The unfortunate truth that all businesses must face is the fact that they all need insurance premium. The price of insurance may seem prohibitive but it is a drop in the ocean compared to the cost of lengthy lawsuits and large settlements. We live in a culture of litigation, and by not having adequate insurance, a company is taking a gigantic risk that may have monetary short-term benefits but will almost certainly backfire in the long-term.
The main goal of insurance is to transfer risk that has the potential to damage, or even bankrupt a business, to third parties i.e. insurance companies. This allows businesses to take risks that they would not be able to take otherwise. Henry Ford said that without insurance companies, New York wouldn’t have its skyscrapers as no company would have risked constructing these huge buildings that could catch fire from a lit cigarette.
Most businesses probably don’t share Henry Ford’s rosy view of the insurance industry. They just see the huge cheques they send out each month and deem it an expensive but unavoidable cost of doing business. Companies feel powerless over the cost of insurance but this is not actually the case.
Insurance premiums are a complex expense but businesses can do several things involving risk management and improving health and safety standards inside the company to help bring down the costs of their insurance.
Companies need lots of insurance
It is important to know and understand the different types of insurance premium policies companies take out to protect themselves from risks:
- Property and business interruption insurance – This protects the business from risks such as fire, wind, flood damage etc. Business interruption insurance premium is a complementary policy to property insurance and protects the company from further costs incurred because of a failure to continue production.
- Liability insurance – There are a variety of liability insurance premiumpolicies:
1) Product liability insurance protects the business from defective products.
2) Environmental liability insurance protects from potential costs incurred through liability or clean-up operations.
3) Professional liability insurance covers the costs of damages incurred through lack of professional care.
There are quite a few more types of liability insurance. We mentioned that business insurance is expensive!
- Worker’s compensation insurance – This covers the cost of claims by workers for the consequences of occupational accidents and disease. This is a big one. In some countries, this insurance is part of a national scheme but in countries like the US, it is provided by private industry. It is often mandatory for companies to provide this type of insurance and can be hugely expensive for large companies. Because worker’s compensation insurance is often mandatory, large companies, particularly in the construction industry, end up buying much more coverage than is financially ideal from a risk management perspective.
- Motor insurance – This covers claims involving vehicles owned by the company.
- Specialty risk insurance – This kind of insurance depends on the business’ field of operation. For instance, if a business is operating in the oil and gas industry, they probably require offshore energy insurance which covers oil rigs, supply vessels and pipelines. But if you’re in the dairy industry, it’s unlikely you need to worry about offshore energy insurance.
- Revenue protection insurance – This policy protects companies involved in industries where the revenue yield can vary significantly. Traditionally, this insurance has been associated with the agriculture industry but this insurance is also very popular in construction and mining where revenue has a lot of variance.
The real cost of insurance
One useful way to measure the effective cost of insurance is to compare the cost of insurance to revenue. Research by Swiss Re, one of the leading global reinsurance companies, found that the construction industry paid the most in insurance premiums compared to revenue. This is due to high general liability costs and very high cost of worker’s compensation insurance pay-outs involved in the construction industry compared to other industries.
One interesting lesson from the insurance costs to revenue information is that larger companies do better than smaller companies. This is because larger companies are better able to implement top-down safety risk management and mitigation strategies to bring down costs. Risk prevention strategies can be very helpful in bringing down premium costs because decreasing the risks for injury decreases the risks of worker’s bringing claims against the employer.
Reducing insurance premiums through health and safety improvements needs to be part of a holistic safety risk management scheme. It may not be a bad idea to consult with a risk reduction specialist to develop a comprehensive risk reduction scheme to help reduce insurance costs. You can also consult directly with your insurance provider or broker to find out what improvements could be made to reduce the cost of premiums.
How training your workers can reduce risk and lower your insurance premiums
We’ve already talked about the high costs of employer liability insurance, particularly in the construction industry, and this is one of the main areas that risk reduction strategies can really help bring down the cost of premiums. By reducing risk and improving the safety at work, insurance premiums can be reduced by significant amounts.
- Training workers and/or contractors to a high standard is vital in this area. Workers who do not get adequate training in health and safety are a danger to themselves and others, as well as a huge liability risk for the company. They also risk delaying production through poor work practices, which can also impact on the cost of insurance premiums. It’s crucial to Instil in your workers the safety ethos of your company. This is best done when onboarding new workers or contractors as it presents an opportunity to show that safety is a priority for the business.
- Listen to your workers. Risk identification is often best done by workers on the front line who are the most likely to confront workplace hazards. It is important to take account of their concerns so an appropriate risk prevention strategy can be implemented. An employer’s first priority is to protect a worker’s life, so listening to a worker’s safety concerns is a good policy in general.
- Perform a safety management review to identify areas not up to the desired standard that can be improved upon to help reduce risk. Regular audits of a company’s safety performance are useful for management so that they’re aware of the areas that the company could improve to lower insurance premiums.
- Improve occupational safety as much as possible. This has obvious benefits in that it reduces the risk of your workers getting injured and the potential for claims. It is also wise to ensure that members of the public are as safe as possible from any potential injury resulting from a project. There should be clear signs and railings to make members of the public aware of the presence of a worksite.
- Ensuring that you have fire alarms and an automatic sprinkler system can help bring down the cost of fire insurance. These improvements might have a high initial cost attached to them but will pay themselves back in deductions from your insurance costs in the future. As with most things in business, it pays to think long-term.
- Prioritize safety. It’s not enough to just talk the talk when it comes to safety, you have to walk the walk. Investing in health and safety improvements in infrastructure training for workers shows an insurance provider that you are serious about risk prevention. Instilling the same spirit of safety at work and accident prevention is just as important. Insurance premiums are partly based on the claims record of the business so having a good historical record in relation to liability will pay off in the future.
- Make sure your safety management structures are of the highest standard. If a business can show they have this then their premiums will decrease. A company should have qualified and experienced people in charge of safety, have a clear accident reporting system so risk can be identified and managed, implement safety targets and objectives and aim to win safety awards.
Conclusion
When taking out a business insurance policy, it is important to review the insurance premium policy at regular intervals to ensure it is exactly the policy that suits the company. You should shop around at different providers to make sure you get the best deal out there. But equally important, a company should review safety practices. They should be of the highest standard, otherwise insurance premiums will be incredibly expensive. By implementing better safety at work, like improvements in training and occupational safety, a company can reduce the cost of their insurance premium.
