Insurance, as defined in the Oxford dictionary, is “an arrangement with a company in which you pay them regular amounts of money and they agree to pay the costs, for example, if you die or are ill, or if you lose or damage something.”
Naturally, it sounds simple, and the definition gives the illusion that it is not overly complex – just your standard “commodity-type business.” We find that to be true at the basic level of insurance, but as businesses mature and grow more complex, their insurance business solutions do too.
We often see business owners acquire a commercial insurance policy when the business is young. As the business grows, the business owner just starts ‘stacking’ a new policy on top of the old policy without any thought. After all, it is just a simple insurance policy added to another simple insurance policy.
This oftentimes results in two undesirable outcomes: (1) the cost of coverage is too high, and (2) the insurance policies are not as effective or as efficient as they could be.
Let us explore a couple of insurance business solutions and case studies with our friend, Harold Howell of Spartan Corporate Advisors, Inc.
Case Study #1 – Software Company
The most common way to develop an insurance program for a new company is to buy as directed when directed. Well, what does that mean?
A landlord will require liability insurance in the lease so that they do not assume the liabilities from the young company’s operations.
The State will require Workers’ Compensation insurance when the young company employs three or more people.
Certain larger client contracts will require Professional Liability, Errors & Omissions Liability, and possibly even Cyber Liability when there exists a potential for financial losses from mistakes.
The downside here is that as new policies are added over time, the overall structure is inefficient.
There are specific insurance companies that design their programs to address all these common risks under one program, thus simplifying claims, reducing the cost of policy premiums, and simplifying the renewal process.
The Solution: Whenever possible, bundle up all the risks under a single insurance company focused on the specific industry sector and with the same effective dates.
Minimizing the work and time consumed to prepare for renewals and underwrite the insurance policies will save money for the insurance companies and that is passed on to the business owner.
Save money, improve coverage.
Case Study #2 – Landscape Company
Loyalty is honorable, but the best fit with the appropriate resources is advantageous when it comes to insurance. Risk management and insurance are vastly different for a 5-employee company and a 200-employee company.
When the risk grows, so should the management of those risks and the right fit should be explored to reduce costs and address rising issues such as workplace safety and risk reductions.
The Solution: Explore the marketplace for the current business operations.
If a high Experience Modification Factor (High Worker’s Compensation Losses) exists, then address the losses and reserves for past claims, install more oversight, and provide additional safety protocols and training if necessary.
Shared risk policies have become an option for larger organizations, and they will reduce premiums as well.
Case Study #3 – Nursing Home
Health Care operations have excessively more risk than most business operations and nursing homes might be the highest risk of all. The two greatest risks within our client base of skilled nursing facilities are Professional Liability and Workers Compensation Liability.
Professional Liability is synonymous with Medical Mal-Practice Liability for Nursing Homes. The claims activity is not necessarily high, but the risk certainly is unusually extreme. Caring for the elderly is a concern for all of us that have older parents, but Nursing Homes are targeted for litigation claiming alleged misconduct, often to simply collect on settlements.
Caring for the elderly is not easy and even the professional nursing staff will lift or support patients from awkward angles causing injury. Slips and falls will happen as well, which creates significant injuries and Workers Compensation claims.
The Solution: Loss Prevention is paramount. Implementing a robust safety and training program seems to be the only way to reduce claims activity which will reduce the risk and therefore reduce the insurance premium.
Certain insurance companies will provide significant loss prevention services.
Additional expertise among the staff will also improve the incident activity. A shared-risk approach is also valid, and in this case, it actually reduced the overall cost of insurance by over $250,000 per year.
Conclusion
As you can see, these are three vastly different businesses, and each one was able to find a much better insurance business solution.
In our landscape case study, you see the ability to save $150k – $200k of annual premium savings. With this company looking to potentially sale in the next 12 – 36 months (about 3 years) at a likely multiple of 5- or 6-times EBITDA, the boost to the bottom line could also lead to somewhere between $750,000 and $1,200,000 in value to the business owner.
Meanwhile, the software company was able to achieve much better coverage for the business. And the nursing home company was able to develop its own captive company to ensure the risks the business faces. This has opened several new, longer-term planning opportunities for the business and the owner.
However, if the business owner simply continued to stack one policy on top of another rather than having a full review of their coverage, none of these unique solutions would have come to light.
Join us as we dive deeper into each of these businesses and their insurance needs with Harold Howell and explore the complex arrangements that can lead to great business opportunities.
