Most businesses define their insurance program by looking strictly at premiums. If business premiums go down, businesses tend to think things are good. However, if business premiums go up, they tend to think their program is not going well. Many other considerations should go into your business insurance or risk management program evaluation. First, know the difference between insurance and risk management.
Risk management can be defined as the process of identifying, assessing and treating various threats to your business. A threat might be anything that can cause a loss to your business, such as a fire, theft, injury, or even financial risks. Insurance is a part of risk management in that insurance is a way to treat or manage risk. In fact, insurance is the most common method of treating your many risks.
Your cost of risk is the combination of all the many different kinds of risk you have, or to put it simply, your cost of risk is the combination of business insurance premiums, retained losses (not covered by insurance) and your cost to administer your program. Your cost of risk is the sum total of these items not just your business insurance premiums, and can include:
- Insurance premiums.
- Self-insured costs or deductibles.
- Agent fees.
- Fines or penalties form Government bodies like OSHA.
- Claims that are uninsured.
- Cost of your administrative time.
- Safety program costs.
- Legal costs associated with your risk program.
Risks can be divided into many different categories, but for the purpose of this article, we have defined them like this:
Strategic Risks can include anything that will have an impact on your business’s overall viability. Examples are managing employees, your businesses reputation, how customers view your business, how the community views your business, product development, your products pricing, marketing, and even how you interrelate to Government regulators.
Operational or Hazard Risks can be defined as those more closely tied to operations. These might include the cost of manufacturing products, cost of goods purchased, business insurance premiums, cost of your fleet management, the management of your supply chain, contracts with third parties, building management, expenses, and human resources.
Financial Risks usually include the cost of capital improvement, banking and other financial service costs, cost of capital or borrowing, business development, and other market factors that might affect your business.
If you have a good understanding of your cost of risk you will be able to have a greater impact on the treatment and management of costs. Here is one of the best ways to start your cost of risk evaluation.
- Identify all your business insurance premiums including property insurance, bonds, liability insurance, and even workers’ compensation insurance.
- Look at all your retained losses. These should include losses that went uninsured and any deductible expenses you paid.
- Try to allocate your administrative costs toward your risk program. Make sure you include total employment costs—not just salary.
- Add these costs up by year and you will have a total cost of risk for that year.
- Divide this number into your total sales or revenue to get a percentage of risk comparison.
- If you compare this from year to year you can see how your cost of risk is doing as compared to revenue.
What Is Next?
Once you know your cost of risk and have a comparison to your business revenue, you are then able to manage it. For example, if your revenue is shrinking but your cost of risk doubles it may be time to review your losses or insurance program. It may be that your business insurance program needs to be adjusted to reflect your reduced operations. In some cases, businesses that are not growing have internal issues (employee claims or human resource issues) that can increase the cost of doing business even though the business is not growing.
Many business owners simply think if costs go up it must be that business insurance costs are too high. However, by identifying your business costs you are able to manage these separately and with greater results. If you desire to reduce your cost of risk without jeopardizing your business insurance coverage you might consider increasing your deductibles. Now that you have tracked your deductible costs over time, you are able to determine if an increase makes sense.
Our agency can review your total cost of risk with you and help you design the right program to meet your needs. One of the goals we have is to understand your business before we provide any solutions. We have an experienced team of licensed independent agents ready to help you find the right combination of coverage and price.