In response to a very hard insurance market over the past two years, business owners have been taking on more risk and opting for higher deductibles on their insurance coverage to keep their premium costs in line. That’s something they should be doing in tough times or otherwise.
Insurance premiums have spiraled upward in the past two years in response to losses from natural disasters, the Sept. 11 terrorist attacks and the exit of several major carriers from the insurance industry.
The tendency to raise deductibles and take on more risk usually occurs when there is a spike in premium costs, but assuming more of the upfront burden for cost control is always a good practice.
“We’ve been recommending to our clients that whether it’s soft or hard, they should always take more control of their risk and be less reliant on the insurance market,” says Paul Hoyt, senior vice president and casualty department manager of Marsh Inc. in Pittsburgh.
Small businesses, Hoyt says, have been more adversely affected than large companies by the current hard insurance market.
“In some ways, I would say, the small business owner has been impacted more because … an increase in their premium or their losses or their exposure to losses has much more of an impact than it would be to a large Fortune 500 company,” Hoyt says.
Indeed, a Marsh study that gathered data from 1,433 of its clients and takes an exhaustive look at insurance costs found that the costs for small employers — those with $200 million or less in sales — are nearly 16 times greater than they are for the largest companies.
Hoyt points out, however, that a small company that effectively manages its exposure can have a lower cost of risk than a larger company with poor risk management.
The biggest bang for the buck in terms of savings is likely to come for most companies in the workers’ compensation area. For every $1,000 of revenue, U.S. businesses spend an average of $2.32 on insurance and other measures to manage their workers’ compensation, auto and general liability risks, according to the Marsh study. Workers’ compensation alone accounts for $1.46 of those expenditures.
Hoyt says workers’ compensation historically has accounted for the lion’s share of casualty cost risks. It continues to be the focus of coordinated approaches by insurers and employers that examine and seek to address key cost drivers, from safety and wellness programs that aim to prevent injuries and illnesses to more effective ways to track and manage claims and to fund exposure.
But Hoyt says there is no one-size-fits-all solution to reining in costs.
“While all of these approaches can be productive in terms of managing costs, organizations need to pinpoint what’s driving their costs and invest in approaches that yield the best results,” Hoyt says.
The Insurance Information Institute recommends the following strategies to control business insurance costs.
* Shop around. Prices vary from company to company. Get the names of several brokers or companies and compare rates and services.
* Choose a higher deductible. The higher the deductible, the lower the premium.
* Buy a package policy. A policy that covers multiple liabilities may be cheaper than individual policies.
* Work closely with your agent or broker. Keep them informed of changes in your business that may affect your coverage or liability, including major purchases, expansions, changes in hiring or the nature of your operation.
* Ask about ways to prevent loss. You may be able to reduce your premium for certain coverages by following your insurer’s recommendations. How to reach: Marsh Inc., www.marsh.com or (412) 552-5300; Insurance Information Institute, www.iii.org
