Covering your assets

Here’s what the president and CEO of American Rental Association Insurance, Phil Kelling, had to say recently about the Canadian Rental Association’s Protected Self-Insurance Program: “I remember the beginning when the board of the CRA asked me how they could set up an insurance program similar to the one we use to serve U.S. members. We could not do it, but we were able to uncover a unique Canadian solution, the Protected Self-Insurance Program.

Justin Friesen

“I have watched over the years as it grew and paid out dividends, and I am jealous. I only wish we had this capability in the U.S. The PSIP does everything that we can do – stabilize insurance rates, provide the best coverage and great service – and as a bonus it gives back to the CRA members and pays dividends to those insured. My only surprise is why more Canadian rental stores don’t take advantage of it.”

Canadian Rental Service asked Western Financial vice-president of commercial insurance Justin Friesen to tell us about this innovative program and explain why it has the Americans looking north in envy.

CRS: Just what does “protected self-insurance” mean?

Friesen: It means it is a partially member-owned program, as opposed to traditional insurance in which the independent businesses purchase their insurance through brokers who are really acting as a middleman between the client and the insurance industry. What the CRA insurance program offers is an insurance product that is tailored for the Canadian rental industry, and the representatives who administer this program have a very insightful knowledge of this industry and the risks that rental dealers face. They have been working with the CRA since, I believe, 1984, so it dates back quite a ways. But what happened in 2006 was the program had grown to an adequate critical mass that would permit a unique structure, a less conventional structure, that would enable an element of self-insurance. Because of economies of scale and the amount of purchasing power that had risen, it had enabled this protected self-insurance model.

What protected self-insurance avails is, rather than paying all the premiums to insure in the insurance marketplace, which means various major insurance companies would fully control premiums, rental dealers are able to allocate a portion of their premiums to a member-owned, protected self-insurance fund, or loss pool. And what happens is, that loss pool comprises 45 per cent of all the premiums paid. The loss pool is only responsible for absorbing the first half million dollars of any one loss, so what you are doing is, you have a fund that is paid by members that is able to self-insure all these smaller, high-frequency, lower claims, and the insurance company is not even seeing the losses. There is still an element of insurance – we call it excess insurance – and what happens is the insurance company only responds in the event there is a large loss that gets over that half-million-dollar threshold. It really minimizes the impact that claims have on your insurance, because the less you can rely on the insurance market for your claim settlements or for the transfer of risk, the more stable your insurance becomes. It is about taking control of your insurance. Collectively, as a group, taking control of your insurance, rather than fully succumbing to the vagaries of the insurance market.

CRS: So the premiums may not be lower, but they’re likely to be more stable?

Friesen: The premiums would inevitably be lower, especially when it comes to the value that is offered through a customized policy. The one really huge benefit is, because of this member-owned fund that is replenished every year as everyone’s policy renews, if this member-owned fund still has money in it, it is paid back to members in the form of a premium return. I can tell you, that in the past few years we have already returned over a million dollars back to the rental industry community because this program has performed so exceptionally well.

CRS: Nice.

Friesen: It is a very strong statement. This program and this structure is tried and true. It is a very proven structure and it has done amazing things for the industry. It has given rental operators the coverage they need. It has brought stability and ratings, and it has actually paid money back.

Another thing we are doing as the administrator of this protected self-insurance program is we are assuming a lot of the administrative responsibilities of the insurance company. We are taking it under one roof and controlling it. What is really important in this structure is effective risk management, because we understand if we can control losses and help participants of this program to reduce losses and reduce claims, then ultimately what you are doing is enhancing the potential for members to get money back at the end of the year. So we are very diligent and proactively working with the rental industry to help reduce losses. We have a department headed by Ken Fingler, who’s our director of risk management, and he has a team of eight individuals that exclusively work on inspecting our clients’ properties, just helping them to ensure they are exerting a proactive protocol.

CRS: So Ken is going to go out and he is going to recommend where they could do better on safety.

Friesen: That’s right. Yes, safety measures, processes, procedures. It is often just about exerting the proper procedures and maintaining the proper logs, so that if an incident occurs, there is a basis to defend. This is the money of independent businesses but, collectively, a difference can be made. So if everyone is on the same page and understands they can benefit through the performance of this program, and says, “I have a stake in this, this is my program,” there is a completely new attitude to managing risk.

CRS: What are some of the special circumstances that make rental a difficult industry to insure?

Friesen: I think what we’ve seen is over half of rental dealers that have insurance through the open market assume they have the right coverage. Their brokers might be good brokers, but the fact of the matter is the brokers just do not understand the particular exposures that are very unique to the rental industry. One of the most common is that rental dealers have equipment that is going off their yard, and what happens in most insurance policies is that coverage for equipment is excluded while off premises. Furthermore, even if they have a special equipment floater, there is also wording that stipulates that coverage is excluded while on rent. And so it is critical that policies have off-premises coverage. Now, there is no argument whatsoever that our policy has off-premises coverage. A lot of brokers think they are giving off-premises coverage to rental dealers, but they are not. There are wordings in there that will exclude coverage while it is on rent. So we have an off-premises rental equipment floater.

CRS: So what is going on out there is people are buying insurance, saying, “OK, my equipment is insured…”

Friesen: And it is not covered when it goes out on rent.

CRS: And the minute it goes out on rent, which is the only place it is going to get damaged anyways…

Friesen: That primary exposure is not being covered.

CRS: That has to be a huge problem.

Friesen: Yes. There is another exposure called theft by conversion. We sometimes call this the long-term rental that never ends. What happens is, because of the way contracts are written, if an individual rents a piece of equipment and simply never returns it, it is regarded as theft by conversion and there is no coverage for that unless it is specifically added to the policy. We provide coverage for theft by conversion on all policies. So equipment that goes out on rent and just simply does not come back because it has been stolen will be covered.

CRS: Other insurance companies, with all of their actuarial geniuses, must have looked at the rental industry and decided, no, there is no way we can make viable premiums and still cover the incredible amount of risk these people are taking by renting this equipment off their yards. How have you guys managed to get around that?

Friesen: One thing that really plays a huge role is the risk management, so the very fact that we understand the rental industry and we ask a lot of questions when someone is entering the program. We take a consultative approach to selling insurance, and our aim is really to help rental dealers understand what they are buying. But by reviewing the risk thoroughly and helping rental dealers understand risk, I think we have tremendously impacted the losses of this industry. The rental industry has always been branded as an undesirable risk, and it tends to be one of these industries that gets hit very hard when insurance rates increase. The insurance industry circulates between hard and soft markets. I can say right now, we are probably at or nearing the tail-end of a soft market, where rates have been relatively low, but when the hard market hits – and it is typically outside market factors that are out of our control that cause an insurance market to increase – these so-called undesirable risks such as rental dealers get hit very hard. And in some cases they cannot even buy insurance. Most people in Canada who have been in the rental industry for 10 or 20 years will remember those days, and they may come again. But this program has proven very well. We can see because of the transparency that exists that there are surpluses at the end of policy years because the risk is being managed. We know the rental industry is not as undesirable a risk as people have made it out to be. Furthermore, when this hard market does hit again, where would you rather be? In the open market with a broker who does not necessarily understand your industry? With an insurance company that is not necessarily interested in writing your risk when the hard market ends? Or in a program that is pooled with hundreds of other members of your industry, that is performing exceptionally well?

When we talk to rental dealers, when we are able to get them on the phone and they really understand how this works, they are very impressed by it. I can tell you that when rental dealers join this program, they do not leave. Our retention is exceptional in this program.

CRS: Because you have to manage your risks so carefully, are there a lot of additional restrictions that some rental dealers might find onerous?

Friesen: You know what? I can say absolutely not. And once rental dealers understand the simplicity in exerting risk management and are offered the guidance in exerting this risk management, they are very willing to undertake it. I mean, they want to manage their business effectively. It is their greatest asset, so when it comes to managing risk, it is something they want to do, and they very much appreciate it. It is simple things, like, are you giving proper instructions on the use of your equipment? Is your maintenance schedule of the equipment being properly maintained so there are proper records? And a lot of these risk-management things, for instance, these ready-to-rent tags you can put on your equipment, these types of things are very helpful.

You know, it has a lot to do just with proper maintenance, proper instructions and fire safety. Our representatives will conduct an inspection of the premises and maybe there are simple housekeeping measures that maybe are just being overlooked just because you are there every day and you just do not notice it. You know, it is a third-party eye just to provide some assistance saying, “Hey, have you ever thought of that? Or have your fire extinguishers been checked recently?” Those types of things.