In a Recession, It’s More Expensive to Pay Less Attention

December 27, 2022

Everywhere you look, the signs all point the same direction: there are harder times coming. Depending on your source, the recession is coming or the recession is already here, but the evidence is already clear.

Businesses, so many businesses, that were hiring new employees across 2021 and early 2022 have been laying them off in inarguable numbers. Costs, for everything, have been going up due to scarcity, inflation, or any of a myriad other factors influenced by our exit from the coronavirus pandemic. Perhaps most telling, interest rates have risen, making it more and more difficult for companies to raise capital.

In this environment, everyone is looking for places to “extend their runway.” We are all scrutinizing all of our expenses. We are all looking for places to accelerate our revenue recognition.

We’re all looking at difficult decisions around where to trim.

This is exactly the time you need to be paying more attention to your downstream risk, not less. Losing focus there now, rather than two or three years ago, can be catastrophic.

You’re Not the Only Company Making These Decisions

You’re a company that hires other companies. Sometimes those companies are giants, and sometimes those companies are one person. Recall in the prior section when I said “every business.”

Every. Business.

Including those.

According to a recent survey from Nationwide, 84 percent of small business owners have or will soon review their insurance policies as a place to save on costs. The survey didn’t say they would review their coverage at the end of their current contract with you.

It said they will review it soon.

Or they already have.

In that same survey report, “51% of business owners say they would be likely to decrease their business’s current insurance coverage or limits to cut back on spending if a recession occurs.”

You could read that and say, “Okay, sure, if a recession occurs.” Look around at the world again. If it’s not already here, it seems pretty certain it’s coming.

Eighty-four percent of the companies you hire, that you require to comply with your insurance requirements, to carry the coverage that you require, are about to review that same coverage from the standpoint of reducing it.

Did you just hire a subcontractor? Did you write the expiration date in your spreadsheet to check next year to make sure it’s still valid a year from now

Certainly recent years have proven how much the world can change in a year.

Not Every Business Leader is as Savvy as You Are

The brokerage GB&A recently pointed out an insight that feels obvious, once you absorb it.

Reducing or eliminating insurance … is shortsighted. Emphasizing a marginal cost savings over insurance coverage, while ignoring the relative increase in exposures during an economic downturn, can result in absorbing losses that can greatly exceed any amounts saved. Recessions are in fact the time companies should pay greater attention to the adequacy of policy limits and depth of coverage.

As we all get more and more spendthrift, looking at things that may not, at first glance, appear to be revenue-driving is going to be common. The very first question we’re all asking right now is “what are we paying for that we’re not using?”

What was that app we installed and used once but never canceled?

Did we cancel that periodical subscription no one ever reads?

Have we ever had a single claim against this insurance we’ve carried forever?

If you’re tempted to let your COI tracking slack, or worse, end engagements with myCOI or companies like us who help you ensure your third-party insurance compliance, please remember the risk you carry your own insurance against—and require your third parties to carry on your behalf.

It only takes one claim to cause irreparable damage.

And this environment, this cost-cutting and downsizing and furloughs and pauses in hiring, is what makes the accidents and mistakes that cause claims more likley, not less.

If your subcontractor has to underbid on hours to get the contract, they’ll be rushing. Or buying the budget materials, rather than the premium. They’ll decide that a tool that’s showing a little wear can be made to work one more year. They’ll have to, in order to make their own business’ ends meet.

You need your COI tracking team to be paying more attention.

You can’t stop other companies from making bad decisions, but you can ensure you’re making the smartest decisions for your own company.

Don’t Discount the Insurance Industry, Either

Always remember that insurance is a business, too. 2023 insurance rates are proving to be higher than 2022, for many of the same reasons all other costs are up, but that’s only part of it. Insurance companies themselves are also companies. They’re feeling the same pressures you are. 

Recently Spixii offered three effects they would expect to see inside the insurance industry during a recession. 

  1. Insurance demand will decrease, as there is generally less business to insure.
  2. Insurers will increase pressure to settle claims more efficiently.
  3. Insurers will face tighter regulations, which will increase their internal costs around compliance and regulations.

All three of those factors will show impacts on any of us, the insured companies, but the second one has the greatest impact for companies like us. An increased tempo in claims settlement reduces the time we have to attempt any corrective actions in claims or litigation.

At first glance, it feels counterintuitive. No one wants claims open any longer than necessary. Spixii points out “The first step [to settling claims] is to categorize them into small claims that can be dealt with automatically and complex ones that require human intervention. This will avoid unnecessary delays in paying out claims and will provide much-needed control over cash flow.”

Small claims processed quickly are closed quickly, which is fantastic if your COI insurance compliance is top-notch and you know the claims are being assessed against the correct party. But if your compliance is not 100%…

… and you’re getting hit with claims that are quickly processed and paid before you can review and challenge…

… that’s a cost you’re bearing.

In an environment where you’re trying to cut costs. Because the insurance company, protecting its own revenue and capital, is going to move fast.

Compliance is the Last Place to Cut Costs

There are decisions you will make for your company, that we will all make for our companies, that are going to be painful. Some of them are going to be borderline risky. The one thing you can’t do, though, is make decisions that make high-impact negative outcomes more likely.

Saving $20,000 a year on certificate of insurance tracking only to be struck with a million-dollar claim is not a good outcome.

Not knowing if the subcontractors and other vendors on your jobs, and inside your buildings, are still carrying the insurance they said they carried yesterday is not uncertainty you want or need.

All the indicators for 2023 point toward an environment of increased risk, not less. More people trying to cut more corners to preserve smaller profit margins cannot point to any other outcome. No one is setting out to cause them, but risk and safety are always casualties when pressure increases.

Don’t let short-term gains put your long-term success at risk.

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