Insurance advice for the innovators

Assessing a client’s business risk profile is much easier when the client has a track record, but what happens when a business entrepreneur comes to you to insure a brand-new start-up company?

 

When dealing with entrepreneurs and start-ups, the business plan is a critical part of the conversation, brokers say. The business plan is a blueprint for the future of the company.

 

“If you are dealing with an established business, you have some historical data that you can work with,” said Andrew Walker of Ray Fredericks Insurance (part of Huestis Group). “You know their trade area. You know what their historical revenue has been, and you can readily determine what risk they have that needs to be adequately covered by insurance….

 

“The difference with the start-up is, we look at not only their current needs, but also their future requirements.”

 

Looking at future requirements means having an honest discussion with the client about where they see their business going. “Get them to paint the perfect picture for you,” said Colin Brien of Macdonald Chisholm Track Insurance (MCTI). 

 

“Say to the client, ‘So tell me a little bit about your business plan,’” said Brien. “’If things go well, what do you see happening here over the next year? Five years? Ten years?’ 

 

“From an insurance perspective, just make sure you have a handle on what kinds of coverages they need right away, and maybe what they might need down the road. Keep that in mind as you follow up with the client as they move forward.”

 

Of course, there isn’t such thing as an insurance product for entrepreneurs. A commercial insurance package is tailored to the class of business, as opposed to the size of the client. “The good news for the entrepreneur is that they have access to that very comprehensive package that most insurers are able to offer,” said Brien.

 

Brokers must be mindful of a start-up business developing in areas that entail new exposures and that may be outside the scope of their existing coverage, Walker adds. Having a handle on the business plan at the outset means the broker can figure out who the entrepreneur’s future insurers might be as well.

 

“There may be something in this business plan that, if everything goes according to Hoyle, that particular insurer [in the beginning] may not be the right fit [later],” he said. “If insurance is all about establishing relationships, then you want to establish a relationship with an insurer that hopefully you continue on with throughout the course of your business. We don’t want to be moving insurers willy-nilly as we move into different facets of the business plan.”

 

In addition to assessing the business plan to determine the right coverage and right carriers, brokers will want to discuss realistic revenue targets with entrepreneurs, since insurance premiums and liability are based in part on company revenues. 

 

In doing so, the broker should be aware that the entrepreneur is fuelled by a sense of boundless optimism and enthusiasm. This can sometimes lead to wide gaps between ambitious first-year revenue targets and more realistic expectations. For example, an entrepreneur might project a first-year revenue of $4 million, for example, when a more realistic expectation might be in the neighbourhood of $150,000.

 

In the early going, brokers will have more frequent communications with their entrepreneurial clients to keep tabs on the evolution of the company.

 

“When you are dealing with an entrepreneur, you don’t just want to know what he’s doing now,” Walker said. “You want an idea of what his vision is, as to where he wants to go. I want that in its entirety [in the business plan], so you can have effective, regular communication to make sure that you are still providing the coverage and scope that he requires.”