NEWSLETTERS: Return on Investment

By Anthony Tellers, Bowermaster and Associates Regional Vice President

Is the premium you pay to an insurance company just money down the drain or an investment in protection? Is this cost just a necessary evil or money well spent? Most every discussion with business owners will revolve around the term "Return on Investment". Money is tight and we all want to make sure that there is an actual benefit resulting from every cost. A business is purchasing insurance for some aspect of their operations but find it difficult to actually convert this expense into something more than just "peace of mind". This confidence is surely a part of the insurance commitment but there can be some hard dollar benefits as well. First, assume that:

There will be a loss – insurance policies provide protection against identifiable disasters and losses – fire, wind, theft, vehicle collisions, and liability for bodily injury or property damage. It would be prudent for businesses to take into account the insurance costs before deciding their location, their operation, or their product. For example, an entrepreneur may see opportunity and profit in manufacturing mattresses in a non- sprinklered building in a congested, down town area. However, that profit margin could be eaten by a disaster caused by the very conditions that made the location attractive. Sure, an insurance policy may pay for the damage, but taking steps to mitigate a hazardous situation prior to a business decision can eliminate the direct costs of a loss – rebuilding, replacing machinery, re-ordering raw materials, etc. Equally, investing in plant safety equipment, plant maintenance measures, or quality control for your product can eliminate the indirect costs of a loss – administrative time, lost clients, lost sales, government regulation costs, and many more. These indirect costs go way beyond the proceeds of an insurance policy.

There will be a business interruption – if the interruption is the result of a major catastrophe or even a minor incident, the proper insurance coverage will keep the profits flowing. Multiply your monthly lost profits, along with expenses that would continue, times the number of months you expect to be recovering. This is the direct cost of the loss. However, don’t forget to add in the above mentioned indirect costs – lost clients / lost sales, and include brand reputation, employee turnover, unfunded legal fees, and many more.

A contract or bid will have insurance requirements – business activities in the U.S. are secured by contracts between the parties. Most of these contracts are then secured by insurance policies. Each participant in the contract tries to make sure that the proper insurance protections are in place, demanding such coverages as liability limits, waivers of subrogation, cancellation notices, additional insureds, property coverages, and a host of other obligations. Calculate the cost of each of these insurance requirements and factor these into your analyses of the potential profit from the performance of the contract.

Considerable courage is involved when an entrepreneur opens a business venture. In addition, there is considerable risk, financial investment, and emotion. The premium paid for a properly constructed and planned insurance program can provide a quantifiable return on investment. This would make sense for the bottom line of a balance sheet. It also makes sense for your peace of mind.