Business insurance premiums pose a major expense. But there are strategies that you can use to lower them. By understanding the factors that influence your insurance premiums and taking steps to reduce your risk, you can save money on insurance costs. In this article, we’ll discuss some of the strategies you can use to ensure you’re getting the best deal possible.
By Randy Sadler, CIC Services
Insurance is necessary whether it’s to protect your business, fulfill an obligation in a contract or satisfy investors. Unfortunately, with the rising cost of premiums, you’re likely left feeling like it’s not just necessary but a necessary evil.
A report from the American Property Casualty Insurance Association (APCIA) addressed these rising premiums. Specifically, the APCIA noted coverages that protect businesses against liability lawsuits, property damage, cyberattacks, and other common risks have continued to climb. Specifically, the APCIA referenced a survey conducted by the Council of Insurance Agents and Brokers (CIAB) found that in Q4 2021, medium-sized businesses experienced an average increase in insurance premiums of 10.6%. Research by The Center for American Progress illustrated how employees are also feeling the hit of rising premiums. For instance, businesses facing these rising premiums can’t hire as many people or retain as many employees as costs for insuring those employees continues to grow.
While the rise of premiums is a hard adjustment for individuals, business owners and businesses, there are strategies to try and reduce insurance costs to your business.
Conduct a risk assessment and look out for internal red flags
Research from Deloitte emphasizes how internal research into risks and threats to a business is a critical process. Risk assessments help uncover qualitative and quantitative risks to your organization and determine what impact those risks pose to your business if they were to be realized. Risk assessments also answer questions like who your stakeholders are, what your key business risks are, how susceptible to error your information is in making strategic decisions and what resources your business needs to address uncovered risks.
While insurance is a great tool to retroactively mitigate damages, it’s undoubtedly better to be ahead of the curve and have the coverages your business needs while also working to solidify weak points so that risks don’t become realized. Fundamentally, this can be applied at any point in the business cycle and is a great tool to use.
Captive insurance for lower premiums and greater profit
Captive insurance is an insurance subsidiary owned by the business or business owner that retains the paid insurance premiums. While premiums rise and fluctuate, captive insurance provides policy holders stabilized costs as captive premiums are determined by the captive’s loss experience. If the previous loss experience is stable, then premiums paid to the captive stay consistent and don’t fluctuate like the cost of premiums in traditional insurance due to changes in the market. The funds captives retain from premiums then go toward covering potential losses captive policies cover. Over time, these retained premiums build and can become a profit center and source of financial security for a business should something unexpected arise or a crisis materialize.
Captive insurance also fills gaps where traditional insurance doesn’t cover the risk. These gaps are felt when traditional insurance coverage doesn’t trigger a policy and the business is left holding the bag. Additionally, if a policy needs to be written to cover a risk your traditional insurance options don’t currently cover, Deloitte reports that it takes between 12-18 months for traditional insurers to make new policies. Meanwhile, your business is left vulnerable to the risk it isn’t insured for. With Captive Insurance, it’s as simple as having the new policy drafted and then included in coverage plans for your business, allowing for new policy implementation in a fraction of the time it takes traditional insurers.
Captives are so effective that 90% of Fortune 500 and S&P 500 companies today use have their own captive insurance subsidiaries. Considering that, captive insurance is also not a solution for everyone as it requires a articles of incorporation for the captive and many other involved processes best handled by medium to large businesses and/or captive insurance management organizations that can manage the day-to-day.
Roll with the punches
There isn’t a cure all to rising insurance premiums. In a report from McKinsey, the insurance industry as a whole had been facing challenges in profitability and the pandemic, like with everything else, only compounded the issue. So much so that in 2021 the insurance industry, as calculated by McKinsey researchers, lost approximately $30 billion and had surpassed previous historical losses.
With historical losses, increased claims, inflation and logistical nightmare in the supply chain, it was only a matter of time until insurers had to raise their premiums. Additionally, cybercrime has become a major risk for businesses with Statista listing cybercrime damages of $8.44 trillion in 2022 and projects this number to grow to over $23 trillion in 2027. The earlier cited report from CIAB also noted a staggering average premium increase of 34.3% for Cyber in 2021.
While global events of the past few years have brought some things to a head in increased expenditures, insurance prices were eventually going to rise, the pandemic and its fallout just sped the process up. Along with this, understanding how these increased prices are going to affect your everyday operations and bottom line even after implementing more cost-effective strategies and considerations with insurance is a necessity. But you wouldn’t be where you are with your business if you didn’t already know that.
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