Why Most Businesses Get Insurance All Wrong?
Before you pat yourself on the back for saving money on your insurance, you need to understand the true cost of managing, retaining or transferring risk. This is a concept called Total Cost of Risk (TCOR). Don’t be short-sighted. Look beyond your insurance premiums. Learn how to identify your Total Cost of Risk.
You may not care about any of this. You just want the cheapest insurance you can find, and you’ll worry about the details later. That’s certainly up to you. But you may want to understand the difference between low price and low total cost.
A Deeper Dive
Take a look at the below iceberg. Insurance premium is an easily identifiable expense. It’s an “above the water” cost. However, it’s the indirect costs lurking below the surface that hurt you the most.
Consider the Cost of Lost Opportunity
For example, some insurance brokers provide safety/loss control services, training opportunities, benchmarking, and much more. When shopping around for an insurance broker, make sure you learn about their other services. If Insurance Broker A’s insurance quote is $5,000 cheaper than Insurance Broker B’s quote, but Broker B also offers free safety training for your employees which would normally cost you $10,000. Insurance Broker A’s cheaper insurance policy suddenly doesn’t look so good, does it?
In times of keen competition and low profit margins, managing TCOR may contribute more to profits than your best salesperson ever could.
The below table shows the amount of sales you would need to offset a certain amount of TCOR. For example, if your profit margin is 5%, you would need sales of $500,000 to pay for $25,000 worth of TCOR; with a 20% margin, $500,000 of sales would be necessary to pay for $100,000 worth of TCOR:
Does the prospect of a $500,000 sale excite you? Identify and manage your TCOR, and you can achieve the same result. Does your insurance broker know how to work below the iceberg? Are they equipped to identify your Total Cost of Risk, so you can make sound business decisions?