With the economic challenges facing most businesses today, many business owners are searching for ways to cut costs and improve their bottom line. Commercial insurance premiums in California often represent a significant expense for most businesses. Skyrocketing workers’ compensation costs in the early part of this decade forced many businesses to relocate outside of California. In contrast, some businesses have seen these same costs decrease by as much as 80 percent.
Despite market fluctuations in insurance premiums, what can business owners do to reduce their costs and eliminate such severe price swings being delivered by insurance companies or insurance brokers?
Smart Business spoke to Griff Griffith, a principal with GMGS Insurance Services, about how to ensure that you are not paying too much for your insurance protection.
What most affects a company’s rates?
The most significant factor affecting insurance premiums is a company’s historical claims. Insurance companies provide the largest discounts to the businesses with the fewest and lowest amount of claims over a five-year period. It is relatively simple for an insurance broker to obtain low rates if a company has had no claims. Premiums increase when your company has claims and your broker does not have the necessary risk management skills to address them. A true risk management-broker is not only able to explain to competing insurance companies the nature of such historical claims but can also present the plan of action your company has implemented to prevent future claims. If you and your broker are not reviewing your open claims regularly then you are not receiving proper risk management service.
At a company, who should make the choices regarding risk management?
As a risk manager for hundreds of companies, we have seen business owners control insurance premiums through personal hands-on collaboration with their risk management broker. Too often, business owners choose to delegate this ‘insurance task’ to someone in their office and designate that person as the ‘insurance coordinator.’ It is shocking that a business owner will invest years of time and money to build a company and then delegate the protection of the company to an employee with no ownership in the company. If a business is an owner’s greatest asset, then the owner should not delegate its protection to someone with no financial stake or someone who lacks the experience necessary to make critical risk management decisions.
Where might companies be losing money?
Business owners need to look out for hidden finance fees. I like to refer to such fees as the broker’s buried treasure. One of the more grievous tactics used by insurance brokers today is marking up interest rates on premium finance quotes. Premium finance companies can offer very competitive financing options to businesses that may lack sufficient financial resources. Unfortunately, many brokers secure the finance agreement on behalf of their clients with inflated interest rates, as much as 5 to 10 percentage points, in order to ‘earn’ additional fees. These padded interest rates can equate to thousands of dollars for the broker and all for five minutes of work. Some brokers may claim ‘every broker does it; it is just the way we do business.’ This is simply not true, and you would be prudent to find a more credible broker who is committed to serving your best interest.
What else should owners look out for?
It is common for brokers to say, ‘Don’t be the bearer of bad news’ rather than provide proper rate forecasting to their clients. Many brokers even wait until the last minute to present your renewal proposal to protect them from potential outside competition. Unfortunately, business owners tolerate such abuse even when most insurance companies are willing to provide your broker with estimated rate projections prior to finalizing their renewal rates. If your broker is reluctant to provide you rate forecasting, then you are probably insured with the wrong broker.
How can owners ensure they’re getting the best service for their money?
A common strategy is the practice of securing ‘competitive bids’ from several insurance brokers. Business owners feel that by having numerous brokers present ‘bids’ for their insurance program, they will secure the most competitive premium. This is a fallacy. The strategy of putting your coverage out to market can be very effective, but to assume that all brokers and carriers provide quotes, coverage and service plans that are ‘apples to apples’ is naive. An astute business owner should carefully select the most competent risk management broker and work with him or her to market the insurance program to the most qualified insurance companies. It is the responsibility of the risk management broker to present each option offering solutions to the specific needs of the company and compare the pros and cons of each option. Insurance companies may come and go, but a qualified risk management broker should be revered as a professional like your CPA or legal counsel.
A cheap insurance rate backed up by unproven service or inadequate coverage can be catastrophic to your business. If you cannot trust your broker to efficiently manage your insurance renewal process then you should not be working with that broker.
A business owner can reap significant rewards and improve the bottom line by investing a little time in the risk management process. By reducing insurance claims, eliminating unnecessary fees and procuring proper rate forecasting, a business owner can obtain lower long-term insurance premiums. Like a quarterback in football, you don’t have to make every touchdown, but you do have to play your role in all the key plays of the game.
Griff Griffith, CPA, CIC, is a principal with GMGS Insurance Services. Reach him at (949) 559-3370 or email@example.com.