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THE COST OF IGNORANCE – A Business Book About Performance Based Insurance

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The Cost of Ignorance is an excellent, targeted business book, a rapid and interesting read. The concept of Performance Based Insurance is told in a novella format, making it surprisingly easy and entertaining to read considering it's a book about business insurance.

The novella is told through a series of misadventures from the perspective of Timothy Franculli, who is the owner of a wholesale manufacturing company that is about to go broke because of escalating Workers' Compensation and health insurance costs. Timothy decides to attend a conference in San Francisco where he runs into an old friend who is doing rather well. His friend explains that a key reason for his success revolves around Performance Based Insurance, a type of insurance that has saved him millions, and that could save Franculli's struggling company hundreds of thousands of dollars per year.

Performance Based Insurance is said to allow companies to take greater control over their insurance, and receive a return on unused claim dollars. In The Cost of Ignorance, Franculli learns that companies can save 25% to 50% on their insurance. Safety centric companies, that is companies that invest in safety and wellness programs, can save even more. Initially, this sounds too good to be true, after all, with millions of dollars at stake, why wouldn't more companies be doing this?

It turns out that most of the Fortune 500 already use some type of Performance Based Insurance, while middle market companies, like Franculli's wholesale manufacturing company, are laggards with this innovation. The author, Bob Phelan, explains that approximately 35 cents of every premium dollar is used to run an insurance company. That's overhead which pays for underwriters, actuaries, lawyers, claims personnel, marketing staff, etc. That leaves 65 cents to pay the claims for a traditional insurance company. But claim payments aren't distributed equally to the policyholders. The "good" companies subsidize the "bad" companies. In the book, it becomes obvious that the "good" companies should be using a Performance Based Insurance model, as this is inherently in their best interest. Even if a "good" company has claims equal to 33% of their premiums, they can save over 30% on their current premiums. A simple and interesting concept, one which I think will change the insurance landscape for middle market companies in the coming decade.

I enjoyed The Cost of Ignorance and read it in only two evenings. I think it's a great book for middle market business owners and executives, or any business seeking to learn more about insurance alternatives in an era of dramatically increasing premiums.

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