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What is the total cost of insurance?

What is meant by “Total Cost Of Insurance?”

When most people think of insurance cost, they think of just the premiums being paid.  Very rarely does anyone truly think about the real total cost of insurance.

I have never heard- “That premium seems fair; the insurance company is getting adequate premium to cover its exposure and I’m getting the protection I need.”

But I have heard, more times than I can count, “I can’t believe I have to pay all this money.  The insurance company is killing me.  Can’t we get this premium down?”

Everywhere you look, insurance carriers are offering low, low rates.  This leads the consumer to believe that insurance is all the same, the only difference is the cost I pay.

However, the premium (the price) is only part and sometimes the smallest part of your “Total Cost of Risk”

The true cost of risk is 6 items:

  1. Deductibles or Self-Insured Retention
  2. The cost of uninsured or self-insured losses (intentional or unintentional)
  3. Legal Costs
  4. Loss control and safety courses
  5. Claims management cost
  6. Opportunity cost

Let’s talk about the deductible

Premium savings can be accomplished by increasing the deductible.  However, you need to compare the premium savings to the total cost of insurance.

Let me illustrate       

Decuctible $1,000 $5,000
Premium $20,000 $18,000
Property Loss $65,000 $65,000
Amount Paid By Carrier $64,000 $60,000
Total Cost Of Insurance
(Premium +Deductible) $21,000 $23,000

This examply is for a single claim.  Just imagine if there are multiple claims that happen during the year?

Premium savings can be eaten away by the cost of deductibles.

The cost of uninsured or self-insured losses

Now let us say in a way to reduce the premium you decide to not have coverage for a particular cause of loss.   Depending on the frequency, how often the loss occurs, or the severity, how expensive is the loss, this could be a huge out of-pocket expense related to the self-insurance cost of risk.

Internal Claims Management costs are mostly associated with claims that are under the deductible or a re not covered.  These losses and claims must be managed by someone, this someone may be an internal employee or a third party.

Legal Costs flow out of claims management 

Defending uninsured or claims under your deductible can be expensive.   The cost of defense counsel at $400-800 an hour will devour any premium savings that you enjoyed.

Loss control and safety control

To avoid or reduce loss, you may invest in an alarm system or safety equipment.   Some of these systems maybe required by regulation.  There are some that are needed due the inherent risk of the operation.  These loss and safety controls are considered in the total cost of risk

Opportunity Costs

Opportunity costs are subjective in the total cost of risk.  In order to manage a non-traditional insurance program requires resources to be used from somewhere else.  Payroll and time costs are factored in the total cost of risk

Ask yourself again, is the Price too high? Or is the the Total Cost Of Insurance too high?

You can always find a lower price, but at what cost.   Understanding the total cost of risk is important.

You should contact us at Huff Insurance to discuss your coverage. 

We will work with you to make sure that you fully understand the coverage that you have in place.   We will discuss the price is what it is and what you may give up to find a lower price.  After discussing the total cost of insurance, we will find a plan that works for you.

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