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Avoiding Hidden Insurance Costs
When evaluating how much business insurance costs, it's important to look beyond just the premiums. Many companies, especially small businesses and startups, fail to account for the significant hidden costs associated with managing insurance policies. These hidden costs come in the form of time and resources spent on manual tasks like collecting exposure data, satisfying underwriting requirements, implementing risk controls, responding to insurer requests, generating certificates of insurance, and managing documentation.
For technology companies in particular, these hidden insurance costs can quickly add up and become a major drain on productivity. In this post, we'll break down the various hidden insurance costs, estimate their impact, and share some tips on how to reduce insurance costs and streamline insurance management.
Defining the Hidden Insurance Costs
The hidden costs of insurance refer to all the time and effort required to manage policies outside of simply paying premiums. Some of the key tasks that contribute to these costs include:
• Negotiating contractual insurance requirements
Reviewing and negotiating the insurance requirements in client and vendor contracts to ensure compliance and mitigate risk. Usually, this involves going back and forth over email and phone to discuss how the insurance requirements can be reduced or avoided. Additionally, the company needs to determine what leverage to use when requesting reduced requirements.
• Collecting exposure data
Gathering and organizing information about the company's risk profile, such as projected revenue, company offices, description of products and services, employee headcount and payroll, physical assets (for example, vehicles or equipment), commercial contracts, etc. Often, such information is scattered across different teams, making it burdensome to find, consolidate, and prepare for sharing. Exposure data mistakes can lead to significant premium under- or overcharges, risking policy cancelations or cash flow mismanagement.
• Satisfying underwriting requirements (also known as "underwriting subjectivities")
Providing additional documentation (for example, customer agreements or SLAs) and answering questions to help insurers assess risk and determine appropriate coverage and pricing. Typical questions revolve around clarifying products and services, safety and security measures, and legal matters pertaining to the commercial agreements (for example, limitations of liability or indemnification clauses). Sometimes, underwriters can take an extra step and impose certain risk controls on the insured to help the company reduce the risk of a claim happening.
• Implementing risk controls
Taking steps to prevent and mitigate identified risks, such as ensuring redundancy in your products and services, improving cybersecurity measures, updating safety protocols, and refreshing employee training. These controls can range from one-off implementation, such as enabling two-factor authentication across all tools, to full-blown compliance certifications, such as SOC 2 or ISO. In general, underwriters are acceptable to internally reasonable risk control implementation practices, which are not as burdensome as official compliance certifications.
• Responding to ad-hoc insurer requests
Fielding ongoing requests from insurers for more information, updated data, or policy changes, especially around renewals or any audits.
• Managing additional insureds
Tracking and managing the addition and removal of additional insureds on policies as required by contracts and agreements. This is a critical task because customers often do not proceed with the deal or transaction unless the Additional Insured requirement is met.
• Generating certificates of insurance
Creating and sending proof of coverage documents to clients, partners, and other stakeholders who require them per agreement or verbally. This goes hand-in-hand with managing additional insureds; in practice, one is often disconnected from another.
• Managing insurance documentation
Organizing and keeping track of all the various insurance policies, endorsements, certificates, and related paperwork. Especially with growth, as the company's insurance program expands, insurance documentation will pile up without an organized approach to managing it in one place.
• Generating risk profile overview for CEO, CFO, or the board of directors
Preparing summary reports and presentations on the company's overall risk profile and insurance program for executive leadership and board meetings. As risk and compliance become more important for executives and investors, the ability to quickly pull together a risk report has become a norm.
• Missing important notifications or dealing with broker or agent delays
Following up and managing delays or unresponsive communication from insurance brokers or agents that can hold up critical insurance activities. This could be a waste of precious time and very frustrating, especially when dealing with non-specialist and non-technology-enabled brokerages or agencies that underinvested in customer service or automation. For example, a company might not get a renewal notification, notice of cancelation, or even hear back on a customer inquiry because a broker or an agent missed or forgot about it.
• Getting educated on and prepared for the first claim filing
Investing time upfront to understand the claims process and gather necessary documentation before a claim occurs to avoid delays and ensure a smooth filing.
Estimating the Hidden Insurance Costs
So just how much time does a typical small business spend on these hidden insurance tasks? While it varies depending on the company's size and complexity, here are some rough estimates:
- Negotiating contractual insurance requirements: 10-20 hours per year
- Collecting exposure data: 10-20 hours per year
- Satisfying underwriting requirements: 15-30 hours per year
- Implementing risk controls: 40-80 hours per year
- Responding to insurer requests: 15-30 hours per year
- Managing additional insureds: 10-20 hours per year
- Generating certificates of insurance: 20-40 hours per year
- Managing insurance documentation: 10-20 hours per year
- Generating risk profile overviews: 10-15 hours per year
- Dealing with broker or agent delays: 5-10 hours per year
- Getting educated on and prepared for the first claim filing: 10-15 hours per year
In total, that's 155-300 hours per year spent on hidden insurance costs. Assuming an average hourly rate of $55 for the employees handling these tasks, that equates to roughly $8,000 to $17,000 annually. What does it mean? It means that when a company purchases an insurance program, let's say General Liability with Business Property, Professional Liability, and Cyber Liability, for a total premium of ~$8,000, you should expect to incur 100% to 200% of that in additional costs associated with manual insurance tasks.
For technology companies that often carry more complex insurance programs with multiple policies, these costs can be even higher.
The time and money spent on hidden insurance costs represent a significant opportunity cost for businesses. Instead of focusing on growth and innovation, employees are bogged down with tedious administrative tasks. This is especially challenging for lean startup teams who are already stretched thin.
Real-World Examples
To illustrate the burden of hidden insurance costs, here are a few real-world examples:
- A midsize SaaS company spent over 200 hours annually managing certificates of insurance and additional insureds to satisfy client contract requirements. This distracted the operations team from more strategic work.
- A fast-growing fintech startup struggled to keep up with underwriter requests for updated financial data and projections each quarter, requiring over 50 hours of work from the finance team during their busiest times. Delays in providing the information held up renewals and left the company exposed.
- A busy startup CEO found himself spending over 20 hours each quarter preparing reports on the company's insurance program for board meetings and investor updates, pulling him away from more pressing leadership priorities.
As these examples show, hidden insurance costs often fall on team members who are already juggling core responsibilities, leading to added stress and reduced productivity across the organization.
Investing in Automation
For CEOs and CFOs looking to streamline operations and boost productivity, tackling hidden insurance costs should be a priority. The key is to leverage automation to make insurance and compliance management more efficient. By investing in tools and platforms designed to automate common insurance tasks, companies can reduce the manual work required and free up their teams to focus on more important initiatives.
When evaluating potential solutions for reducing hidden insurance costs, look for features like:
- Automated data collection and exposure tracking
- Streamlined application and renewal processes
- Centralized document storage and management
- On-demand certificate of insurance generation
- Real-time collaboration with brokers and insurers
- Claims management and loss run tracking
For example, we designed and developed an ERM (enterprise risk management) Automation tool to purposefully handle all the insurance and compliance tasks mentioned above. The most notable productivity feature is contractual requirements management, which helps customers consolidate all insurance requirements in one place.
In Conclusion
For any business looking to optimize its operations, hidden insurance costs should not be overlooked. By understanding the various tasks involved in managing insurance and the time they require, companies can get a full picture of how much business insurance really costs.
Leveraging automation to reduce this burden can lead to significant productivity gains and cost savings over time. Especially for technology companies dealing with heightened exposure and coverage needs, investing in more efficient insurance management can have an outsized impact. The key is to act now, before the hidden costs of insurance become an entrenched drag on growth. By prioritizing insurance process improvements, companies can position themselves to scale more smoothly and remain agile in the face of evolving risks.
