Save Money on Business Insurance: Self-Insure What You Can

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Insurance companies have operating expenses, just like any other business, and want to make a profit. Insurance companies typically have an “expense ratio” of between 30-35% and claim handling expenses of about 10%. They would love to make a profit of 5-10%. The remaining 50% is for actual claim payments. The insurance company will charge you twice what they expect to pay for claims. In the long-term, you will save approximately 50% by self-insuring any claims that are within your means.

Be aware of these points.

First, the long and short term are two different things. Murphy’s Law is a factor that can throw off the best laid plans. It is possible to have multiple claims, up to five for $100,000. Make sure you have enough coverage to handle both the most likely claims and the worst case scenarios. You should consider whether you can handle the worst case scenario, such as a tornado or earthquake that could result in multiple vehicles being damaged. If you are able to handle the worst scenario without putting your company at risk, then you can drop the insurance. This will allow you to make a profit over several years. You will be more likely to have a positive outcome if you can handle the worst case scenario without compromising your company’s financial viability.

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Also, ensure you’ve done an accurate analysis of your exposures. Self-insuring known risks is one thing, but not being able to recognize risks is quite another. Self-insurance does not mean that you are ignoring insurance. As you can see, self-insuring vehicles for earthquake and flood damage should be considered. If all of them are in the same place and could be at risk, then you should consider how much each one will cost and adjust your self-insurance limit accordingly. This is a crucial step and you may need to hire help if you don’t have the expertise. Although many brokers are competent enough to help, it is a good idea to seek out an independent consultant or risk manager if your situation is more complicated. For assistance, you might contact RIMS (the Risk and Insurance Management Society) at www.rims.org

Third, ensure that your lender or bank is on board. Many loans require insurance. If you don’t have it, they will give it to you. This insurance is often more expensive than normal insurance and should be avoided. You can discuss the self-insurance program you are considering with your agent and ask them to waive any insurance requirements.

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Fourth, make sure your bank, stockholders, auditors, partners, etc. You are okay with earnings volatility. The advantage of insurance is that you can even out the cost and provide earnings stability. You might want to build up your reserves and start slowly if stability is important. You can start by increasing your deductible and tracking the savings or losses.

Fifth, you shouldn’t self-insure claims with high severity. Even if your new building is equipped with alarms, sprinklers and fireproof constructions, you should not insure it. If you are unsure about the likelihood of a fire, I wouldn’t recommend self-insuring your building. You cannot take on that risk just to save a minimal premium. Your self-insurance program should be able to focus on those areas where losses are more common and less severe.