Knowing how much insurance you will need as a small business owner can be a challenging endeavor. Nevertheless, having the appropriate insurance policy can save a small business a lot of money.
Needs analysis can give you a better idea of what kind and how much insurance would be the optimum for your business. Of course, buying liability, property and health insurance, in addition to Workmen’s Compensation, can be quite expensive, so assessing your business’ needs and what kind and how much insurance can be crucial.
Evaluating Your Business
The first consideration when using needs analysis for deciding on an insurance policy for your small business consists of accurately analyzing the different liabilities and assets which directly affect the business. These include:
Property — this includes equipment, real estate and other assets.
Business Volume — the amount of accounts receivable and the average cash flow of the business.
Salaries — how much you pay yourself and however many employees the company has.
Overhead — the cost of running the business including rent, utilities and other miscellaneous expenses.
Future Trends and the Local Economy — how future trends and the state of the local economy will affect the business in the future.
You can then better determine your company’s insurance objectives and what type of insurance plan would be optimal for your business by keeping the above factors in mind.
The second consideration for your insurance needs involves estimating your business’s potential for losses. This includes fire, theft, property damage, an employee’s legal action or losses due to economic hardship.
Getting the Right Amount of Insurance
Once you have evaluated your assets and liabilities, you will be much better prepared to determine how much insurance your company will need. You will want adequate coverage for your assets so make an accurate assessment of potential risks to your property to get adequate coverage.
Remember, a high premium will provide a higher amount of coverage so be aware of potential risks and make sure your business is covered for any high risk factors. Also, if you choose a higher deductible, you will probably pay less for your policy. Make sure you get the right amount of insurance depending on what your company can afford.
By law, your business will need Workers’ Compensation insurance. Consult with your company’s lawyer or advisor on how much your company may need and what type of package would be optimal for you and your employees.
Comprehensive coverage might be optimal for your business if you have several employees and own the business property. Group health and life insurance along with disability, property, flood and fire insurance can often be included in your policy.
Choose a Reliable Carrier
A reliable insurance company and an experienced agent can be an important element to obtaining the right amount of insurance for your business. A knowledgeable agent can help you perform your needs analysis, and can sometimes speed up the claim process, if you need to make one.
Also, choosing an insurance company with a good reputation and solid finances will give you greater peace of mind if any unfortunate event befalls your business. The last thing you need if you have to make a claim is an insolvent insurance carrier.
Finally, have your business appraised periodically to gauge how much insurance you will need on an ongoing basis. Since business finances and assets change over time, the amount of insurance you might need can also change.
The majority of small businesses would like to offer health insurance to their employees as it allows them to attract and retain high-caliber talent. But the expense involved can be a major constraint.
The National Small Business Association’s (NSBA) 2015 Health Care Survey found that only 41% of firms with zero to five employees offer health care benefits, down from 46% a year ago. The situation is slightly better when all firms with less than 500 employees are considered with 65% of employers in this category offering insurance benefits.
Rising costs and the complexity of the health care system are among the reasons for the reluctance of small business owners to provide this essential benefit.
But it is possible for companies to reduce their expenses on insurance.
Check out group insurance vs. the cost of individual plans — The age profile of your employees and the pre-existing conditions they have will determine which of the two options is more economical. A group rate may be cheaper as the premium you have to pay is based on the rate applicable to people with the same demographic profile. You will be better off with this option if your employees are more susceptible to chronic diseases.
On the other hand, staying with individual plans may cost you less if each of your employees attracts a lower premium.
There is no simple formula to determine whether a group plan or a bunch of individual plans will save you more money. The best way to find out is to ascertain the insurance premium payable under each option.
If you are of the view that you don’t have the number of employees that are necessary to qualify for a group, don’t worry. Even two employees are enough.
Remember to negotiate — Many small business owners think that the annual premium figure cannot be lowered. But this is not true. Health insurance premiums can be negotiated, especially by firms that have between 50 to 99 employees.
When an insurance company raises rates, they usually refer to the fact that all the employees have become a year older. Employers should point out factors in their favor. They may have implemented an extensive wellness plan in the last 12 months which could have resulted in healthier employees. Some older employees may have retired or resigned.
Brokers can play an important role — Don’t underestimate the benefits that health insurance brokers can bring to the negotiating table. They would be aware of the latest developments in the various laws and regulations governing the health insurance industry. They would also have extensive knowledge about the various plans available with different insurers.
You may be eligible for tax credits — Raise this point with your tax consultant. Employers with less than 25 full-time employees who earn an average of $50,000 or less are eligible under certain conditions. These include contributing at least 50% of the total premium cost and obtaining coverage through the Small Business Health Options Program (SHOP).
Make bringing insurance costs down your priority
Bringing down health insurance costs should be a prime concern for every private firm. According to the findings of the NSBA’s survey, 90% of small business owners reported paying increased health plan premiums at their most recent renewal. Rising health insurance costs prompted slightly less than half of the respondents to defer salary increases.
If small businesses are to remain competitive they should take every opportunity to deliver the most appropriate health insurance policies to their employees at the lowest possible cost.
Main article: Insurability
Risk which can be insured by private companies typically shares seven common characteristics:
Large number of similar exposure units: Since insurance operates through pooling resources, the majority of insurance policies are provided for individual members of large classes, allowing insurers to benefit from the law of large numbers in which predicted losses are similar to the actual losses. Exceptions include Lloyd’s of London, which is famous for insuring the life or health of actors, sports figures, and other famous individuals. However, all exposures will have particular differences, which may lead to different premium rates.
Definite loss: The loss takes place at a known time, in a known place, and from a known cause. The classic example is death of an insured person on a life insurance policy. Fire, automobile accidents, and worker injuries may all easily meet this criterion. Other types of losses may only be definite in theory. Occupational disease, for instance, may involve prolonged exposure to injurious conditions where no specific time, place, or cause is identifiable. Ideally, the time, place, and cause of a loss should be clear enough that a reasonable person, with sufficient information, could objectively verify all three elements.
Accidental loss: The event that constitutes the trigger of a claim should be fortuitous, or at least outside the control of the beneficiary of the insurance. The loss should be pure, in the sense that it results from an event for which there is only the opportunity for cost. Events that contain speculative elements such as ordinary business risks or even purchasing a lottery ticket are generally not considered insurable.
Large loss: The size of the loss must be meaningful from the perspective of the insured. Insurance premiums need to cover both the expected cost of losses, plus the cost of issuing and administering the policy, adjusting losses, and supplying the capital needed to reasonably assure that the insurer will be able to pay claims. For small losses, these latter costs may be several times the size of the expected cost of losses. There is hardly any point in paying such costs unless the protection offered has real value to a buyer.
Affordable premium: If the likelihood of an insured event is so high, or the cost of the event so large, that the resulting premium is large relative to the amount of protection offered, then it is not likely that the insurance will be purchased, even if on offer. Furthermore, as the accounting profession formally recognizes in financial accounting standards, the premium cannot be so large that there is not a reasonable chance of a significant loss to the insurer. If there is no such chance of loss, then the transaction may have the form of insurance, but not the substance (see the U.S. Financial Accounting Standards Board pronouncement number 113: «Accounting and Reporting for Reinsurance of Short-Duration and Long-Duration Contracts»).
Calculable loss: There are two elements that must be at least estimable, if not formally calculable: the probability of loss, and the attendant cost. Probability of loss is generally an empirical exercise, while cost has more to do with the ability of a reasonable person in possession of a copy of the insurance policy and a proof of loss associated with a claim presented under that policy to make a reasonably definite and objective evaluation of the amount of the loss recoverable as a result of the claim.
Limited risk of catastrophically large losses: Insurable losses are ideally independent and non-catastrophic, meaning that the losses do not happen all at once and individual losses are not severe enough to bankrupt the insurer; insurers may prefer to limit their exposure to a loss from a single event to some small portion of their capital base. Capital constrains insurers’ ability to sell earthquake insurance as well as wind insurance in hurricane zones. In the United States, flood risk is insured by the federal government. In commercial fire insurance, it is possible to find single properties whose total exposed value is well in excess of any individual insurer’s capital constraint. Such properties are generally shared among several insurers, or are insured by a single insurer who syndicates the risk into the reinsurance market.