A Business’s View of Insurance Premiums
A business views insurance premiums as a cost of doing business. On their financial statements, insurance is categorized under expenses. One of a CFO’s responsibilities is to reduce and manage business expenses. Therefore, businesses will work to minimize premium expenses in order to maintain a healthy bottom-line.
Businesses Don’t View Premiums as Investment Capital
Historically, businesses do not view insurance premiums as investment capital. Standard insurance premiums provide coverage against potential losses. Businesses do not expect any return on premium investments other than claims payment and management. Good brokerages may provide additional services to their clientele, but the carrier predominantly only provides claims services. Without any tangible ROI outside of claims handling, businesses view premiums as a cost of doing business in lieu of investment capital.
Damned if You Do, Damned if You Don’t
Businesses face a damned if you do, damned if you don’t scenario with standard market insurance policies. Let’s assume a business pays $300K in insurance premium annually.
If a business does not utilize its premium investment through claims, it is a phantom investment that safe-guarded against liabilities the business did not experience. In this scenario, the business paid $300K in premiums and received no return on investment other than paper that safe-guarded against liabilities the business didn’t experience. That is a $300K direct detractor from net profit with zero yield to the business.
On the other hand, if the business utilized its premium investment by having claims, their future investment increases through elevated premiums in subsequent years. In this scenario, the business paid $300Kin premiums, experienced claims which the insurance is in place to cover, and as a result the business may be forced to pay $350K in premiums the following year.
This type of structure can feel like a no-win scenario for business owners. When you couple this structure with insurance inflation, rates on policies are increasing even when an insured doesn’t utilize coverages via claims. If a businesses expenses increase (insurances for example), sales must also increase to offset margin erosion at the business.
There is an Alternative
Professional Employer Organizations offer a business a way through the damned if you do, damned if you don’t scenario. A good PEO will provide a tangible return on premium investment dollars. Through the PEO structure, a business owner could make their premiums work for them during a policy year, regardless of whether they experienced claims or not.
PEOs provide insurance coverages in the capacities of health insurance, ancillary benefits, EPLI, and workers’ compensation. Beyond insurance coverages, PEOs also provide their clientele with HR consulting, workforce management technology, regulatory compliance assistance, safety and risk management, 401(k) plans, and more. It is this offering that provides the tangible return on investment for premium spent to the business.
Cost-Effectiveness for the Business
Since a PEO provides more than a traditional insurance carrier, how can it do so in a cost-effective manner to the business? PEOs procure insurance at scale. If the PEO manages its underwriting and risk profile appropriately, it can procure insurances for its clientele at a lesser cost than the standard market. These cost savings help offset the administrative costs of providing all of the additional services a PEO offers. Moreover, the business can reduce or eliminate vendor expenses by consolidating these services with a singular provider in the PEO. Since the PEO is handling multiple facets of the businesses vendor relationship, it can do so at more favorable margins to the client.
Workforce and Profit Byproduct of the PEO Offering
Results to a business working with a PEO typically include:
- Increased profitability
- Reduced liability
- Increased workforce capacity
- Lower insurance premiums
- Reduced risk
- Improved regulatory compliance
- Increased speed to HR solutions
- Access to more products at better prices
Even if the PEO all-in cost is slightly higher than a standard market insurer, when a business weighs the above bullet-points into the decision-making process, the business is healthier long-term by having a partner vested in the businesses success.
A PEO isn’t the right fit for every business and every business isn’t the right fit for a PEO. However, when the relationship works out, there is an element of symbiosis that occurs where each party mutually benefits from the relationship. Bottom-line, for small and medium sized businesses, exploring the option of a PEO partner is worthwhile to determine if this structure is beneficial to the business.
Keep in mind that picking the right PEO and understanding your full monetary commitment to the relationship versus the potential ROI from the PEO is paramount to making an informed decision for your business. Click here to view an article further comparing the PEO offering to the standard insurance offering.
Rob Comeau is the Founder and Featured Author of NPG. Comeau is also the CEO of Business Resource Center, a business consulting and M&A advisory firm to the PEO industry. Comeau is a minority partner in 3 PEOs and works with PEOs and businesses to identify the best solutions for each. You may contact Rob at firstname.lastname@example.org. To learn about Business Resource Center’s offering, please visit us at www.biz-rc.com.