Business Insurance
Background
Basic Insurance Issues
Coverages and Cost Increases
a. Property Damage
b. Product and Professional Liability
c. Business Interruption
d. Environmental Liability
e. Employee Health
f. Slips and Falls (Premise Liability)
g. Vehicle Collision and Liability
h. Employment-Related Liability
i. Workers’ Compensation
Responses to Cost Increases
Claims and Claims Satisfaction
Life Insurance
Owners and Agents
Final Comments
Background
Insurance protects business assets from losses due to possible, but individually unpredictable events. Such losses could result from any number of incidents including fires, liability suits, and accidents. Small-business owners therefore purchase large amounts of insurance so they will not be crippled or destroyed by some unforeseen circumstance. Yet, insurance not only protects the immediate owner of business assets, it also secures them for creditors who would be unlikely to provide financial resources without the guarantee to collateral that insurance provides. But, insurance has become a serious small-business concern over the last several years. Its cost has risen inexorably. Though premium increases have been associated most often with employee health and product and professional liability insurance, complaints have been registered about other lines of insurance as well. The complaints have recently become louder and more frequent. In addition, the complaints have not been confined to premium increases. They have moved to availability, exclusions, fits, and even claims. Insurance is an odd business. Industry profits stem not only from underwriting, but also from investments. When investments are profitable, insurance premiums typically are low as insurance companies attempt to increase market share. The opposite is also true. In addition, underwriting losses are not always predictable in the short-term. The huge losses from Hurricane Andrew in 1992 are an example. Further, when losses leave their long-term trend line and become larger and more unpredictable such as medical malpractice claims in Mississippi, higher costs follow. Each line of insurance is impacted by these factors differently. One overarching result is that insurers suffer cycles, sometimes extreme. Cycles make insurance a more volatile cost than most business inputs. State insurance commissioners supposedly regulate insurance premiums. But current problems demonstrate that insurance premium regulation has not always been successful. Since small business cannot operate without insurance and higher premiums mean that insurance coverage is increasingly less available, this issue of the National Small Business Poll is devoted to Business Insurance.
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Basic Insurance Issues
Sixty-four (64) percent of small employers believe that the biggest problem with business insurance today is cost (Q#1). The larger the firm, the more likely the owner was to cite higher premiums. No other potential insurance problem rivaled it. In fact, the second most frequently offered response (15%) was “no real business insurance problems.” That response too was related to firm size, but inversely. The smaller the firm, the more likely the owner was to believe that there are no real problems with business insurance today.
Respondents had an opportunity to cite several other possible problems as the greatest, though comparatively few exercised the option. Six (6) percent did mention the increasing number of excluded coverages as their biggest problem. Excluded coverages are simply those previously included in standard policies that now are excluded and require separate coverage (with an additional premium). Black mold is an example. Another 5 percent reported that the unavailability of some insurance types was the biggest problem.
The survey on which this report is based did not elicit the type of coverage these owners found unavailable. Two 2 percent cited “poor claims response.” Given anecdotal complaints, the number identifying this problem was a pleasant surprise.
Most small-business owners buy insurance rather than self-insuring or “going bare.” Still, the proportion selecting answers other than “purchase” was striking and suggested that the term “self-insurance” may not be familiar to large segments of the population. Just 68 percent reported that they buy their business insurance exclusively (Q#2). Another 17 percent reported that they buy some insurance and self-insure in addition. This response is plausible since many small employers procure at least some of their coverage through trade groups that can self-insure. However, 13 percent claimed to be self-insured (without any insurance purchases).
That group consists primarily of owners of the smallest enterprises, those employing fewer than 10 people. These firms are almost assuredly too small to self-insure in any meaningful sense of the term. So, it is likely that self-insurance implies that they are uncovered (bare) or their owners think they are covered by some type of personal policy. Another 2 percent volunteered that they don’t have business insurance. But when asked if they had personal insurance that covered business activities (not presented in the tabulations due to lack of cases), all 13 cases said that they did. As a result, it is not clear if this substantial segment of the small-business population (15%) is uncovered or believes that it is covered by personal insurance. For the latter group, the question becomes does their personal insurance actually cover business activities?
The median (50% more and 50% less) expenditure for all types of business insurance (including workers’ compensation and unemployment insurance) among those purchasing it is a reported 7 percent of sales (Q#7). That means that a typical firm grossing one million dollars a year would spend about $70,000 annually on insurance. The range of reported insurance expenditures is considerable. About one in ten spends less than 2 percent of sales while 9 percent estimated that they spent 16 percent or more of sales. But 31 percent could not/would not make an estimate indicating that total insurance premiums as a percent of sales is a difficult spur-of-the moment calculation and one they are not accustomed to making. Comparing these data with deductions for insurance- related costs on Federal income taxes argues that the estimates are high. Still, owner estimates reveal the importance they attach to insurance costs in their overall business cost structure.
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Coverages and Cost Increases
Business insurance is commonly sold to small-business owners in various packages or combinations of coverages, sometimes under a brand name or generalized title. The survey disregarded these packages and separated them into component coverages for purposes of asking small-business owners about coverages and costs. This step made response more difficult for some who purchase packages, but it permits individual examination of nine of the more important coverages purchased by small employers.
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a. Property Damage
Eighty-seven (87) percent of those who purchase insurance have coverage for property damage (Q#3A). If there is a fire or a hurricane or a lightening strike or water damage, they are generally covered. The curious population segment is the 13 percent who are not. It is possible that most of these are home-based businesses and believe that they are covered by a personal homeowners’ policy. Yet, the data show that two-thirds of them are not; their primary business location lies outside the home. Another possibility is that the firm has few assets to protect. That explanation is unlikely because 7 percent that employ 20 people or more said they had no such coverage. The survey did not collect asset data however, so the possibility cannot be proven one way or the other. Another possibility is that the business is doing poorly and the owner cannot afford the insurance. A modest association does appear between sales trends and coverage, particularly among the group of owners whose sales are declining. Still, the association is not strong and several cases appear in all categories of sales trends. A final possibility is that the terminology in the question does not register with respondents and therefore elicited a negative answer. Yet, the lack of clarity usually yields a high non-response, not a negative one. The result is that there is no obvious, single reason why such a large percentage fail to protect themselves against property damage.
The cost of property damage coverage on a per unit basis rose over the last year for a majority of those with this type of insurance. Fifty-six (56) percent reported that its cost rose (Q#3A1). Over half who said it had risen estimated the premium increase at less than 20 percent with 13 percentage points estimating costs increased by 50 percent or more. Thirty-six (36) percent of the insured reported that premium costs remained about the same and 2 percent reported that they fell. Of the nine types of insurance coverage examined, protection against property damage was an area where the cost of insurance rose a little above average.
In a pattern that will reoccur for virtually every line of insurance coverage examined, very few dropped coverage altogether for property damage during the last three years. Just 2 percent reported having done so. Most small-business owners who do not have this coverage have not had it previously (within three years).
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b. Product and Professional Liability
The second type of coverage examined was product or professional liability, including negligence, and errors and omissions. Two-thirds (67%) indicated having such coverage while 30 percent said that they did not. The propensity to have product or professional liability coverage is not related to firm size, nor to industry with the exception of financial and professional services. Coverage does appear to be related to success as measured by sales trends, however. Those with declining sales are about 25 percentage points less likely to carry it than are others.
Fifty-eight (58) percent of small-business owners purchasing this type of liability insurance said that cost had risen in the last year while 37 percent said that it had stayed about the same (Q#3B1). One (1) percent claimed that premium costs had fallen. A majority of those experiencing premium increases responded that their’s was less than 20 percent while 7 percent indicated that their’s was over 50 percent. The frequency of increases and their size parallel those of increases for coverage of property damage. This comparability is somewhat surprising given the history of complaints about product/professional liability coverage.
One explanation for the apparent anomaly is that increases are a percentage calculation and disregard the base on which the percentage calculation is made. Again, comparatively few who have had coverage in the last three years have dropped it. Just 2 percent reported having done so (Q#3B3).
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c. Business Interruption
Business interruption insurance protects the owner against losses caused by an inability to conduct operations. In the event of a storm, for example, property and casualty insurance would pay for any physical and water damage while business interruption insurance would compensate the owner for losses incurred because the business could not operate until repairs were made. About one in three (34%) small employers reported having business interruption insurance with 59 percent of those employing 20 or more people saying that they do (Q#3C).
Premium increases for business interruption insurance have risen less than any of the other eight insurance types examined. Thirty-eight (38) percent of small employers reported increases, but 51 percent said that costs were stable (Q#3C1). Still, declines are rare. Only 2 percent reported them. The percentage increase among those reporting them are relatively small.
Twenty-two (22) percent said that their increases were less than 20 percent while just 2 percent reported that their increases were 50 percent or more. The likelihood of increases was substantially more frequent among larger, small firms than smaller ones. It is not obvious why this should be. But despite the fact that premium increases were modest comparatively, premiums for business interruption insurance on balance rose and at a healthy rate. Virtually no one dropped coverage during the last three years (Q#3C3).
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d. Environmental Liability
Comparatively few small businesses that purchase business insurance carry environmental liability insurance. Just 18 percent of owners reported doing so, though 10 percent did not know (Q#3D). The latter is an unusually large number that suggests environmental liability is still a relatively unknown form of insurance among small-business owners. Owners in the construction industry carried the coverage more frequently than did those in other major industries.
Forty-four (44) percent of owners with environmental liability coverage indicated
that premiums per unit of coverage had risen in the last year or so (Q#3D1). Slightly fewer (42%) said that there was no change. Fifteen (15) percent did not know and another 7 percentage points among those who claimed prices had risen could not estimate the size of the increase. About half who did estimate a price increase indicated that it was less than 20 percent while the remainder indicated it was more. Less than 1 percent of those without it said that they dropped coverage within the last three years (Q#3D3).
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e. Employee Health
No other type of insurance has attracted more interest from small-business owners and policy-makers alike than has employee health. A number of recent studies and surveys have found premiums again increasing at double digit levels and the number of firms offering it declining. Most of these reviews isolate employee health and fail to put it in the context of other insurance coverages.
Fifty-two (52) percent of those small businesses that purchase business insurance carry employee health insurance (Q#3E). As has been well-established, larger, small firms are substantially more likely to offer it than smaller, small firms. Forty-five (45) percent of those employing fewer than 10 people have such coverage while 83 percent of those employing 20 or more people do.
The frequency of premium increase reports is striking. Ninety (90) percent of small employers purchasing employee health insurance reported that premiums rose over the last year (Q#3E1). No other insurance type even approaches that frequency of increase. But not only did almost every insured disclose premium cost increases per unit of coverage, the percentage increases reported were extraordinary. Only 6 percent said their increases amounted to 50 percent or more on a per unit basis. Still, 44 percent claimed premium growth of between 20 and 49 percent. Even allowing for exaggeration due to concern over the problem as well as the imprecision of “top of the head” estimates, the numbers portray the great difficulty that many small-business owners face in paying for employee health insurance.
While these numbers are not novel, the data do reveal one important new fact that has direct relevance to discussions surrounding employer provision of employee health insurance. Few employers appear to drop coverage, even in the face of large percentage rises in premium costs. Just 6 percent of those without employee health insurance indicated that they had dropped it within the last three years (Q#3E2). As will be demonstrated shortly, small businessmen and women have made many adjustments to confront the new, higher premiums levels. But one of them has not been to drop coverage altogether. That means most of the decline in small business coverage comes from new (entering) firms not purchasing employee health insurance or waiting to purchase it at a later date while established firms (more likely to have employee health insurance) leave. While we do not know whether entries, exits or both are responsible, the churn seems obviously associated.
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f. Slips and Falls (Premise Liability)
Protection against instances of premise liability is one of the most frequently purchased types of business insurance. Seventy-four (74) percent of small-business owners disclosed that they have slips and falls coverage (Q#3F). Larger, small firms are more likely to possess it than smaller, small firms, but even then 16 percent of those employing 20 or more people reported that they carried none.
The comparatively large proportion of small businesses without this basic coverage appears strange. The propensity to carry premise liability type of insurance is about 15 percentage points lower both among those in home-based operations (compared
to non-home-based) and among those whose sales have been declining (compared to those whose sales have been stable or rising). Still, a large number of ventures daily exposed to the public and doing reasonably well do not carry premise liability insurance.
Almost half (49%) of owners with premise liability insurance said that premiums for the insurance had risen over the last year or so (Q#3F1). Forty-one (41) said that they were stable, though an inexplicably large 9 percent did not know. Over half reported that the percentage increase was less than 20 percent while only 4 percent reported premiums rising 50 percent or more. Over 7 percent of these could not estimate the increase. Perhaps the large number who could not answer is tied to the incorporation of this coverage into policies with various names.
Just 1 percent dropped coverage in the last three years (Q#3F3).
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g. Vehicle Collision and Liability
The use of vehicles for business purposes (not transportation to and from work) in small businesses is significant. One prior report in this series estimated that as many as five of eight employees in small businesses drive at one point or another as part of their job responsibilities. This makes vehicle insurance, collision and liability, among the most pervasive types of insurance purchased among small employers. Seventy-one (71) percent who purchase any business insurance disclosed that vehicle collision and liability are among their coverages (Q#3G).
The cost of vehicle insurance is rising, too. Sixty-three (63) percent experienced premium increases over the last year (Q#3G1). However, the amount of increase appears smaller than for most other insurance types. Thirty-six (36) percent reported increases of less than 20 percent while just 4 percent reported them over 50 percent. One in three (32%) said premiums were stable and 2 percent said that they actually fell.
Three (3) percent reported that they had dropped vehicle insurance over the last three years (Q#3G3). It is likely that these firms eliminated firm vehicles during the period.
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h. Employment-Related Liability
Concern among employers is rising over the ability of employees (more often, former employees) to sue them for alleged wrong. Wrongful termination, defamation, and discrimination (age, race, sex, etc.) are a few examples. Many employers, including 21 percent of small employers, take out insurance to protect themselves and their firms against such suits (Q#3H). However, a large majority still do not do so. Seventy-two (72) percent do not carry it and another 7 percent said that they are not certain. Owners of larger, small firms are more than twice as likely to carry it than owners of smaller, small firms.
Forty-eight (48) percent of small employers who purchase this coverage said that their premiums rose in the last year (Q#3H1). Almost as many (42%) said premiums were stable and another 10 percent were not certain. The average premium appeared to rise somewhat less than for other insurance lines. Virtually no one reported extreme increases while almost three of five (58%) who reported an increase indicated that it was less than 20 percent. Only about 1 percent dropped this coverage in the last three years (Q#3H3).
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i. Workers’ Compensation
As a general rule, employers must carry workers’ compensation insurance to protect their employees from the consequences of on-the-job injury or illness. Important exceptions exist. The state of Texas, about six to 7 percent of small employers, has no such requirement. Fourteen (14) other states do not require it for certain very small employers, usually those employing less than two to four people. Many allow corporate officers to “opt-out” meaning that owner/operators in very small corporations aren’t necessarily counted as an employee. Thirteen (13) states require coverage of agricultural workers like other workers, but 11 do not require coverage and 26 carry limitations. Thus, 76 percent of small businesses purchase workers’ compensation insurance including 96 percent of those with 20 or more employees and 92 percent of those with between 10 and 19 (Q#3I).
Workers’ compensation normally pays medical, rehabilitation, lost work-time costs or some fraction thereof, and benefits for permanent disability and death. Given that
much of the workers’ compensation cost is associated with health care, it is surprising that just 58 percent reported rate increases while 31 percent reported that they were stable (Q#3I1). Four (4) percent even said that they had fallen, the largest number among all insurance types examined. The average premium increases, though high, were no higher than those reported for most other types of insurance and significantly below employee health. The explanation for the difference is not immediately obvious.
Ten (10) percent indicated that they had dropped coverage in the last three years, also the largest number among the insurances examined (Q#3I3). The number of respondents is small (n=111) making the margin of sampling error relatively high. One explanation for the large number dropping is that some firms contracted under size limits and were able to drop it in the face of an expensive product and economic difficulty. Another is that some once believed that they had to purchase it, but really did not. A third is that as larger, small firms (and presumably covered) exit, smaller, small firms (that qualify for exemptions) replace them.
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Responses to Cost Increases
The cost of employee health insurance on a per unit basis has risen more in the last year than any other. Thirty-three (33) percent of all who purchase insurance identified employee health as having the fastest rising premiums even though just over half of them (52%) actually buy that coverage (Q#4). Owners of larger, small firms are more likely to name it than are others.
The next two most frequently cited types of insurance where premiums are rising fastest are workers compensation (12%) and product/professional liability (12%). Vehicle collision and liability is the only other mentioned with the same approximate frequency (9%). These three have one thing in common. They are each purchased by a substantially greater proportion of small employers than purchase employee health. Thus, relatively large groups identify them even though other data, such as found for example in Q#3B1, indicate that they are rising much more slowly than employee health. Still, these three are not purchased as often as property damage and slips and falls (premise liability), but are cited far more frequently as rising the most rapidly.
When asked how they intend to react to the premium increase that they identified as largest, small employers reported that they have taken or plan to take various steps to reduce the impact of insurance premium increases. Some steps involve direct retaliation against insurers and agents; others involve the amount of insurance purchased; and still others involve changing business operations to minimize risk. Of the six potential responses appearing on the survey, no one response drew more than a one-third positive reaction. Different owners planned varying steps to address their situations. Individual circumstances clearly were leading small-business owners in different directions.
The most frequent change made or planned is to switch insurers. Thirty-four (34) percent claimed that they already have or are planning to change providers (Q#5A). Those employing 20 or more (and presumably generating the most premium) made this choice over 10 percentage points more frequently than the smallest. Nor were brokers and agents immune. One in four (25%) have either changed or plan to change agents or brokers (Q#5D). Again, owners of larger, small businesses are more likely to pursue this course of action than owners of smaller, small businesses. Many small employers believe that shopping will get them a better deal and they intend to do it (or already have). (The relationship between small-business owners and insurance agents will be revisited later.)
The second most common response is to increase the deductible. Thirty (30) percent determined that a higher deductible was an appropriate reaction to higher premiums (Q#5B). This strategy was twice as common among owners of larger, small ventures as owners of smaller, small ventures. Eighteen (18) percent indicated that they would change business operations to reduce claims risk (Q#5E). This option offers owners more potential for premium cost control under some circumstances than others. Any benefit to the small employer from such actions depends on the relation of claims experience to premiums; the closer the tie, the more likely the direct benefit and vice versa. The expense required to change business operations is therefore a critical factor in the benefit equation. An owner can also reduce (beyond a higher deductible) or eliminate coverage.
Elimination (or dropping coverage) is unusual, if not rare, as shown earlier. As a result, almost all of the 17 percent who have or plan to reduce or eliminate coverage will simply reduce it (Q#5C). How the reduction will occur is not clear. It is likely the choices will vary substantially with some, for example, narrowing coverage, others lowering limits, etc.
Employers can defray the cost of employee health insurance by raising the employee’s share of the premium. That option is not available with other forms of insurance. So, if the respondent did not want to absorb the increase or to lower benefits, increasing the employee cost share is an option. Thirty-three (33) percent of small-business owners who identified employee health as having the most rapidly rising premiums either raised the employee cost-share or are planning to do so (Q#5F). The option was chosen most often by owners of larger, small firms who opted to follow it in a majority (58%) of cases.
Given the frequency and size of premium increases as well as the concern expressed over them, the proportion who have or plan to take action in response is less than would be expected. Just 61 percent will take at least one of five possible steps in reaction (raising the cost-share on employee health is excluded because not all could respond to the question) and 39 percent will not. Another 3 percent raised the cost-share on employee health and took (will take) no other action. That changes the proportions to 64-36. However, if these actions are spread over all who purchase insurance rather than just those who identify one line as being a particular cost problem, the number taking at least one measure to counter cost increases falls to 52 percent.
The question is why don’t more small employers react to these premium increases. One answer is that a small, but notable percentage (around one in ten), do not believe that premiums are rising or rising out of line with other cost increases. But subtracting that number still leaves a large percentage experiencing considerable premium hikes who intend no response. Perhaps these small-business owners believe that they have no bargaining power and simply must swallow the higher premiums. Perhaps they purchase relatively small amounts of insurance and aren’t greatly affected by a large percentage increase in one line. Perhaps they simply depend on their agent to do all that can be done to minimize costs. Whatever the reason(s), small employers take counter measuresless often than would be anticipated.
There is an important caveat to the discussion of these reactions. These are reactions to premium increases that have already occurred; they are not necessarily reactions to premium increases that might occur in the future. While past performance is usually a reasonable proxy for future performance, the compounding effect of premium increases may push owners in new directions at magnified speeds. That means the possibility of dropping coverages accelerates. So, does the possibility of lesser coverage among those retained. And, premium shopping will intensify.
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Claims and Claims Satisfaction
Premium costs are obviously tied to claims experience. It is therefore important to have an idea of the amount in claims filed. Because a large claim is a “rare event” and the survey sample is relatively small, respondents were asked for each line of insurance purchased whether they had filed one or more claims of $1,000 or more in the past year.
The most common qualifying claim filed by small-business owners is vehicle collision or liability. Seventeen (17) percent of those with vehicle coverage reported filing such a claim in the last year (Q#3G2). Given the pervasiveness of coverage, the frequency of claims filed consumes considerable resources. The same is true with workers’ compensation. Fifteen (15) percent of those who reported coverage also reported that they have had a WC claim of $1,000 or more in the last year (Q#3I2). These two types of insurance alone constitute a significant share (a majority in this survey) of all business insurance claims made.
Claims from three other insurance types also occur with some frequency. Last year, 9 percent put in at least one claim of $1,000 or more for property damage (Q#3A2). A non-mutually exclusive 6 percent did the same for premise liability (Q#3F2) and another 6 percent for product and/or professional liability (Q#3B2).
Claims under the remaining three insurance types (employee health is omitted because the employee makes the claim) were much less frequent both because the incidence was lower and because the number purchasing it is relatively low. It is likely the two are associated. Still, 4 percent disclosed claims of $1,000 or more for employee-related liability (Q#3H2). Three (3) percent said that they filed at least one such claim under their business interruption coverage (Q#3C2). Finally, less than 1 percent of the insured filed an environmental liability of $1,000 or more in the last year.
Insurer response to small-business owner claims has been satisfactory overall, though the data contain a suggestion that some types of claims may be handled more satisfactorily than others. The handling of vehicle claims received high marks. Though the sample size is small, 51 percent said that the insurance company’s response was “very satisfactory” and another 44 percent said that it was “generally satisfactory” (Q#3G2a). Small employers were not as happy with workers’ compensation claims. Thirty (30) percent were “very satisfied” while 46 percent were “generally satisfied.” The remaining 24 percent either were “not too satisfied” or “not at all” satisfied.
The number of claims for the other type of insurance are too few to break out separately. But if all responses are totaled, there are 75 cases. Those cases breakout, 57 percent “very satisfied,” 37 percent “generally satisfied,” 4 percent “not too satisfied,” and 1 percent “not at all” satisfied. Given that only 2 percent earlier identified claims resolution as the greatest problem with business insurance today and the overall satisfaction with claims handling registered here, it is fair to say that claims handling is not a small-business problem.
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Life Insurance
The primary interest small-business owners have in life insurance other than the obvious is the excess amount some are forced to purchase in order to offset any potential estate and gift tax liability. One critical question is how many purchase excess life insurance for such purposes. Thirty-three (33) percent believed that they currently do (Q#6). Among those employing 10 or more people, the proportion who believed it is in the mid-40s. While the questionnaire did not specifically ask for the amount of excess, one-third of owners are transferring capital from other uses to protect their heirs from the “tax man.” That is not an efficient use of resources.
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Owners and Agents
Small-business owners have traditionally been dependent on insurance agents for a large share of the information they have on business insurance, including the most favorable prices and coverages. This relationship has often been helpful to small employers because it allows a knowledgeable person to marry the needs of the firm with the products and prices available in the market.
Unfortunately, there is also an inherent conflict of interest because what may be most advantageous for a small-business owner may not always be most advantageous for an agent (most of whom are small-business owners themselves), and vice versa. The implication is that it is fine for an owner to rely on an agent, but the owner also needs to be an educated insurance consumer.
Eleven (11) percent of small businessmen and women claimed to be “very knowledgeable” about business insurance (Q#8). (If the financial services sector is eliminated, the proportion who believed that they are very knowledgeable falls just over 1 percentage point.) But most replied that they are “somewhat knowledgeable.” Sixty (60) percent placed themselves in the some- what knowledgeable category. Thus, over 70 percent believed that they have reasonable familiarity with business insurance. In contrast, 24 percent classified themselves as “not too knowledgeable” and 5 percent said that they are “not at all knowledgeable.”
Curiously, business experience measured by the number of years the individual has owned and operated the enterprise seems unrelated to the self-assessed level of knowledge about business insurance.
Almost three of four (73%) have one person whom they would call “their insurance agent” (Q#9). The self-assessed business insurance knowledge level is unrelated to possession of one. The existence of the relationship is also unrelated to firm size. Forty-nine (49) percent of those with an agent disclosed that the agent is their primary source of information on business insurance and the firm’s insurance needs (Q#9a). That means 35 percent of all small-business owners who purchase business insurance rely heavily on their agent for insurance information. Another 31 percent described their agent as an important source of information on business insurance and the firm’s insurance needs. That translates into another 22 percent of the entire purchasing population. About one in five (20%) said that their agent is either only a modestly important or not an important information source. But even if a small employer does not have a personal agent, it is likely that much of the insurance information they obtain flows through one of some type. It is therefore fair to assert that insurance agents continue to play an important role in small-business owner decisions on insurance.
If and/or how that role will change due to current problems and to insurance activity on the Internet remains to be seen.
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Final Comments
Small business cannot function without business insurance. Yet, business insurance is becoming a major problem for smaller enterprises. The principal concern is rising premium costs. While other concerns such as availability and exclusions stir interest among many small employers, cost is the fundamental issue. Higher premium costs not only directly require re-channeling business resources to larger insurance payments, but they also drive secondary insurance issues such as the growing number of exclusions.
Higher premium costs in addition may cause some small-business owners to reject purchasing insurance altogether, refuse to carry coverages whose costs appear particularly out-of-line with risk, or rely on personal insurance (and hope it covers them). The number of small employers who choose one or more of these routes cannot be calculated from the data. But the fact that so many reported that they .self-insured (13% exclusively and 17% partially) when the size of their firms suggests self-insurance (contrasted to .going bare.) is improbable, implies a small, but non-trivial percentage have opted out of the market.
The business insurance cost problem is not confined to one line of insurance. The most seriously impacted seems to be employee health. Those premium increases have been well-documented here and elsewhere. But employee health is only the worst. Other lines are rising rapidly as well.
Vehicle collision and liability as well as workers’ compensation and product/professional liability are others where small-business owners report experiencing rapid premium increases. Even lines that have experienced more temperate performance have risen at relatively sharp rates. Insurance prices supposedly are regulated within reasonable parameters by state insurance commissioners. That approach obviously is not working. So, small employers have responded as one would expect them to respond. They shop. The most frequent step they take is to look for new sources of insurance supply (insurers). They are not bashful about looking for new intermediaries as well. Significant percentages also raise deductibles, increase employee cost sharing in the case of employee health insurance, and reduce coverage. The one step they rarely appear to take is complete elimination of coverages once they have them. Unfortunately, not enough of them react, even among those who believe premiums are rising rapidly. The reason(s) for their lack of more frequent and more vigorous (more different actions) reaction cannot be found in this data set. However, it is likely some small employers feel that they simply have no options available.
Insurance premiums are rising for a reason(s). Escalating medical costs clearly play a role since they not only drive employee health premiums, but workers’ compensation, vehicle liability, and premise liability
premiums as well. Legal costs and our tort law system also are contributors. And, then there is “cash-flow underwriting.” With the soaring stock market a few years ago, insurers were more interested in generating premiums to invest than in ensuring premiums covered losses and expenses. Conditions are the opposite today requiring insurers to price differently. Yet, there are forces moving premiums in the opposite direction as well. The workplace is becoming progressively safer; structures are becoming more fire-proof and weather-proof, etc. But the forces pressuring premiums downward are obviously insufficient to overcome those pushing in the opposite direction.
The critical question is what to do. And, the answers to that question can be in direct contradiction to one another depending on the viewpoint of the individual espousing them. Small-business owners have views on the question, and those views are rarely flattering to the actors and institutions involved.
Their primary focus is currently on trial lawyers and the tort law system. They also know that insurance fraud is occurring more frequently than anyone would like to admit. They just cannot understand the reasons for the health cost increases. Yet, they are not fond of insurance companies either for reasons associated with volatility of premiums, impediments they sometimes raise to competition, settlement of claims that owners believe should be challenged, etc. The only ones who seem largely to escape blame are insurance agents, a group with whom they still have an affinity. Yet, that may be changing, too.