Your startup should always be looking to save money. Insurance is definitely one of those expenses most entrepreneurs want to cut. We don't believe any business should ever operate without insurance, so how can you save money when purchasing an insurance policy?
First step: Understand 3 sets of stakeholders.
1. Venture capitalists and angel investors.
2. Banks or lending institutions.
Each stakeholder has a different interest in your business and therefore should be given a different perspective on your financials. It is common for entrepreneurs to create a "Best, Ideal, and Worst" case scenario when creating financial statements. Truth is each stakeholder should then receive those scenarios depending on their interest in your business.
1. Venture capitalists and angel investors - They want to invest in the upside potential in your business and thirst for extremely profitable businesses. This group should get your "best case" financial projections as you look attract them into investing in your startup
2. Banks or lending institutions. - They want stability and risk-adverse investments that are easy to understand. This group should receive your "ideal case" financial projections as they look to lend money to stable companies.
3. Services - This group is truly making decisions based on financial factors and should receive "worst case" financial projections. This doesn't mean you shouldn't give your actuals at year end or misrepresent your financials, it just means you should be aware more profitable companies get charged more. In insurance we see too often startups giving us very optimistic financials when applying for insurance. Insurance companies use financials to help "group" businesses together and rate their insurance premiums accordingly. Therefore optimistic financial projections can be costly to a startup who is trying to save on insurance premiums.
Second Step: Understand how you are being rated by insurance companies.
There are a variety of different pricing models mentioned below but there is one key concept to understand. Insurance companies truly price based on the riskiness of your operations. The better job you do explaining how safe your operations are, the more likely you are to save on your insurance premiums. We often recommend startups use best-in-class competitors as a comparison when explain to their insurance company how their operations work. This gives the insurer a better understand and better impression of the business when they start pricing insurance.
1. Class or Manual Pricing: This applies to a "class" or group of consumers with a similar exposure. For example: You will group the electricians together with other electricians. Once a group of consumers are identified, the insurance company will us two calculation methods:
a) Pure Premium Method - The total claims compared to the number of consumers in that group.
b) Loss Ratio Method - Pricing adjusted to reflect claims that have occurred.
2. Individual or Merit Pricing: Focused on the clams experience of individual consumer. This type of pricing can be complex and uses several methods for calculation:
Experience Pricing - Uses a claims made calculation to determine the pricing based on the last 3-5 years.
Judgement Pricing - Prices each company individually based on a variety of factors.
Schedule Pricing - Setting a base for a group of consumers, then adjusting the price based on individual differences of each consumer.
Retrospective Pricing- Adjusts the pricing after the policy year to accommodate fluctuations.
What do you think?
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