Accounting Best Practices, Fifth Edition

11–16. Consolidate Insurance Policies

Insurance policies are frequently added to a company’s insurance portfolio in a piecemeal manner. Someone on the management team decides that some additional coverage is needed to mitigate a perceived risk, and so an additional policy is added—sometimes beginning at a different time of the year from the other policies already in existence, and perhaps with different insurance companies. This can be an expensive approach, for each insurer must factor in potential loss costs plus operating expenses and profit—on each policy it issues.

A better alternative is to aggregate the policies with a single insurer. By doing so, insurers can see that their administrative cost will be the same, despite the much higher volume of insurance, and so they can reduce their insurance prices. Also, there is little risk that claims will arise on every single policy held, so the overall risk to the insurer declines—which in turn can reduce prices yet again.

This option is best used by large companies with large-dollar insurance policies, since insurers will want their business badly enough to be willing to reduce prices based on the factors just noted.

Cost:

Installation time: