Joined: 15 May 2007 Posts: 774 Location: Baton Rouge, LA
Posted: Tue Mar 04, 2008 2:59 pm Post subject: Risk, Cost and Insurance
Insurance is a wonderful tool, allowing businesses to deal with risk they could not otherwise accept. For instance without insurance, few people could take the risk of building a new facility. Devastating occurrences (e.g., fire, tornado, hurricane, etc.) do not happen often, but the ‘downside’ cannot be tolerated, if they did. This is the proper use for insurance, in my opinion.
While insurance is a useful tool, it does not come without a cost. Paying someone to assume our risk is expensive. Like anything expensive, insurance should be managed. For example, not every risk needs to be covered by insurance and often it is better to work to lower the risk than pay the premium.
A major factor in considering whether to insure is the “downside,” or possible maximum cost of a claim. What is the worst that might happen and can you live with it? One example might be collision and comprehensive insurance on a company vehicle. If the vehicle is expensive or money is still owed, the risk may need to be insured. However, does the company need an expensive vehicle for this purpose? By purchasing an older vehicle and paying cash, the need to insure may be able to be dispensed with.
Partially self-insuring, with very high deductibles can also save money. Again, a business can decide the risk it can tolerate and take that deductible. We carry $10,000 deductible and have for several years. I have saved more than twice that amount in premium over the period. This is possible, because I can tolerate a $10,000 occurrence. If I could not, it would not be feasible to accept the risk.
Self-insuring on smaller, limited risk can also help control premium cost. This is not for everyone. Some people may not like the idea of having to pay their own claims. I would also not suggest this on high-cost or open ended liability issues. On limited-liability issues, such as tools, equipment, signs, windows, computers, etc. it may be feasible to manage your own risk.
Joined: 19 May 2007 Posts: 206 Location: Camp Verde, AZ
Posted: Tue Mar 04, 2008 10:53 pm Post subject: Re: Risk, Cost and Insurance
louis wrote:
Self-insuring on smaller, limited risk can also help control premium cost. This is not for everyone. Some people may not like the idea of having to pay their own claims. I would also not suggest this on high-cost or open ended liability issues. On limited-liability issues, such as tools, equipment, signs, windows, computers, etc. it may be feasible to manage your own risk.
I agree with you. The longer we are in business the more we raise the deductible because we can afford to take a bigger part of the risk.
It is surprising how expensive it is to insure tools and some of the smaller items. The insurance cost per $1000.00 of tools is much higher than for liability insurance.
By covering the smaller claims, in house, the rates stay lower plus you do not run the risk of the insurance company dropping your insurance.
_________________ David Wittmayer
Owner / Manager
Hansen Enterprises Fleet Repair, LLC
Camp Verde, AZ
www.hefrshop.com
Joined: 09 Dec 2007 Posts: 21 Location: Lathrop MO
Posted: Wed Mar 05, 2008 1:36 am Post subject:
Hi Louis,
Couldn't a person look at insurance much the same way you see the warranty on a new car? When you buy the car you purchased repairs in advance. I think the same is true with insurance. The premium you pay is to purchase the damage in advance, and paying interest on top of it (the insurance companies profit).
My personal preference would be to keep their profit to a minimum. With this in mind there is more then one way to save money on insurance. For example it seems I hear or read "good" management advice is to price shop insurance yearly because there may be money that can be saved by making sure they know they are competing for your business or another company may have a lower rate. On the surface that seems like decent enough advice but I have insurance rates most people think are unbelievablely low. Like you, I'll carry a higher deductable (although not nearly as high as the example you gave). However, I don't think that's where I've made the most gain in keeping the rates low. I believe I've gained the most by keeping their profit in porportion by not having very many claims in my life and possibly the most significant way is by staying with one company for a long time (they've made their profit, now they just "maintain" it). For my car insurance I've had the same company [a major name company] and same agent for about 20 years now. He also insures my home. I have a different agent and company for my shop that is a friend and also located only 3 doors down from my shop. He mentioned to me to consider purchasing my car insurance from him. When I told him how long I've had my insurance with the same place and what my rate was he didn't think it was to my advantage to attempt to change, there was no way anyone is going to beat their rate. Another added benefit is about 7 years ago I recieved a letter from them telling me they appreciate my business and because of length of time I've been with them and low claims they are happy to inform me they will never cancel me or my spouse.
Joined: 15 May 2007 Posts: 774 Location: Baton Rouge, LA
Posted: Sun Mar 09, 2008 1:11 pm Post subject: Re: Risk, Cost and Insurance
Hi Dave,
Dave wrote:
louis wrote:
Self-insuring on smaller, limited risk can also help control premium cost. This is not for everyone. Some people may not like the idea of having to pay their own claims. I would also not suggest this on high-cost or open ended liability issues. On limited-liability issues, such as tools, equipment, signs, windows, computers, etc. it may be feasible to manage your own risk.
I agree with you. The longer we are in business the more we raise the deductible because we can afford to take a bigger part of the risk.
It is surprising how expensive it is to insure tools and some of the smaller items. The insurance cost per $1000.00 of tools is much higher than for liability insurance.
By covering the smaller claims, in house, the rates stay lower plus you do not run the risk of the insurance company dropping your insurance.
You make a very good point. I find a lot of coverages, like tools, is very expensive, relative to risk. The cost to secure the tools (e.g., locks, bars, alarms, etc.) may be considerably lower and more effective.
Joined: 15 May 2007 Posts: 774 Location: Baton Rouge, LA
Posted: Sun Mar 09, 2008 1:29 pm Post subject:
Hi Jeff,
Jeff S wrote:
Hi Louis,
Couldn't a person look at insurance much the same way you see the warranty on a new car? When you buy the car you purchased repairs in advance. I think the same is true with insurance. The premium you pay is to purchase the damage in advance, and paying interest on top of it (the insurance companies profit).
I think it's very similar, with a few differences. Insurance is something purchased separately from that which it covers and in an amount and coverage decided by the client.
Warranty is added to the price of the product.
Insurance also normally pays [a set amount] for an occurrence and the client chooses whether, where and how the occurrence is resolved.
Warranty specifies you will go to their agent and have the repair they deem proper or receive nothing.
Jeff S wrote:
My personal preference would be to keep their profit to a minimum. With this in mind there is more then one way to save money on insurance. For example it seems I hear or read "good" management advice is to price shop insurance yearly because there may be money that can be saved by making sure they know they are competing for your business or another company may have a lower rate. On the surface that seems like decent enough advice but I have insurance rates most people think are unbelievablely low. Like you, I'll carry a higher deductable (although not nearly as high as the example you gave). However, I don't think that's where I've made the most gain in keeping the rates low. I believe I've gained the most by keeping their profit in porportion by not having very many claims in my life and possibly the most significant way is by staying with one company for a long time (they've made their profit, now they just "maintain" it). For my car insurance I've had the same company [a major name company] and same agent for about 20 years now. He also insures my home. I have a different agent and company for my shop that is a friend and also located only 3 doors down from my shop. He mentioned to me to consider purchasing my car insurance from him. When I told him how long I've had my insurance with the same place and what my rate was he didn't think it was to my advantage to attempt to change, there was no way anyone is going to beat their rate. Another added benefit is about 7 years ago I recieved a letter from them telling me they appreciate my business and because of length of time I've been with them and low claims they are happy to inform me they will never cancel me or my spouse.
I have been told insurance companies are by law required to accept certain high risk clients. Their cost is balanced with other low-risk policy holders. In effect, because of averaging, the good pay for the bad as far as claims.
Some companies seem to realize the inequity of such a system and attempt to reward low/no claims policy holders, as you mention. The more effective companies are at managing their high-risk and attracting low-risk, the lower their rates may be. I suppose it's much like everything else and comes down to management. Thanks Jeff, you make a very good point.
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