At some point, every risk manager has received the mandate: reduce insurance spend by 15-20% over the next two years. Meanwhile, exposures are growing 10-15% annually, rates are rising, and your coverage needs aren't decreasing.
At the Risk Leadership Roundtable in New York City, senior risk managers from leading organizations discussed how they navigate these seemingly impossible constraints. What emerged was a framework for strategic decision-making that goes beyond simply cutting coverage.
Let's start with the reality. You're told to reduce spend by 20% over two years. In that same period:
Your exposures will grow 20-30% through acquisition, expansion, or inflation.
Insurance rates may increase 10-25% depending on line of business.
Your organization's risk profile is becoming more complex, not simpler.
The knee-jerk response—raise retentions, lower limits, eliminate coverages—often backfires. But what if you increase retentions only to see premiums return to previous levels the following year? You’re paying the same premium with higher retained exposure.
Effective insurance cost management starts with a framework that helps leadership understand the tradeoffs.
Consider categorizing your insurance portfolio into four distinct buckets:
These are non-negotiable. Workers' compensation, contractual insurance requirements, and regulatory mandates fall here. You can optimize the structure—consider captives, fronting arrangements, or alternative delivery—but you can't eliminate the coverage.
Strategy: Minimize cost while maintaining compliance. Focus on efficiency, not elimination.
These policies protect against catastrophic events that would materially impact the organization's financial position. Earthquake for West Coast REITs. Cyber for technology companies. High-limit excess casualty for transportation companies.
The CFO test: What loss would affect our stock price or require board notification? Coverage below that threshold is discretionary; above it is strategic.
Strategy: Align limits with board-approved risk appetite. Use data to demonstrate that retained risk falls within acceptable parameters.
These policies build long-term capacity or maintain critical relationships. Multi-year programs locked in during soft markets. Emerging coverages purchased early (like cyber insurance 10-15 years ago) to establish relationships before they become critical. Capacity from carriers who stood by you during difficult renewals.
Strategy: Think 3-5 years ahead. What capacity will you need that's hard to access? What relationships matter most?
These are "nice to have" coverages that you buy when pricing is attractive. EPL during soft markets. Specialty coverages that address low-frequency, low-severity risks. Coverage where the organization has excellent loss experience and sees arbitrage opportunity.
Strategy: First to cut, first to add back when pricing improves.
One roundtable participant walked through their process:
They classified their entire program across these four buckets, creating a visual representation of where premium dollars were allocated. The exercise revealed that 40% of their spend was in the "Optional" category.
They asked their CFO: "What size loss would we need to report to the board? What would affect our stock price?" This clarified where the line between Bucket 2 and Bucket 4 fell.
Rather than across-the-board cuts, they eliminated all Optional coverage, achieving 90% of their reduction target. They then slightly increased retentions on Required coverage (funding through their captive) to reach 100%.
Critical: They maintained all Strategic coverage despite some being temporarily overpriced.
For the remaining program, they used insurance data analytics to demonstrate value. They showed leadership the distribution of potential losses, the probability of breaching retention, and the impact on balance sheet volatility.
This framework only works with solid data. Participants emphasized several requirements:
One participant noted they'd purchased a building for $2 billion but replacement cost was closer to $1 billion. Insuring at acquisition cost meant they were overpaying for coverage they didn't need. Their program data helped identify these discrepancies across their portfolio.
Understanding frequency and severity by coverage line reveals where you're getting value. One organization discovered their workers' comp program ran about $35 million through their captive annually with extremely predictable losses—making it an ideal candidate for retention.
This goes beyond premium and paid losses. Include risk control costs, claims administration, captive capitalization, broker fees, and internal FTE. The full picture often reveals unexpected opportunities.
How does your spend compare to peers? What about loss ratios? One participant noted that their broker provided industry benchmarks, but they pushed for actual peer company data (anonymized) to better assess their position.
Beyond basic budget cuts, sophisticated organizations employ several tactics:
Locking in favorable pricing across 2-3 years smooths volatility and can reduce total cost. One participant successfully negotiated multi-year D&O coverage with a single aggregate limit, reducing total premium by 20% versus annual renewals.
Splitting programs to increase competition can work. One organization separated a product’s unique exposure from their general program. Suddenly, carriers uncomfortable with risk could compete for the traditional business, and specialty carriers focused on the unique exposure. Both programs saw improved pricing.
Rather than just using captives for retention, use them as negotiation tools. Several participants noted telling carriers: "If your rate isn't competitive, we'll move this to our captive." The threat isn't idle if you have a functioning captive ready to write the coverage.
Most large organizations pay fixed broker fees. When budgets are tight, renegotiate what services are included. Can broker-adjacent services (claims consulting, risk control, analytics) be provided from negotiated commission to reduce out-of-pocket expenses?
Participants shared cautionary tales:
A 10% reduction in every policy sounds fair but ignores that different coverages provide vastly different value.
D&O, EPL, and similar coverages with long development periods shouldn't be cut just because recent experience is good. You're solving for unknown future exposures.
One participant discovered their broker was earning significantly more than peer arrangements for similar services. After renegotiation, they reduced broker costs by 15% without changing coverage.
When comparing captive versus traditional insurance, include captive management fees, audit costs, actuarial expenses, and regulatory compliance. The total cost picture matters.
The framework helps, but you still need to communicate effectively upward. Participants offered several suggestions:
Instead of "our retention is $5M," say "if we have a significant cyber event, we'd pay the first $5M before insurance responds."
Show the distribution of potential outcomes. What's the 50th percentile cost? 90th? 99th? Help leadership understand what "good" and "bad" years look like.
If you can't buy coverage, what's the alternative? Self-insurance? Risk acceptance? Make those options explicit with dollar values attached.
Saying "our peer companies spend less" may not resonate if your risk profile is different. Benchmark against similar risk profiles, not just similar industries.
Perhaps the most important insight from the roundtable: this isn't a one-time exercise.
Your four-bucket categorization should be revisited annually. Coverage that's Strategic one year may become Optional the next if you've successfully diversified risk or if market conditions change. Required coverage may shift if regulations change.
Risk reporting that helps leadership make these decisions requires this kind of framework thinking. Traditional metrics—premium per million of revenue, total cost of risk (TCOR)—matter, but they don't guide strategy.
The organizations that navigate budget constraints most successfully are those that can clearly articulate:
Why we buy this coverage (which bucket)
What we're protecting against (risk appetite alignment)
What alternatives we considered (strategic thinking)
What might change (forward-looking analysis)
When you receive the mandate to cut insurance spend, your response shouldn't be "where can we cut?" It should be "let me show you what we're buying and why."
The Four-Bucket Framework transforms a budget exercise into a strategic conversation. It helps you protect your most important coverages, maintain critical relationships, and make cuts where they matter least.
Most importantly, it demonstrates that you're not just an insurance buyer—you're a strategic advisor helping leadership understand and manage enterprise risk. That's a conversation worth having, even when budgets are tight.
The risk managers who left our roundtable with this framework weren't worried about the next budget mandate. They had a plan, the data to support it, and a way to communicate that made sense to their CFO and board.
That's the difference between reacting to pressure and leading through it.
Join the forward-thinking risk leaders using LineSlip Risk Intelligence to optimize their program. It’s easier than you think. Reach out today to discover how.
Frequently Asked Questions
1. What is the Four-Bucket Framework for managing insurance budget cuts?
The Four-Bucket Framework categorizes insurance into: (1) Required Coverage - non-negotiable policies like workers' compensation and contractual requirements where you optimize structure but can't eliminate coverage; (2) Risk Appetite Coverage - catastrophic protection for events that would materially impact financial position or stock price; (3) Strategic Coverage - multi-year programs and relationships that build long-term capacity and maintain critical carrier relationships; and (4) Optional Coverage - "nice to have" policies that are first to cut when budgets tighten and first to add back when pricing improves. This framework transforms budget exercises into strategic conversations about enterprise risk.
2. How should risk managers determine which insurance coverages to cut when facing budget constraints?
Start by categorizing every policy using a strategic framework rather than making across-the-board cuts. Engage leadership on risk appetite; for example, ask your CFO what size loss would require board notification or affect stock price. This clarifies where the line between strategic and optional coverage falls. Risk managers can achieve the majority of their reduction target by eliminating all optional coverage while maintaining strategic policies despite some being temporarily overpriced. Then slightly increase retentions on required coverage, potentially funding through a captive, to reach 100% of the target while protecting the most critical coverages and relationships.
3. What is total cost of risk and why does it matter for budget decisions?
Total cost of risk (TCOR) encompasses premium and paid losses plus risk control costs, claims administration, captive capitalization, broker fees, and internal FTE expenses. This comprehensive view reveals optimization opportunities that premium-only analysis misses. For example, risk managers may renegotiate broker costs if they discover a broker earning significantly more than peer arrangements for similar services. When comparing captive versus traditional insurance, including captive management fees, audit costs, actuarial expenses, and regulatory compliance, risk managers might change their cost-benefit analysis significantly. The full picture matters for informed decisions.
4. How can risk managers use data to push back on insurance budget cut mandates?
Use quantitative analysis to demonstrate value: show the distribution of potential losses, probability of breaching retention, and impact on balance sheet volatility. Lead with scenarios rather than statistics—instead of "our retention is $5M," explain "if we have a significant cyber event, we'd pay the first $5M before insurance responds." Present the 50th, 90th, and 99th percentile cost outcomes to help leadership understand what "good" and "bad" years look like. Compare alternatives with dollar values attached. If you can't buy coverage, what's the cost of self-insurance or risk acceptance? Benchmark thoughtfully against similar risk profiles, not just similar industries.
5. What mistakes should risk managers avoid when cutting insurance budgets?
Avoid cutting blindly across all programs. A 10% reduction in every policy ignores that different coverages provide vastly different value. Don't eliminate limits on long-tail exposures like D&O or EPL based on recent good experience; you're solving for unknown future exposures. Don't assume your broker has optimized commission without verification. Don't ignore internal costs when comparing alternatives, such as captive management fees, audit costs, and regulatory compliance. Finally, avoid short-term thinking. Coverage that's strategic today should be protected even if temporarily overpriced, and optional coverage should be clearly identified as first to cut and first to restore.