Reducing Overhead Costs

With the uncertainty of the current economic slowdown, the potential for stagflation, and staffing difficulties, firms are aggressively moving to manage costs. With project delays and shutdowns, clients processing invoices slower, and new opportunities delayed or limited, managing expenses and overhead costs is critical.

One area for potentially significant cost reductions is business insurance. Total insurance program costs for professional services firms average from roughly 1 percent to as much as 3.5 percent of gross revenue. Depending on the size of your firm, the potential for savings ranges from thousands to millions of dollars.

SHORT-TERM INSURANCE PREMIUM SAVINGS

Has your firm been provided with a benchmark report showing what comparable firms pay for insurance? Without access to legitimate and meaningful benchmark data on insurance program design, coverage, and cost, you do not have the data to determine if your firm has a competitive deal. Not every insurance broker has the needed data for benchmarking for three typical reasons:

• Many insurance brokers operate only in a single regional market and do not see program design and pricing throughout the country. While it’s not supposed to happen, some insurance companies are more competitive in some regions than others.

• There is no sharing of data. An insurance broker with multiple offices, or account managers who operate in silos without collaboration across teams and offices, does not aggregate information in a way that allows competitive analysis.

• Many brokers simply lack the client portfolio for effective benchmarking and thus offer only what wholesalers or insurers can provide or offer no benchmarking at all. Even those insurance brokers with enough clients in the professional services space to create benchmark data can only do so by revenue—but not by discipline. Rates, limits, and retentions vary tremendously among disciplines.

The key to effective benchmarking is not only collection of information for similar sized firms but also those with similar disciplines. 

To further drive home the point on the importance of insightful comparative data, here are some examples of potential scenarios and solutions that could impact the cost of insurance:

Misunderstood Exposure: The underwriter of a unique firm may misunderstand the exposure thinking it is a lot riskier than it is. After successful communication, the underwriter’s opinion could be changed, and the premium reduced.

Multiple Policies: As a design firm grows and adds new services and exposures, the insurance broker keeps adding new policies. The correct solution is not more policies but simply to find a new insurance company that could handle all exposures in one policy, reducing cost.

No Other Design Firm Clients: The service team at a large national broker may not be experienced in serving design firms. The bigger broker was selected for their perceived market “clout” rather than their familiarity with the client’s unique needs.

Excessive Limits: In some cases firms will purchase, perhaps on the advice of their broker, a policy limit well in excess of what benchmark data indicates their peers have purchased.

LONG-TERM RELATIONSHIPS

For many firms, a long relationship with an insurance company or broker provides certainty and peace of mind. Insurance is a product that depends on trust—design firms pay premium now for the promise of quality coverage and claim service in the future. A long-term arrangement should result in a good deal for both sides. But is that always the case? And is the perceived trust warranted? In cases where a design firm makes the decision to leave a long-term broker relationship, they might be surprised by one or all the following issues:

• The premium that had been paid in the past, often for many years, is much higher than prevailing benchmarks. The cumulative additional cost incurred can be substantial.

• Coverage gaps can be considerable. Despite higher premiums, firms are unknowingly uninsured for major risks. As one example, a firm that mostly does work for public entities may have an exclusion in their policy for all work done for government agencies.

• Some design firms outgrow their insurer. Many insurance carriers specialize in representing firms of a particular size or discipline or focus on smaller firms with revenues below a certain threshold. The insurer may maintain an insured as they grow but normally at a less competitive premium with gaps in coverage.

Loyalty should result in a better deal, with lower premiums and better coverage, but that is not always the case.  Usually one of two things has happened:

• The insurance program suffers neglect and drifts higher, just a little each year, than market pricing. Over several years, the cumulative difference become considerable.

• The incumbent broker has limited experience working with design firms and is unaware of what options are available.

The argument isn’t against long-term relationships between insurance companies and insureds.  However, an insurance program must be properly tested against market pricing so an “open book” decision can be made on cost and coverage. This can be achieved without planning to obtain competitive options each year – which could exhaust underwriters and leave the insurance marketplace less competitive over time – by using benchmark data and the timeframe outlined below.

TIMING MATTERS

While it might seem an easy goal to achieve, few insurance brokers complete the renewal process well ahead of policy expiration. Last minute renewals result in a time crunch that limits options, reduces negotiating strength, gives little time for making decisions, and causes late issuance of certificates of insurance—which can negatively affect cash flow when clients will not process invoices without a renewal certificate.

Your renewal should be started many months ahead of the renewal date (as much as six) and planned to finish at least 30 days ahead of policy expiration. That means if your firm’s insurance renews on July 1, your kick-off renewal planning meeting should happen around February 1. Working well ahead of time not only reduces stress, but it also allows time to pursue and evaluate cost-competitive options. Many firms with summer and early fall renewals this year may soon find that their renewals are progressing slower than they should because brokers and underwriters are affected by the shift to remote working and a hardening insurance marketplace.

CREATIVE SOLUTIONS

Larger firms have even more creative solutions available to address cost savings related to their business insurance programs. For firms of $50M in revenue or more, this is particularly true. They have the option to enter a group captive insurance program for their workers compensation, commercial general liability, and business auto coverage, potentially saving millions of dollars over the long term.

A group captive works and looks like traditional insurance with two key differences:

• The investment income that insurers normally keep is instead paid to policyholders.

• The premium is not fixed regardless of losses. If your firm has favorable losses in these lines of coverage, as most design firms do, then the group captive program will provide a refund of most unused premium dollars.

CONCLUSION

Access to benchmark data and creative alternative risk programs, plus being open to competitive options, has the potential to save your firm significant dollars at a time when reducing expenses may be critical.