Insurance is often termed a grudge purchase, and let’s be honest, we all wish we could do without it. But few of us can, and certainly no business should.
There’s ample anecdotal evidence that owners of cash-strapped small businesses are cancelling their policies – both short-term cover and life. Worse, some are also cutting back on risk measures such as security and plant maintenance.
Not only does this put businesses at greater risk in an environment that is already more challenging, but it also increases costs for the future. Brokers have a vested interest, and it’s no surprise they warn people not to cancel policies. So what can businesses that are really cash-strapped do to cut costs?
Ask for quotes
Denis Ternent, executive general manager broking services, Glenrand MIB, confirms that there isn’t too much, but the good news is that insurance premiums in the small business space are not increasing. On the contrary, he says, for the remainder of this year they will either remain flat, or even decrease slightly.
In this light, he recommends that small businesses consult a broker to get quotes – it may be that cheaper cover can be found.
Costs of cover are difficult to define, as they vary with the circumstances of the business. But Ternent says a broker will pay for himself by getting you the cheapest deal.
“Ask your broker to get several different quotes. The cost varies from insurer to insurer and from time to time, depending on the claims experience and appetite for risk of that type of business by various underwriters,” he adds.
“There is a lot of competition right now as major insurers fight for market share – so the single best move any business can take to reduce their insurance cost at this time, is to get as many as six new quotes,” says Ternent.
However, he claims it makes no financial sense in these tough economic times to cancel a policy or even reduce cover.
“The real question is, can you afford to not have reasonable cover? In good times, if a business is under-insured it can maybe cover the difference off its balance sheet – but it is exactly in times such as these that companies cannot afford to do so.
Trim the fat
“In addition to getting fresh quotes, companies can look at eliminating unnecessary cover: such as reducing turnover or cash limits if your turnover and cash has actually dropped. Car insurance is one area to look for fat – especially if insured for replacement cost, which no insurer will pay. However, we are doing this exercise with many clients and find there is not a lot of saving to be achieved – if a good job was done in the first place,” he says.
“These actions tend to have more impact in the medium- rather than short-term.”
Under-insuring can be almost as catastrophic as having no insurance for a cash-strapped business. If a business only insures 75% of the replacement cost of a building, for instance, and suffers a complete or partial loss – the insured will recover only 75% of the claim amount, and will have to self-insure the remaining 25%
Risk Management
Insurance needs to be regularly updated as circumstances may change radically.
Rod Pearson, technical consultant at Glenrand MIB, offers some basic principles to get you started: “Look at the major risks facing the survival of your business. While they vary from business to business, they’ll probably include your credit book, your staff’s integrity, your own indispensability to the business, and insurable risks like theft, fire and motor.”
These are things you’ll be thinking about every day – so formalise a risk management strategy around them.
That done, Pearson says you should separate the risks into those inevitable incidents which you self-insure, and catastrophes – the type of events which could wipe out your business – which you certainly insure against.
“You need to ensure you have adequate limits, and that your assets are all fully covered for replacement value rather than market value or you may not be able to get back to business after an incident. Your liability limits must be adequate in case you’re sued – you may otherwise be personally liable for your business’s dealings.
“When taking out a policy, you must disclose everything and tell no lies – and the same goes when reporting claims.”
He suggests you self-insure as much as possible. The occasional burglary and car accident is bound to happen. Insuring them is what is called rand-swapping – you pay your insurer at the beginning of the year, and they repay you during the course of the year. Such claims will be built in to your premium. Most companies for this reason self-insure to some extent, and take every measure possible to prevent claims from happening.
Pearson lists the cover that a start-up business should minimally have: material damage; business interruption; directors and officers liability; personal accident and life cover for yourself and principal staff; motor, with adequate liability cover in the event of a court case; burglary, covering cash and contents; and fraud by staff.
Regulation is often the curse of small business, but insurance is one area where it has been kind: all the regulation is aimed at consumer protection, and has resulted in a far more professional industry, claims Ternent.
How are premiums calculated?
Insurance companies charge premiums in order to mitigate their risk of payout in the event of a claim.
They employ risk analysts to evaluate and determine the risk of insuring a specific insured item and as a general rule, the greater the risk, the higher the premium. An actuary will conduct a statistical analysis of the different variables involved and determine which risk factors are more likely to result in a payout.
The factors considered differ depending on what’s being insured; for office contents an insurance company may take into account factors such as location, security systems and who has access to the building, while for a motor vehicle they will compile a risk profile of the driver based on accident history, age, gender and various other demographic factors.
Often there are things you can do to reduce your premium, and it’s worthwhile asking your insurance company about these. They may include fitting a tracking device to your company vehicle, purchasing a surge protector for your electronic equipment, or installing additional security for your office building.