Have you ever compared premium quotes only to discover the policies had different deductibles, limits, or even a different audit basis? Confusing, isn't it?
Premiums do not compare easily, nor do they necessarily reflect the costs of your risk profile. Lower premium is not always your best bet, because uncovered risk can put companies out of business.
So how do you know the right amount to budget for insurance? You don't—budget for risk, and from that, buy insurance.
As a business owner and entrepreneur, identify and assess your risks. Uncovered liability risks, like driving vehicles or manufacturing a product, can destroy your company; running out of postage will probably not slow things down. For additional guidance, see The Importance of Insurance for Entrepreneurs.
You prioritize and decide what liabilities you want to assume and what liabilities you want to transfer.
For example, consider automobile physical damage: how large is your fleet and how predictable is this loss?
If you have one executive new vehicle with financing, you're going to buy insurance to cover it; just think deductible versus premium. If you only have a financing interest in a vehicle, see Single-interest insurance.
If you have twenty similar vehicles, say panel trucks, and the fleet is paid for, you may consider not insuring the physical damage for collision or other perils.
Why? Because you're often just paying a fee to bank the money while you do the claims legwork anyway, so you may prefer to keep the premium and accept the risk.
Your drivers can reduce your risk through defensive driving techniques and by avoiding alcohol, texting, or other distractions.
How about your products in transit? Is the value in one load big enough to ruin your company financially?
If you ship relatively small amounts by common carriers, you may decide to self-retain the loss; if one load could be catastrophic, you need insurance. For help assessing those choices, see Business and Personal Insurance: Risk Management and Planning.
Okay, you've thought through your process. Now, in plain English, talk to an agent about what you want covered.
Make a simple list: employee safety and health, product liability if your products cause harm, and auto liability if your vehicle hits someone.
Then decide how much per incident you are willing to pay — for example, the first $1,000 of any loss.
Now choose a total budget (a number or a percentage of annual gross) that limits all your claims and premiums to the most you're willing to pay, and let agents design programs around those parameters so you can compare.
When comparing quotes, make sure policy limits, deductibles, coverages, and audit bases match so you compare apples to apples.
Frequently Asked Questions
How do I decide whether to insure a particular risk?
Compare the frequency and severity of potential losses and whether a single event could threaten the business; insure catastrophic, low-frequency losses and consider retaining small, predictable ones.
What should I check when comparing insurance quotes?
Confirm that limits, deductibles, covered perils, exclusions, and the audit basis are consistent across quotes so you are comparing equivalent programs.
What does it mean to self-insure?
Self-insuring means retaining certain losses and budgeting to pay them directly instead of transferring the risk to an insurer through a policy.
When is it appropriate to raise deductibles?
Raising deductibles can lower premiums if you have sufficient cash reserves and a predictable loss history, but it increases your out-of-pocket exposure for each claim.