How is your Insurance Premium Really Determined?

As a consultant who has reviewed thousands of insurance policies over my career, premiums can vary dramatically from policy to policy, from insured to insured. Clients always ask me the same thing: “Am I paying too much for my insurance?” Below are five factors that help determine what premium you will pay.

1. What line of business are you in?   Do you manufacture dynamite, build hundred story buildings, or do you own an accounting firm? Each type of business has its own risks but the frequency and severity for loss for each line of insurance coverage can vary dramatically by type of business. You should expect to pay premium commensurate with the risk of your operations.
2. Do you have good loss experience? I tell my clients, if you average $100,000 of losses every year for the past five years, don’t expect to pay $10,000 a year in premium.   Would you own a business that lost money every year?   Insurers are not in business to lose money.
3. Do you have a safety program in place to improve operations? Do you review losses and make improvements in your operations to prevent them from reoccurring? If you didn’t answer yes to either question, you should invest a little time and energy in developing and supporting a safety program as insurers will provide discounts even at the prospect of a business implementing safety initiatives.
4. Do you have a profitable, growing business or are you struggling to pay your bills? Insurers want to grow with a partner that will grow their operations (and the premium that can be charged). Insurers also want to know that their invoices will be paid.
5. If it is too good to be true, it probably is! I tell my clients that I can sell an insurance policy for $10, but it may not cover anything. Coverage is critical and to get the best coverage an insured should expect to pay more.

Risk Manager’s Takeaway:

Knowing the insurance marketplace and how your insurance premiums are calculated will let you develop a strategy to minimize your insurance costs while finding true insurance carrier partners offering the best of coverge.