All nonprofits have administrative tasks that need to be taken care of, and one that is absolutely a necessity is insurance. We are frequently asked questions like "How do insurance companies determine how much our directors and officers insurance rates will be?" And "Will our rates go up each year?"
There are four major factors that influence your insurance premium. Here they are in no particular order.
Insurance companies use your organization’s annual revenue as the simplest way to measure the scope of your operations. Running on the positive side of the ledger is important, but don't be entirely concerned if your ledger is in the red. While running a deficit may indicate some sort of financial straits, most nonprofits adopt a fiscal strategy to run at or near a deficit.
Your revenue is tied to your rate for two reasons. First, it indicates that you can balance your day-to-day transactions. Are full records kept? Are cheques properly co-signed? Are tax receipts being issued in compliance with CRA requirements? Second, rating based on revenue allows for a proper and accurate risk analysis of exactly what it is your organization is doing. If your revenues escalate year over year, but your insurance premium remains the same, this might be cause for concern — an increase in revenue could mean you’ve contracted with more individuals. It could mean that your organization has taken on a social enterprise to finance and fulfill your mandate. It could also mean that you’ve taken on more funding, which usually requires a certain level of insurance protection. Monitoring your revenues plays an integral role in helping to identify potential risk factors for your organization.
What your nonprofit does is very important to the insurance company. The more complex your operations — the greater the risk. If you're a small fundraising organization your exposure is going to be considerably less than if you are a large, national nonprofit providing professional or legal services to clients. Risk, as it relates to your organization, can mean different things to different people. You may think that what your organization does is relatively risk-free; however the insurance company might see it differently. It is important that your board members identify and answer the big picture questions. Do your organization’s operations make it more or less susceptible to a potential lawsuit? Does your organization interact largely with the young or the aged? Does your organization provide advice that may result in a financial loss for an individual or group? A full disclosure of all activities is important because you may feel your operations are risky, but that doesn't necessarily mean that they aren't insurable.
3. Board Structure
As much as revenue and operations tell the story, they don’t tell the whole story. Compiling a diverse and experienced board is important, but for the purposes of assessing the risk, the insurance company prefers to see that your daily operations mirror that of your constitution or bylaws. If they mandate at least 12 board members, why are you currently operating with fewer (or more)? Has there been a rash of resignations or is there simply a lull in recruitment? Are there more directors present to help pass a motion, or has the organization brought on more directors for a busy time of year? Following your constitution or bylaws is an important factor because this is one of the first principles of effective board management. In the absence of this discipline, an organization opens itself up to possible lawsuits, primarily for those affected most — the directors themselves.
4. Loss Experience
Insurance companies, for the most part, base their rates on history and fact. Has your organization been around for a long time, or is it relatively new? Have there been any complaints against the organization? What was the result? Have there been any paid losses that would indicate what type of risk the insurance company is dealing with? Loss experience is often a tricky part of the rating mechanism because organizations may be afraid or even coerced into not disclosing losses. The fact is, losses happen. An insurance broker's role is to fully understand the type of loss to make sure the loss history of the nonprofit is explained. Was the loss foreseeable? Did it result from a negligent act or simply an unavoidable accident? Have steps been taken to remediate or eliminate the risk in the future? There are important questions that have to be asked to ensure that your organization is rated correctly. A loss does not necessary mean it’s the end of the line for your organization.
These four factors provide a simple approach to rating for your organization. As a broker our job is to ensure that we review each of the above points to ensure that your organization is fully understood by the insurance company. This way you will get the best rate possible and ensure that you can focus your attention on the things that matter most — your day-to-day operations.
Here’s what your organization can do to ensure that you’re getting the best rate possible:
1. Know your business
Make sure that if you are the person responsible for obtaining insurance that you have a good idea of everything your organization does. Full disclosure to your broker will allow them to better explain your risk and get the best rate possible. For example, if you provide social services to your community are you simply a referral source or do you actually provide legal, accounting, or other professional services? There is a big difference between the two, so you must be able to clearly identify all aspects of your organization's work.
2. Rely on an experienced broker
The commercial insurance marketplace for nonprofits is extremely competitive. With increased competition come lower rates and better terms. Having access to multiple markets is extremely important. Always challenge your broker to get you the best terms available for your organization at the best rate. If you accept your renewal each year on an "as is" basis, ensure that your broker has sought quotes from each market available to them to ensure that staying with your current insurer is best. Be proactive, not reactive.
3. Know your policy
Not all policies are created equal. It takes a keen eye to notice that some policies may appear to cover everything, but do not. Seek counsel from your broker to resolve ambiguities in coverage. Some policies exclude coverage for directors and volunteers while others include full coverage. Directors and officers liability policies, for example, often include Employment Practices Liability. If you’re paying for both separately, you may be able to group them together to save money, without sacrificing coverage.
4. Do your own risk management
If you’re looking for the best rate, tell your broker exactly what it is your organization does to make it a good risk. Do you have a procedures manual in place? Do you have waivers, interviews and background checks for all volunteers? Send these to the insurance company to prove how well your organization is run. These procedures can be taken into consideration when getting a better quote. If you’re managing a portion of your risk internally, then certainly you should be given a credit with the insurance company.
The only thing that is certain is change. If your organization’s mandate changes or your operations reduce significantly, let your broker know. If your revenue decreases, it may bring you into a smaller rating bracket. At the same time, if you accept increased funding or increase your operations, it's important to also let your broker know so that he or she can negotiate with the insurance company to keep your increase, if any, to a minimum.
Derek Grieve is an account manager at Hub International Sinclair Cockburn specializing in nonprofit risk management. He can be reached at email@example.com or 1-800-328-7887 x 342. You can follow his blog at insurancefornon-profits.blogspot.com or on twitter @CAP4NonProfits.