“How can I, as a business owner during this crisis, reduce my insurance expenses right now?”
Managing cash flow is at the top of people’s minds right now and yes, there is an opportunity to lower your insurance expenses immediately. Here are three things you can do right now to make sure you don’t spend a penny more than you need to on insurance. Contact your insurance provider today and ask them to do these things:
1. Switch to a “pay-as-you-go” billing method.
In my opinion pay-as-you-go, or PayGo, is the best billing method for small business workers’ compensation policies. There are many benefits of switching to PayGo. You can learn more about them here.
I’m sure there are instances where it doesn’t make sense, but businesses get tremendous benefit from this billing method almost all the time. The real value here is that you only pay premium when you pay employees. So if you close for a day, week, or month and have no payroll – you don’t pay any premium. This is the single best way to manage work comp cash flow. And as an added benefit, insurance companies who do this well (shameless plug for Cerity) virtually eliminating the need for an audit at the end of the policy term.
If you’re wondering how it’s all possible, traditional policies provide an annualized quote and are paid with installments (monthly invoices). When PayGo policies are calculated they result in a “percentage of payroll” as the price.
Traditional: $500,000 estimated annual payroll; $1,200/year = $100/month
PayGo: Rate of 0.0024 ($1,200 / $500,000); 0.0024 * payroll during the pay period = amount due)
Assuming the estimated annual payroll equals the amount actually paid, a business pays the exact same amount per year. Your insurance company should easily be able to switch. This, too, will immediately save you money. To learn more about PayGo, here’s a page with more info.
2. Reduce the revenue or square footage on your liability policy.
Insurance companies use different ways to price liability coverage. Some use square footage and others use forecast revenue. Ask which variable your carrier uses. Then:
If you’ve temporarily closed operations, remove that square footage from the policy. This is akin to taking a car off your policy while the driver is away at college (for instance) and nobody will be driving it. Once you resume operations you’ll want to have the square footage added back. If you reduce operations to, say, curbside service only, you should not remove this square footage.
If you forecast lower sales, ask your insurance carrier to incorporate this new forecast in the price of your policy. The upside to this option is that you can continue to operate your business “as-is” but with lower revenue.
3. Request a payroll endorsement on your workers’ comp policy.
For many small businesses, workers’ comp is the largest insurance expense. The full calculation for workers’ comp premium is fantastically confusing, but all are based on “estimated annual payroll.” This is the amount of payroll you expect to pay all employees (generally excluding owners) within a twelve month period. If you currently have work comp, this is why insurance companies do an “audit” at the end of the policy term – to compare “estimate” to “actual” and true up the payments.
If you’ve reduced payroll (or expect you will), ask your insurance company to process a “payroll endorsement” to the policy. A payroll endorsement is the exact term you want to use. A payroll endorsement can either raise or lower the estimate you originally provided. In this case, an endorsement to lower the premium will immediately lower the amount you owe for the policy term.
Under certain circumstances the insurance company may refund premium already paid. This is rare, but if you’re near the end of your policy period, have already paid the entire premium, and your new estimated annual payroll is lower, you will have overpaid. You will have to request the refund as many carriers prefer to handle these payments at the end of the policy term.
On a related note, if qualified owners are currently included in the workers’ comp coverage, you may want to consider removing them. This can be complicated and something you’ll want to talk through with an agent.
I suppose a final option is to simply find a new insurance company that offers you a better price. Cerity usually can.