Breakage statistics?

[echelon6]

Hi

I''m about to have my diamond set without any insurance (because I can''t get any). My diamond is round, med-sl.thk girdle, pointed culet, SI1. Can I get some statistics on what are the odds of a setter chipping the diamond? I''ve been told it can vary between 1/100 to 1/50,000 depending on skill of the setter. In my case, it will be a very skilled setter, but I''d still like an idea of what the odds are.

Thanks

 

[avlis]

1,000,000:1 > X >2:1


i really dont think anyone can give you any real meaningful number on that.

 

[Ellen]

Even if someone could give you a number, what does it really matter? you have to get it set anyway.


The key words in your post are "very skilled setter". So go with that thought and try to relax.

p.s. That girdle helps.

 

[strmrdr]

My benchman says he hasn''t broken a stone in years other than some very small melee and he sets a ton of I1 and I2 stones for the chain stores.

 

[denverappraiser]

Obviously the actuarial details at the insurance companies are proprietary information but some good clues can be gleaned from their pricing structure. Jewelers Mutual, the only company I know of that offers this type of coverage, includes coverage for setting breakage for ‘free’ if you buy their regular policy costing between 1-2% of the value of the item. Even if they are accepting a certain amount of additional risk for what amounts to advertising reasons, you can bet that some smart people there have considered this topic. My guess that they’ve determined the risk to be under, say, 0.5% without even knowing anything about either the job or the setter. Most skilled setters have a breakage rate that’s way under that.

Neil Beaty
GG(GIA) ICGA(AGS) NAJA
Professional Appraisals in Denver

 

[echelon6]

Thanks all

I just dont understand why setters arent willing to bear this risk in return for a fee? They are in a much better position than any actuary to judge their own risk of breaking a diamond, and make a nice profit from charging this fee

And I''m sure clients would gladly pay.

 

[strmrdr]

Date: 8/2/2007 5:42:30 PM
Author: echelon6
Thanks all

I just dont understand why setters arent willing to bear this risk in return for a fee? They are in a much better position than any actuary to judge their own risk of breaking a diamond, and make a nice profit from charging this fee

And I'm sure clients would gladly pay.

self insurance is not smart business.
one stone can cost them 3 months take home pay and that hurts.

 

[denverappraiser]

Date: 8/2/2007 5:54:51 PM
Author: strmrdr

Date: 8/2/2007 5:42:30 PM

Author: echelon6

Thanks all


I just dont understand why setters arent willing to bear this risk in return for a fee? They are in a much better position than any actuary to judge their own risk of breaking a diamond, and make a nice profit from charging this fee


And I'm sure clients would gladly pay.

self insurance is not smart business.

one stone can cost them 3 months take home pay and that hurts.

Echelon6,
Been there, done that. I definitely agree with you, and I routinely recommend exactly this to setters. A fee of say, 1% of the value, would be enormously profitable for most setters on almost every job, quite possibly more so than the setting charge itself.

Storm,
I sympathize with the problem and there certainly needs to be some limits but I disagree that this isn’t smart business. For starters, remember that the jeweler gets the salvage. A chipped $10k diamond will cost $10k to replace, which is a bite to be sure but it can usually be repaired and recerted for a few hundred dollars and then resold to someone else for a slightly discounted price, say $9,000. They might even be able to sell it back to the original supplier. Even really drastic acts like dropping, for example, a 1.01ct/F/VS down to a .95 or some other such thing is likely to be less than a few thousand dollars. More typical case would be a few hundred dollars out of pocket and a cash flow pinch for a few months. For a $10k diamond, a 1% fee is $100 and a busy setter (or their employer) can do that a couple of times per day with no additional work. In just a few weeks this will produce an insurance reserve that’s sufficient to pay for even severe losses. At 2 stones per day of $10k each, that’s $52k per year in additional revenue! Losing money at that involves cracking stones at rate of several per month! Anyone whose breakage comes anywhere near that should really consider alternative employment. Setters who work with bigger and more expensive stones have the same math just with bigger numbers. For most skilled setters breakage more like 1 per year (or less) so this passes $40-$50k directly to their bottom line. I’ld call that a pretty good business, wouldn’t you?

In the extreme cases where they either feel the risk is too high or they simply don’t have enough reserves to afford it, they can subrogate the whole thing to JM by insisting that the client secure a JM policy and providing them, possibly for a fee, with the paperwork to do it. In effect, the jeweler is highgrading the low risk/high profit insurance jobs and leaving the balance to JM. This isn’t good news for JM and if lots of jewelers did it they would change the rules, but for now it’s free money for the setter.

Neil Beaty
GG(GIA) ICGA(AGS) NAJA
Professional Appraisals in Denver

 

[echelon6]

As Neil points out, the jeweler''s exposure is rarely the face value of the stone. It''s more likely at most 30% of the stone.

So an appropriate pricing rule for taking on breakage risk may be: Exposure % x Probability of breakage x Face value of stone. So for a typical setter setting a 10k stone, it may be 10000 x 30% x 0.1% = $3 ! Now I''m sure clients are happy to pay 1% of the face value of their stone, so that''s 10000 x 1% = $100. That''s 33x your expected loss per stone!

A very smart business... on paper. Also add the discretion of rejecting inherently risky stones such as cornered fancy cuts, thin girdles etc, and your risk falls further.

 

[strmrdr]

Date: 8/2/2007 6:20:20 PM
Author: denverappraiser


Echelon6,
Been there, done that. I definitely agree with you, and I routinely recommend exactly this to setters. A fee of say, 1% of the value, would be enormously profitable for most setters on almost every job, quite possibly more so than the setting charge itself.

Storm,
I sympathize with the problem and there certainly needs to be some limits but I disagree that this isn’t smart business. For starters, remember that the jeweler gets the salvage. A chipped $10k diamond will cost $10k to replace, which is a bite to be sure but it can usually be repaired and recerted for a few hundred dollars and then resold to someone else for a slightly discounted price, say $9,000. They might even be able to sell it back to the original supplier. Even really drastic acts like dropping, for example, a 1.01ct/F/VS down to a .95 or some other such thing is likely to be less than a few thousand dollars. More typical case would be a few hundred dollars out of pocket and a cash flow pinch for a few months. For a $10k diamond, a 1% fee is $100 and a busy setter (or their employer) can do that a couple of times per day with no additional work. In just a few weeks this will produce an insurance reserve that’s sufficient to pay for even severe losses. At 2 stones per day of $10k each, that’s $52k per year in additional revenue! Losing money at that involves cracking stones at rate of several per month! Anyone whose breakage comes anywhere near that should really consider alternative employment. Setters who work with bigger and more expensive stones have the same math just with bigger numbers. For most skilled setters breakage more like 1 per year (or less) so this passes $40-$50k directly to their bottom line. I’ld call that a pretty good business, wouldn’t you?

In the extreme cases where they either feel the risk is too high or they simply don’t have enough reserves to afford it, they can subrogate the whole thing to JM by insisting that the client secure a JM policy and providing them, possibly for a fee, with the paperwork to do it. In effect, the jeweler is highgrading the low risk/high profit insurance jobs and leaving the balance to JM. This isn’t good news for JM and if lots of jewelers did it they would change the rules, but for now it’s free money for the setter.

Neil Beaty
GG(GIA) ICGA(AGS) NAJA
Professional Appraisals in Denver

That sounds good until tax time and you get nailed.
Most shops are not C corps but are S or LLC or SP and all 3 get nailed at tax time for leaving money in the business.

 

[echelon6]

What if they classify the premiums received as a sort of provision for losses, so proceeds don''t ever go through the P&L statement. i.e. no tax effects because technically it''s not revenue.

Even if they''re taxed, im sure you can factor that into the pricing somehow, and clients would still be happy to pay.

 

[Garry H (Cut Nut)]

We record the cost of broken stones. Most are smalls, and colored gems. We average around 0.2% by value a year.

Last year we broke a 1ct Princess polishing off he corners (which we do as a matter of course to save setting and later consumer damage). this was about 1 average years in one stone!

 

[strmrdr]

Date: 8/2/2007 8:21:26 PM
Author: echelon6
What if they classify the premiums received as a sort of provision for losses, so proceeds don''t ever go through the P&L statement. i.e. no tax effects because technically it''s not revenue.

Even if they''re taxed, im sure you can factor that into the pricing somehow, and clients would still be happy to pay.

Only way I know of too do that is buy a bond from a bonding corp.
If you ever have to use it your in a world of hurt.
The problem is lets say you leave 60k in, 1st year you pay taxes on it, second year you pay taxes on the same 60k, 3rd year same, you just paid more in taxes than the 60k you have in reserve.
With a C corp you could leave 75k in without taxes but it will cost you $5k+ a year too get your taxes done and sox record keeping will kill you.
You could use the money too buy gold bars and carry it over as inventory but if you get caught your in deep trouble.
The laws kill small businesses when they try too do anything fancy.

 

[denverappraiser]

Date: 8/2/2007 8:04:44 PM
Author: strmrdr

Date: 8/2/2007 6:20:20 PM

That sounds good until tax time and you get nailed.

Most shops are not C corps but are S or LLC or SP and all 3 get nailed at tax time for leaving money in the business.

It’s true that this would be taxable income but it really is income so what’s the problem? The taxes are the same for sole proprietors whether they profits are kept in the company or not. As you point out, certain types of corporate owners have a token short term advantage for this kind of thing but the difference isn’t enough to affect this issue and they get socked by paying corporate income tax on the front end and then personal taxes when they finally decide to take the money. Some, even a lot, of that $40k bonus is going to go to taxes, just like any other income you can make. So what? If and when an expense comes along, it’s really an expense as well and it’s fully deductible at the same rate after all. More profit is good, even if it is kept in the form of a savings account. Heck, it’s especially if it’s kept in the form of a savings account because then you get investment income too. Pay the taxes and laugh on the way to the bank with what's left.

Date: 8/2/2007 8:40:40 PM
Author: strmrdr

The problem is lets say you leave 60k in, 1st year you pay taxes on it, second year you pay taxes on the same 60k, 3rd year same, you just paid more in taxes than the 60k you have in reserve.

Retained earnings in the company are only taxed once, in the year in which they are earned. The ownership basis of the company then rises to the new level. Income tax only nails S, LLP and SP owners once. There are a few other taxes, like property taxes on inventory that can sneak up on you but I think your incorrect in the above statement.

Neil Beaty
GG(GIA) ICGA(AGS) NAJA
Professional Appraisals in Denver

 

[strmrdr]

Date: 8/2/2007 10:45:28 PM
Author: denverappraiser

Date: 8/2/2007 8:40:40 PM
Author: strmrdr

The problem is lets say you leave 60k in, 1st year you pay taxes on it, second year you pay taxes on the same 60k, 3rd year same, you just paid more in taxes than the 60k you have in reserve.

Retained earnings in the company are only taxed once, in the year in which they are earned. The ownership basis of the company then rises to the new level. Income tax only nails S, LLP and SP owners once. There are a few other taxes, like property taxes on inventory that can sneak up on you but I think your incorrect in the above statement.

Neil Beaty
GG(GIA) ICGA(AGS) NAJA
Professional Appraisals in Denver

carefull there only a C corp can report cash as an aset rather than income.
Any cash left at the end of the year shows as personal income to the owners.

 

[denverappraiser]

Date: 8/2/2007 10:56:46 PM
Author: strmrdr

Date: 8/2/2007 10:45:28 PM

carefull there only a C corp can report cash as an aset rather than income.

Any cash left at the end of the year shows as personal income to the owners.

A Sole Proprietorship, as one of the above examples, is accounted for and taxed on the schedule C of the owner. The business is inseparable from the owner and keeping a savings account is not going to be taxed as income.
I think you're flat out wrong about this although there are probably better accountants than either of us that are reading in on this thread. Anyone care to comment? How are cash reserves taxed in S, LLP, LLC and SP type ownership companies?

Neil Beaty
GG(GIA) ICGA(AGS) NAJA
Professional Appraisals in Denver

 

[echelon6]

Date: 8/2/2007 8:25:48 PM
Author: Garry H (Cut Nut)
We record the cost of broken stones. Most are smalls, and colored gems. We average around 0.2% by value a year.

Last year we broke a 1ct Princess polishing off he corners (which we do as a matter of course to save setting and later consumer damage). this was about 1 average years in one stone!

Hmm the general consensus is that the odds are quite low then...

What about the odds of breaking a Round SI1 (no surface feathers) Med-Sl.Thick girdle? 1/1000?

 

[Cehrabehra]

Date: 8/2/2007 11:28:50 PM
Author: echelon6

Date: 8/2/2007 8:25:48 PM
Author: Garry H (Cut Nut)
We record the cost of broken stones. Most are smalls, and colored gems. We average around 0.2% by value a year.

Last year we broke a 1ct Princess polishing off he corners (which we do as a matter of course to save setting and later consumer damage). this was about 1 average years in one stone!

Hmm the general consensus is that the odds are quite low then...

What about the odds of breaking a Round SI1 (no surface feathers) Med-Sl.Thick girdle? 1/1000?

I know it sucks, but as a professional I would hesitate to give you a concrete answer... what if you are the 1? I wouldn''t want to even in a small way give you a number you may tuck yourself in at night with, kwim?

 

[echelon6]

Well that''s not much help to someone needing to make a decision now is it?

It''s like telling me not to drive because I might be the one of 100s that die daily in auto accidents.

I just need a few numbers to get "comfortable". Part of decision making and everyday life. If it happens to me, despite overwhelming odds against it happening, then so be it - miracles happen.

 

[diagem]

Date: 8/2/2007 6:20:20 PM
Author: denverappraiser

Date: 8/2/2007 5:54:51 PM
Author: strmrdr

Date: 8/2/2007 5:42:30 PM

Author: echelon6

Thanks all


I just dont understand why setters arent willing to bear this risk in return for a fee? They are in a much better position than any actuary to judge their own risk of breaking a diamond, and make a nice profit from charging this fee


And I''m sure clients would gladly pay.

self insurance is not smart business.

one stone can cost them 3 months take home pay and that hurts.

Echelon6,
Been there, done that. I definitely agree with you, and I routinely recommend exactly this to setters. A fee of say, 1% of the value, would be enormously profitable for most setters on almost every job, quite possibly more so than the setting charge itself.

Storm,
I sympathize with the problem and there certainly needs to be some limits but I disagree that this isn’t smart business. For starters, remember that the jeweler gets the salvage. A chipped $10k diamond will cost $10k to replace, which is a bite to be sure but it can usually be repaired and recerted for a few hundred dollars and then resold to someone else for a slightly discounted price, say $9,000. They might even be able to sell it back to the original supplier. Even really drastic acts like dropping, for example, a 1.01ct/F/VS down to a .95 or some other such thing is likely to be less than a few thousand dollars. More typical case would be a few hundred dollars out of pocket and a cash flow pinch for a few months. For a $10k diamond, a 1% fee is $100 and a busy setter (or their employer) can do that a couple of times per day with no additional work. In just a few weeks this will produce an insurance reserve that’s sufficient to pay for even severe losses. At 2 stones per day of $10k each, that’s $52k per year in additional revenue! Losing money at that involves cracking stones at rate of several per month! Anyone whose breakage comes anywhere near that should really consider alternative employment. Setters who work with bigger and more expensive stones have the same math just with bigger numbers. For most skilled setters breakage more like 1 per year (or less) so this passes $40-$50k directly to their bottom line. I’ld call that a pretty good business, wouldn’t you?

In the extreme cases where they either feel the risk is too high or they simply don’t have enough reserves to afford it, they can subrogate the whole thing to JM by insisting that the client secure a JM policy and providing them, possibly for a fee, with the paperwork to do it. In effect, the jeweler is highgrading the low risk/high profit insurance jobs and leaving the balance to JM. This isn’t good news for JM and if lots of jewelers did it they would change the rules, but for now it’s free money for the setter.

Neil Beaty
GG(GIA) ICGA(AGS) NAJA
Professional Appraisals in Denver

Neil..., your playing it safe!!! (what if the chipped Diamond lost 70% of its value???)
Dropping from a 1.01 ct. to a 0.95 ct. in by no means drastic!

What happens if the stone stays the full 1.01 ct. weight..., but instead of a VS1..., the clarity drops to an I1-I2? what do you do? recut it to a .20 ct or perhaps a 0.20ct. and a 0.15 ct.?

Usually when my setter chips or I would actually call it breaks a Diamond..., it is salvaged compared to the state it was before...

As far as insurance goes..., its not even economic for us cutters to get "cutting" insurance..., as the insurance Co''s demand a 25% deductible and full payment only towards a total lost Diamond! (or 75% loss of original value!)

 

[denverappraiser]

I’m a little surprised that insurance is available for cutters at all because the risks in that operation are higher and the insurance company has the same problem of entering into the deal knowing nothing about either the stone at hand or the cutter. Can you tell us more about this offer? Setters cannot buy insurance for this. The options are to self insure, have the client carry the liability or have the client sell the risk to some 3rd party, which may include the possibility of a claim against the jeweler after the fact if negligence can be proven.

Use whatever stats you want, the numbers work out well for the setter unless either their breakage rate is extremely high or they set the price so low that it doesn’t cover the losses. Echelon6’s 30% exposure rate seems like a good number to use and his/her general formula is spot on. Use 40% or even 70% if you prefer. The ‘typical’ setter caused damage is relatively subtle and almost all setters are associated with jewelry stores which gives them good connections to both the repair sources and the avenues to resell the repaired stone if it needs to go that way (for clients who have an attachment to that particular stone, they could repair it and offer some sort of cash compensation to the owner in lieu of replacement). Both of these are a problem for consumers who do this infrequently and consequently make the perceived risk higher for the consumer. I picked that particular one because what looks at first glance like a very minor chip could be sort of expensive while dropping a 1.35 to a 1.32 would be much less so, even though it’s more expensive stone and even though the fees to both the cutter and lab will be higher. Total destruction is, of course, the worst case. The key is assessing the various risks involved. Total destruction would be a very atypical loss.

Neil Beaty
GG(GIA) ICGA(AGS) NAJA
Professional Appraisals in Denver

 

[diagem]

Date: 8/3/2007 9:02:32 AM
Author: denverappraiser
I’m a little surprised that insurance is available for cutters at all because the risks in that operation are higher and the insurance company has the same problem of entering into the deal knowing nothing about either the stone at hand or the cutter. Can you tell us more about this offer? Setters cannot buy insurance for this. The options are to self insure, have the client carry the liability or have the client sell the risk to some 3rd party, which may include the possibility of a claim against the jeweler after the fact if negligence can be proven.

Offer??? With a 25% deductible and full payment only when at least 75% of the value lost due to damage..., (and I think a minimum of $100K++ per gem)..., You call that insurance? I don''t..., and I never contemplated using it...

I once tried to find out the info. on insuring a big (brown) colored Diamond for cutting..., (brown Diamonds are known between cutters being of softer and fragile material...)

I heard the numbers and understood its a lose-lose business proposal!

Use whatever stats you want, the numbers work out well for the setter unless either their breakage rate is extremely high or they set the price so low that it doesn’t cover the losses. Echelon6’s 30% exposure rate seems like a good number to use and his/her general formula is spot on. Use 40% or even 70% if you prefer. The ‘typical’ setter caused damage is relatively subtle and almost all setters are associated with jewelry stores which gives them good connections to both the repair sources and the avenues to resell the repaired stone if it needs to go that way (for clients who have an attachment to that particular stone, they could repair it and offer some sort of cash compensation to the owner in lieu of replacement). Both of these are a problem for consumers who do this infrequently and consequently make the perceived risk higher for the consumer. I picked that particular one because what looks at first glance like a very minor chip could be sort of expensive while dropping a 1.35 to a 1.32 would be much less so, even though it’s more expensive stone and even though the fees to both the cutter and lab will be higher. Total destruction is, of course, the worst case. The key is assessing the various risks involved. Total destruction would be a very atypical loss.

Neil Beaty
GG(GIA) ICGA(AGS) NAJA
Professional Appraisals in Denver