How business owners can manage insurance effectively to reduce costs and control rising business expenses, while still remaining covered.
Whether you just started your small business or have been operating for years, cutting costs is a perpetual conversation. Small companies facing the rising costs of doing business need to remain vigilant in uncovering areas where expenses can be marginalized or reduced if they want to keep their doors open.
Entrepreneurs and business managers must take a hard look at balance sheets to determine what is necessary versus what constitutes frivolous expenditures. Still, the question remains, what if necessary expenses are bleeding your small corporation or sole proprietorship dry? Is there any relief to be had when it comes to the unavoidable business expenses that cut into profitability margins?
Insurance is an expense that comes from the bottom line. An insurance policy is also one of the only products a business owner may buy with the hopes of never using. For this reason, it is often viewed as a necessary evil and a negative product. This is likely a contributing factor to business owners avoiding conversations with agents about their coverages and policy premiums.
Reviewing and analyzing insurance policies is the first step in determining cost savings measures while filling potential coverage gaps. Here are a three ways that business owners can manage their insurance effectively to reduce costs and control rising business expenses.
1. Review deductibles
Sometimes policies are issued with deductibles that have been selected by the agent. Common deductibles range from $250-$1,000, although higher deductible options are available. Your deductible is the amount of a property loss that you retain in the event of a claim. In other words, if you have a $100,000 loss to your commercial building, and you carry a $1,000 deductible, you may receive the cost to replace the damaged property at less than the deductible amount (if you have insured the building at a replacement cost valuation), or $99,000.
Because taking a higher deductible reduces the occurrence of small claims payments by the insurance company, insurers will offer a policy credit for the policyholder's assumption of additional risk in the event of a claim. Likewise, if you elect a very low deductible, you may be receiving a policy debit for the opportunity to transfer nearly the entire loss to the company.
When you are considering your deductible amounts, it is important to evaluate what increasing the deductible will save in relation to the increased amount of self-insured loss you are assuming. If increasing your deductible from $500 to $1,000 only saves $50 annually, it might not be a good risk management tool to employ since you will have to remain loss-free for 10 years for the annual premium savings to equal your increased deductible costs at claim time.
Additionally, a proper evaluation of your business's cash flow and reserves needs to be taken into account before deductible changes are made. You may be able to save hundreds, or even thousands, of premium dollars by taking a $5,000 deductible; however, if you cannot likely manage to cover $5,000 of a loss out of pocket, it is probably not a good idea to assume this much risk. Also, you need to be aware that you will need to cover all small claims under your deductible out of your own pocket, which can also put a strain on your businesses cash flow. If you are in a position to manage a higher deductible at claim time, you can save significant premium dollars; however, these changes should only be made after careful consideration and adequate discussion with your agent.
2. Are you BOP eligible?
In an effort to provide streamlined insurance underwriting and prepackage policies for homogenous types of risks, many insurance companies have rolled out BOP (Business Owners Policy) products. BOPs are an effective solution for businesses who fit within a specific eligibility criterion. BOP rating can sometimes be more cost effective than a standard commercial package policy, and they include property coverage for your assets and liability for your business operations and products. Since many of the same exposures exist from one company within a given industry to the next, BOPs can provide coverage for the typical needs of the companies which qualify for this type of policy even though these companies may differ drastically in size.
In addition to sometimes providing more cost effective rating, BOPs also include some valuable coverages that are built into the policy. These can include things like business income coverage, sub-limits for outdoor property and signs, automatic equipment breakdown, etc. Many of these coverages need to be added separately when you purchase a commercial package policy, and these additional line items can begin to add significant premiums to your annual insurance costs. BOPs are often a good place to look in order to enjoy a cost effective policy with valuable add-ons that can benefit your business.
3. Ask for another quote
There is nothing wrong with asking your agent to provide you with another quote from time to time. While it is not in your best interest to shop your insurance every year, there is a benefit to taking a look at other companies from time to time. Be aware, however, if you move your insurance to a new company annually, insurance carriers can become reluctant to write your coverage or apply more aggressive pricing to your account. When an underwriter asks for your company's loss runs, they will see that you have not remained with one company for any significant amount of time and will assume they too might lose your account after just a short amount of time. It is often into the second year of writing coverage for a business before an insurance company will even break even. It can take several years to realize a profit, so if the underwriter believes the transaction will likely be short term.
When an underwriter asks for your company's loss runs, they will see that you have not remained with one company for any significant amount of time and will assume they too might lose your account after just a short amount of time. It is often into the second year of writing coverage for a business before an insurance company will even break even. It can take several years to realize a profit, so if the underwriter believes the transaction will likely be short term, there is less incentive to get aggressive when determining the amount of policy credit they may be willing to apply to your account.
At the same time, loyalty is appreciated and often rewarded and if your business proves to be a favorable risk. If you are paying premiums promptly,and have remained claim free, you might not have to move your coverage to receive better pricing consideration on your policy.
Underwriters will often be willing to add policy credit after the account has shown itself to be a good risk. Retaining existing clients is more cost effective than producing new ones and as a policyholder, you can take advantage of this reality. At the same time, if you have been with the same insurance carrier for many years and never received a quote from another company, it is advisable to ask your independent agent what other options they may have for your business.
Managing insurance costs takes a proactive approach and open dialogue with your agent. Allowing your policy to go without regular review is not the most advisable practice from either a pricing or coverage standpoint. It is not uncommon for policyholders who choose not to review their coverage to be paying a higher price for coverage that they don't want or need. In the worst case scenario, a business owner could be paying a premium for a policy that is failing to cover their actual loss exposures while providing coverage for risks that are not present in their business.
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