How to Evaluate Your Insurance Policy?
You want to manage risk in your business. You have bought business insurance.
How do you know whether the insurance meets your needs?
In this article, we will show you 5-step process on how to analyse insurance policy.
Step 1: Identify Your Insurance Needs
The first step in evaluating insurance policy is to know your insurance needs.
How do you identify your insurance needs?
An easy way to start is a list of common business risks. Your general business liability insurance should cover most of them.
Identifying the risk event is not enough. You also have to know how much coverage do you need.
The coverage amount depends on your business nature.
When trying to determine your coverage requirements, you should consider:
- Sales price of your products and services;
- Number of customers you have;
- What is the worst your products or services can do to your customers; and
- Any contracts that will limit your risk.
At the end of this exercise, you should have a range for each risk.
The premiums are higher when coverage amounts are higher. So you have to balance between costs of insurance and coverages.
If you need help in identifying your business risks, please feel free to contact us. We will love to help you.
Step 2: Find out what does the insurance policy covers?
Most insurance policies will have a general coverage of certain risk events.
When analysing the policy wordings, you should pay attention to the following:
What Kind of Risk Events Does the Policy Cover?
You buy the insurance because you want to protect yourself against certain risk events. So, you should make sure the policy includes these risk events.
For example, you are protecting your business contents against theft. You should ensure that theft is a risk event included in the policy.
What is the coverage limit?
Most policies have a coverage limit. There can be sub-limits in certain categories. You have to find out these limits. Then determine whether you are comfortable with the coverage.
When does the risk event occur?
The risk event can occur when:
- You (or third party) make a claim to the insurance company;
- The risk event occurs; or
- The business activity relating to the risk event occur.
For example, you sell your product at 28 December 2014. Your product caused injuries on 30 November 2015. And your customer makes a claim on 5 January 2016.
When does the risk event occur?
The answer is:
It depends on the policy wording.
Why is this question important to you?
Imagine you buy the insurance from 1 January 2015 to 31 December 2015:
Is the claim made against you on 5 January 2016 still covered?
Understanding when the policy defines the risk events will save you lots of hassle. You will also know how to manage your exposures better.
Is there any deductible or coinsurance?
The deductible is the amount you have to pay before the insurance company indemnifies you. You can also view it as a minimum threshold for policy payments.
Deductibles are common in auto insurance.
For example, your commercial vehicle suffered some damages. You can claim your commercial auto insurance.
Suppose that the deductible is S$2,000, and the damage is S$5,000. The insurance company will only pay S$3,000. The first S$2,000 will be out from your pocket.
Coinsurance is the amount you have to pay for the damages. It is often quoted as a percentage.
Suppose that the co-insurance is 10%, and the total damage is S$10,000. The insurance company will indemnify you for S$9,000. You have to pay the S$1,000 from your pocket.
Why are deductibles and coinsurance important?
First, deductibles and coinsurance determine your risk exposures. The higher they are, the higher is your risk exposures.
Second, deductibles and coinsurance affect the insurance premiums. The higher they are, the lower is the premiums you are going to pay.
You have to balance between the risk exposures and premiums. One consideration you should make is your business nature.
Are the claims likely to be large or small amount?
Step 3: Evaluate Exclusions on the Coverage
Most insurance policies have a general coverage (covered in Step 2). There will also be a section that describes the exclusions.
Exclusions are circumstances that the policy does not cover. You need to read them. I am sure you do not want a shock from the insurance company that your claims are not successful.
Exclusions are usually in the form of:
- Geographical territory: Only if the risk event occurs in Singapore;
- Causes of the risk events: For example, due to terrorists or government / political factors
You have to ensure that your business has little risk exposures on these exclusions.
Step 4: Find out other Terms and Conditions when making the Claim
Sometimes, you will find other terms and conditions in the policy about claims.
The most important thing to take note is the deadline in making the claims. You do not want to start claiming after the deadline has lapsed. Most policies will specify the deadline.
Another important thing is the supporting documents required. Sometimes, the supporting documents are self-explanatory. For example, if you want to claim against theft, you need to produce a police report.
For other insurances, it might not be so clear. If it is not in the policy, always clarify with the insurance company or the agent.
Step 5: Compare the Coverage and Exclusion with What You Need
The final step is to compare your results in Step 1 against Step 2 and 3.
Ask yourself the following question:
- Does the insurance coverage meet your needs?
- Do you need to increase or decrease the coverage amount?
- Are the exclusions acceptable for your business?
- Are you comfortable with the deductible amount?
- Do you think the deductible amount is too low? You can increase it to save on insurance premiums.
- Is there any missing coverage?
These questions will provide a good starting point in analysing your insurance policies.
After evaluating your insurance policies, you should take actions to rectify what’s missing.
Contact your insurance agent/broker and consult them on what you intend to change. Seek their advice and get them to return you with a revised quotation.
You might also need them to renegotiate certain terms and conditions with the insurer.
Bottomline: Do not waste your effort in this exercise. Set your insurance right after you evaluate your insurance policy.
Getting insurance to protect your business is a good first step. But it is not enough. You have to ensure that the insurance you got is the right one.
In this article, you have learned a simple 5-step process in evaluating your insurance policies. We hope that this can help you in your risk management process.
Do you need help in evaluating your insurance needs? Please contact us for a free consultation. We love to speak to you!