts that award an exceptionally high-dollar settlement. Lawyers have painted the picture that insurance companies have huge sums of money that the plaintiff should have access to upon being rewarded.
Unfortunately, the American public has bought into that concept, leaving propane companies to pay the ensuing increased premium.
If the insurance company’s loss ratio is over 100% (1.00), they are forced to pay the loss out of their own funds, which means they eventually must dip into the surplus funds. Insurance companies are owned for the most part by stockholders who demand a return on their stocks, and losing money is not acceptable.
‘Reinsurance’ Issues
An additional difficulty is that insurance companies are rated by A. M. Best Company, both financially and for their overall performance. When an insurance company’s rating drops into the B range, many financial institutions will not accept insurance policies issued by that company.
The current problems have increased due to the “reinsurance” that many insurance companies buy to insure their losses if they are above a certain threshold. The reinsurers have experienced several years of catastrophic losses, forcing them to increase their rates twice in 2023.
Increased Premiums & Other Ways Insurance Companies Cope
Faced with rising loss ratios, insurance companies can take several steps to stop the bleeding:
- Look at their book of premiums and losses and increase the premiums
- Stop writing a class of business that is susceptible to large losses or stop writing smaller accounts within that class
- Reduce coverages and increase deductibles
- Increase underwriting standards to include pre-inspections by knowledgeable loss control specialists
The propane industry is currently faced with insurance companies trying any and all of the above choices to minimize their losses. What is a marketer to do?
What to Do When Facing Rising Premiums
The first step marketers can take is to acknowledge that the propane industry needs insurance, then double down on loss prevention. When an insurance company’s loss control representative visits your business, it is important that senior management does not leave the visit to someone else in the organization. Safety culture starts at the top.
Second, take the expert’s recommendations seriously and respond in writing with how you will correct the items found.
Third, do not sell anything without a bill of sale. Too many companies have been sued for filling a propane bottle without a receipt that includes the name, serial number and date. Without a record, they are dragged into a lawsuit and cannot prove they filled or never filled that bottle.
Work to get more sophisticated with gas check forms and other paperwork. Try software that incorporates a tablet or smartphone with the capability of typing information and getting the customer a document showing what was done.
Last, do not set a dispenser at a non-owned location without a contract between your company and the owner of the site at which the dispenser is located. The contract should spell out who owns the equipment, responsibility for training and that the site owner is responsible for anything happening to the equipment while on site. The site owner should be primarily responsible for the dispensing of the propane. The contract should also include a well-written indemnification clause between companies.
