Risk Management
Multi-Store Dealers: Keep Your Insurance Program Consistent
By Roger Beery
The multi-store dealer faces many of the same insurance struggles and challenges as any other dealer; however, with a whole bunch of stores comes a whole bunch of new issues.
From an insurance point of view, I see multiple dealership groups managed in two ways. First, as a single organization with one insurance program and one objective in mind; secondly, as a group of stand-alone stores that all make independent buying decisions. In most cases I recommend the first model as the proper way to approach insurance buying. Bidding a big group gets more attention than a series of single points. The second model can sometimes be useful when the stores have large geographical distance between them. Some insurers are just more aggressive in some parts of the country than they are in others.
Regardless of the model you choose, it is very important to keep the coverages consistent between stores. Many reasons are obvious, such as ease in management and claims handling. However, another reason to consider is management compensation. Many managers are compensated based on the profitability of their store; therefore, it is important that they be treated the same should a large loss occur. As an example, we can look at the dealership who loses their shop to a fire. If one store carries business interruption coverage and another does not, one manager may get his bonus and the other may not.
A less obvious problem centers around the fact that all coverages are not created equally. Take as an example, "Employment-Related Practices" coverage. This coverage can vary dramatically from carrier to carrier. If two stores have similar claims, you would not want to see one covered and one excluded.
Another question I get asked often is, "How should the multi-store dealer allocate the premiums between dealerships?" Of course, there are no hard and fast rules. Some dealers allocate by exposure. An example of this would be an allocation by the number of employees and/or inventory size. Another alternative is to allocate 60% of the premium based on exposure and the remaining 40% on two or three years' average losses. This system gives your managers a financial incentive to keep their losses down.
The system would work like this: Let's say you have four stores of equal size and you pay $300,000 in premium and their losses are as they appear below:
Premium = $300,000 to $180,000 allocated to exposure; $120,000 allocated to losses.
As you can see, the manager who has been successful at keeping his losses down benefits. Manager four gets to take $42,000 of profit to the bottom line. You have his attention.
There are other areas where consistency problems which deserve more attention can arise. Here are a few to think about: Review your physical damage deductibles, the amount paid to you for repair work, business interruption on all stores and the limits on dealer specialty coverages (i.e., errors and omissions, legal defense costs). Consistency pays at the time of a loss.
Roger Beery is President of Austin Consulting Group Inc., a firm specializing in dealer insurance consultation. rbeery@dealeronline.com
