Business Insurance: Small Business Report

---Note:  Names were withheld at the request of the agent that I interviewed.---

I had a conversation with Mr S. an agent at one of our local insurance companies.  I wanted to get a quick lesson on buying business insurance.

Mr S has been with his company for approximately 7 years and he is one of their top sellers of business insurance.

Like many small town insurance companies, Mr S's company has been in business for a long time.  It was started in 1946 after the founder mustered out of the military.  He was joined by a partner in 1955 after the parner was discharged from the military.  Both have since retired.  A third partner joined the firm in 1977. 

The first visit

I asked Mr S what information a business owner should bring to the first meeting in order to make it a productive use of the owner's time.

• Bring something that looks like a balance sheet.  A list of assets.  When they were purchased? Approximate replacement value if it is readily available.
• Something that looks like an income statement.  What was the business's revenues last year? What do you estimate it will be next year?  
• What is the nature of the business?  A general contractor has a different risk profile than a roofer or a dry-wall guy or an electrician.
• A list of employees, if any.  What do they do?  How many hours do they work?

Mr S will also go through a list of questions to ensure that he understands your business.  He will use that information to precisely tailor coverage to meet your needs without over insuring you.  It might not be possible to completely fill out the check-sheet on the first go around.  But being exposed to the questions will guide the business owner and give him/her a better idea of what to bring to the second meeting.

Local Agencies

I asked Mr S to elaborate on what he saw as the advantages of purchasing insurance from a local, independent insurance agent.

He said that as a local guy, he will usually come and personally check out any major claims.  Having a fire or a major theft is a traumatic event.  In general, he will stay out of the adjuster's way.  It has been his experience that things proceed more quickly when he lets the adjuster do his job and mostly stays out of the process.

But sometimes he is needed to act as a translator between the adjuster and the business owner.  He translates from trade jargon to "real English" to help his client understand what is happening.   That is not a service the client will get if he/she buys insurance over the internet from an boiler room in Hialeah, Florida.

Also, rarely, there are times when the adjuster does not see something or misinterpret something.  An example of this is when there is a clear outline of unbleached vinyl siding where a piece of equipment was parked but is now missing.  The local agent can help coordinate the interactions between the adjuster and the business owner and can help the business owner find documentation (pictures, sometimes) of the items to satisfy the adjuster's needs.

Independent agencies

According to Mr S, the primary advantage of taking one's custom to an independent agent is that the agent can shop several carriers to find the best deal.  Most of Mr S's business policies goes to one of four carriers but he has the ability to shop over 80 different carriers if the business owner has needs that are out of the ordinary.

---Side bar---

Insurance carriers price specific sectors based on the rate of claims/losses.  Some carriers are more heavily exposed in specific sectors or geographic regions than others.  A run of claims due to, say, the weather will likely result in an increase in the rates for all clients regardless of their region.

Additionally, as the pool of clients becomes larger, the "randomness" of the claims will smooth out.  In general, the "randomness" will decrease by 50% for every quadrupling of the size of the pool.

The actuaries, the statisticians who calculate potential loss rates, must add extra Kentucky Windage to their calculations when dealing with small pools.

The combination of pool size and recent claim history results in different insurance companies offering nearly identical coverage for rates that might vary by 40% or 50%.  That is, one insurance carrier might offer a business a monthly rate of $900 per month while a competitor might charge $1400 per month for identical coverage.

Purchasing insurance from a captive agent locks the purchaser into whatever rates the carrier chooses to charge.  The only pricing options a captive agent can offer to help meet budget is to reduce the coverage.

---End sidebar---

Beyond price

An additional benefit to purchasing from a local agent, according to Mr S, is that the local agent is likely to look beyond the out-of-pocket cost.  They will typically start with the broadest possible coverage and then, if necessary, remove coverage that the client does not see as "value added".

An example:

In Late October of 2001 a series of tornadoes hit Eaton Rapids, Michigan.  Many homeowners were dismayed to learn that their homes were not covered for wind damage.

The NOAA (National Oceanic and Atmospheric Administration) identified two of the six "tornadoes" as actual tornadoes.  According to their Doppler radar, there was not enough "recirculation" to meet the NOAA criteria of a tornado.  Rather, they were wind-shear embedded in 60 mph ambient winds.  The only claims that were paid off for "tornado" insurance were those buildings that were in the direct path of the events that the NOAA identified as tornadoes.  Unless, of course, your agent had written the policy for wind damage.

What else should a business owner know?

Insurance coverage will be audited at the end of the year.  Adjustments will be made if your revenue falls short of the estimate.  You will receive a refund if business slows down and your receipts fall.  The year end audit is also a good time to assess if you have added any significant assets that need to be added to the policy or if another carrier might be less expensive.

Expect to have several meetings.  Buying insurance is overwhelming and it is best taken in small bites so you don't feel like you are being sold coverage you do not need.  That is OK.  An experienced agent knows that business owners have a lot on their plate.  They need to take breaks so the can absorb what they are learning.

At some point you will have a discussion about liability insurance.  You may think that you do not need it because you have a great relationship with all of your customers.  But consider a mowing business:  The window that is broken by a rock might not be your customer's window, it may be the neighbor's.

Three pieces of advice

I asked Mr S what three pieces of advice he would give a niece or nephew who was considering starting, or buying, a business.

1. Do it right.  Get your licenses.  Get your certifications. Have your ducks in a row for capitalization.   File your taxes....and buy insurance.  The cost may seem high at the start.  But it is better to start small and safely grow the business than to start big and roll the dice.
2. Be honest.
3. Know that you can always call him on the phone to talk problems through.  He is there to help you.

Index of  Small Business Reports