Ways To Manage Your Business Insurance Costs
Everyone is looking for ways to conserve money and keep budgets manageable. For high-risk industries and those with seasonal revenue spikes and lulls, finding ways to control the costs of insurance can be especially challenging. Here, we’ll look at ways you can manage your premiums while keeping reliable coverage.
Managing cash flow
Two popular ways to manage your premiums are pay-as-you-go insurance and premium financing. They serve different budgetary needs, but both are meant to help your business avoid large capital outlays for insurance.
Pay-as-you-go insurance
Whether you have a startup or a seasonal or project-based business, paying a large upfront annual premium for insurance can be burdensome. It can take crucial resources away from advertising, growth, or safety and maintenance programs. Insurers and their agents have recognized this and now offer a solution: pay-as-you-go insurance. This is a premium payment structure that requires no front-loaded lump sum. It is sometimes called no-down-payment insurance.
Pay-as-you-go insurance is an option for many types of coverage, including property, liability and workers’ compensation. And it’s flexible.
You can structure payments to match your inventory or payroll fluctuations, so you only pay for what you need at the moment. Moreover, you don’t risk owing at an end-of-year insurance audit. In some cases, you will have to pay a small upfront charge, about a fifth of what you’d pay for a traditional policy. But you may be able to avoid finance charges. Many providers work with your payroll company to determine and administer premium payments.
Premium financing
If you don’t have steep fluctuations in your insurance needs but want to avoid a large upfront premium payment, premium financing offers a solution. Using this method, you can pay a flat monthly fee for insurance along with a finance charge. Doing so makes budgeting very predictable, and payments can usually be scheduled as automatic withdrawals.
To take advantage of premium financing, you will have to qualify by showing decent credit and sustainable financials. This method is available to all business types and sizes.
Premium financing has no bearing on your ability to alter your policy, whether by adding endorsements or cancelling. If the change is allowed under your policy, it isn’t affected by the financing contract. However, be aware that your monthly premium might change.
Bundling policies
If your company has relatively straightforward insurance needs and your annual revenue is below $10 million, you likely qualify for a business owners policy (BOP). A BOP bundles the basic coverages for your type of business into one policy with a single payment. It is designed to be a more affordable solution for companies with standard risks and a predictable frequency and severity of claims.
A BOP includes property, general liability and business interruption insurance, which helps sustain revenue during a covered shutdown. You can add extra insurance, like workers’ compensation and commercial auto insurance, as separate policies to round out your protection. You can also obtain umbrella or excess insurance if you think the limits of insurance in your BOP are too low. But most small enterprises find their BOP’s limits are sufficient.
Joining or forming a risk retention group
Commercial entities with high liability risks often have trouble finding affordable insurance, or any insurance at all. Because of coverage scarcity and high prices, risk retention groups (RRGs) have been formed to allow organizations with similar risk characteristics to band together and self-insure for liability.
Members aren’t just insured by the RRG; they are also owners. That means they share the administrative costs and loss costs. This incentivizes them to reduce the number and severity of claims. Profits resulting from good risk management and low administrative overhead are returned to the members.
Additionally, RRGs carry highly customized coverage designed specifically for the liability risks of their members. That means they do not pay any portion of their premium for potential liability losses incurred by outside industries, which is the case in traditional insurance.
You will need to work with an insurance broker to join an RRG. They can help you evaluate whether becoming a member is financially beneficial.
Joining or forming a captive
A captive insurance company is owned by the organization it is insuring. It can be owned by multiple companies or just one, and can insure property or liability risks. You don’t need to have a big enterprise to own a captive, but you do need to have enough capital to meet claims payout demands. These can include legal costs as well as repairs and compensatory expenses.
If your risks are particularly expensive or difficult to cover through traditional insurance, and you have the capital to manage the administrative and claims costs of a captive, the budgetary savings can be significant. For example, you get to keep the reserves that aren’t paid out. Those can be rolled into the next year’s reserves or spent on risk management, company growth, or other initiatives to increase scale or profits. A captive owned by an entity with low claims frequency and severity can be a revenue generator rather than a net expense.
The key is having adequate capital to pay for claims and administration. Some insurance brokerages specialize in evaluating the pros and cons of establishing or joining a captive. They can help you determine whether this solution is right for your company.
Risk management
Despite all the ways of insuring and paying for insurance, the best method of keeping your premiums low is to practice excellent risk management. Your claims history factors heavily into what premium you will be charged and whether you can find insurance in the standard market.
A culture of safety, good recordkeeping, quality cyber controls, building and system maintenance, employee vetting and training, and overall good business practices makes your company eligible for lower premiums. It also makes you more attractive to insurers.
Whether you decide to spread out your premium payments, bundle your coverages, or join a nontraditional insurance group, mitigating losses is the top way to control your insurance costs.