Multi-year policies can provide advantages for commercial policy holders, even in the alternative insurance market space, but they have downsides too. If you’ve wondered if a multi-year policy is a good option for your risk management strategy, here are 6 things you should consider before entering into a multi-year insurance commitment:
Multi-year policies can provide premium savings and premium certainty – sometimes. Still, you might be able to secure reasonable premiums during a hardening insurance market, and the certainty of having set premiums for multiple years can assist with predictable budgeting and long-term financial plans.
Of course, you’ll need to decide if it’s worth tying up your cash to pay for multiple years of insurance all at once. Annually billed multi-year policies may be an option, but it’s not uncommon for these to involve annual price adjustments, thereby eliminating the advantage of locking in a multi-year premium.
Finding the right balance between potential savings and costs may depend on the following:
How much time do you spend administering your insurance program? A multi-year policy may reduce the frequency of some administrative tasks, such as the following:
Keep in mind that some insurance lines, like Workers’ Compensation, cannot be written on a multi-year basis, so you may still need to provide certificates of insurance for this coverage annually; however, any multi-year policy will retain the same policy number, which will reduce updates to your certificates.
Some states require annual auto filings or UM/UIM selection forms, so a multi-year policy may not eliminate all of your annual insurance tasks, but it doesn’t hurt to evaluate your situation to find ways you can work smarter, not harder.
Whether a multi-year policy makes sense for your business may depend on the types of contracts you enter. If you need to insure multi-year projects or ventures, a multi-year policy can provide consistent coverage and premiums over the term of the contract. It can also help avoid policy lapses during active projects.
If a contract requires separate, designated policies for a project, multi-year policies can minimize the work required to maintain a separate project-specific insurance program.
Multi-year policies work best for companies that are well-established and stable. If you expect massive growth or a change in direction, a multi-year policy may fall short in keeping up with your rapidly changing needs.
If you decide to make major changes to your program structure mid-term, such as changing deductibles or limits, or adding risk transfer, it may require a cancellation and rewrite of your policy, thus eliminating any benefits the multi-year policy may have provided. Rapid changes in the insurance market, can also create challenges with multi-year policies, as these policies may not provide the flexibility to meet emerging industry needs. Before committing to a multi-year policy, it helps to think through the full term of the policy and forecast where your company, your industry, and the insurance marketplace will be.
One of the advantages of a fronted policy is that you can control the amount of risk your business assumes under it. A multi-year fronted General Liability policy offers an additional risk limitation: You can potentially remove the annually recurring aggregate limit, so that only one aggregate limit applies over the full multi-year term.
Capping the limit on a multi-year policy in this way can also reduce the collateral required to secure your obligations under the policy. Be sure to check with your insurance broker and excess carriers to find out if this is a reasonable option for you.
A multi-year policy is a long-term commitment for both the insured and carrier. For this reason, it is essential to have a good relationship with your insurance carrier, one that is based on trust and transparency. Carriers, likewise, need to feel confident that a long-term coverage contract will not result in complacency in an insured’s risk management practices.
A multi-year policy is just one of the tools in a risk manager’s toolbox that can provide financial benefits or help solve business problems. A thorough evaluation of your company’s needs and direction will help you determine if a multi-year policy should have a seat at your insurance table.