Home » General Insurance » How Your Business Insurance Premiums are Determined

How Your Business Insurance Premiums are Determined
Business insurance premiums can be a mystery. Understanding the factors that calculate those premiums can help unravel the mystery. It will also help you understand what you can do to control your expenses over time.

Home » General Insurance » How Your Business Insurance Premiums are Determined

How Your Business Insurance Premiums are Determined

Business insurance premiums can be a mystery. Understanding the factors that calculate those premiums can help unravel the mystery. It will also help you understand what you can do to control your expenses over time.
Business insurance premiums can seem like a mysterious thing. Yet, some of the most common questions we receive are about how insurance premiums are determined and what you as a business owner can do to control those expenses over time. While we can’t tell you exactly how every carrier calculates your final premiums, we can provide a high-level overview of the things that impact insurance premiums and advise on what you can do to control those expenses over time.

Two general areas factor into your final insurance premiums each year— external market trends and factors that are internal or related directly to your organization. External factors are trends and events taking place in the general market, such as:

  • interest rate environment
  • inflation
  • social movements
  • Supply chain issues
  • large-scale catastrophes

Such external trends aren’t directly connected to your business specifically. Instead, they are happening across the marketplace and will likely impact insurance premiums for all policyholders because they have a significant impact on the insurance industry as a whole.

For example, if inflation causes the cost of construction materials to rise significantly (as it did in 2021), the cost to repair and replace a building after a loss grows with it. This then causes an increase in your insurance premiums to account for the rising construction costs.

business insurance premium factors table
Internal factors, those are that are directly related to your specific business that impacts your annual premiums, are things such as:

  • size of your business
  • industry you operate in
  • business location
  • coverages that you need
  • claims history
  • risk management practices

Of all of the factors that contribute to determining your business insurance premiums, your loss history and your risk management practices are most within your control – and significantly impact the premiums you can expect to pay.

Business insurance carriers view effective, robust risk management practices as a highly favorable factor because the more effective you are at managing your operation, the less likely you are to experience a loss, which contributes to the company’s profitability. Risk management essentially means that you have the proper controls to lower the likelihood of something negative happening in your business. Examples of this include handbooks, operating procedures, safety and return to work programs, human resources procedures, and so on. Demonstrating your ability to control for such factors helps your business insurance carrier feel comfortable providing you with better insurance rates because the likelihood of loss is lowered.

Another positive consequence of strong operational management is a reduction in claims. When you have a history of few or no losses, business insurance premiums tend to be lower because you have less risk of a loss. In addition, with few or no losses over time, you’ll be more able to contain your insurance expenses and create more predictability in your budget.

But the benefits of risk management go beyond more favorable insurance premiums. Implementing the appropriate structures and processes within your business can help you more easily grow, gain efficiencies, improve quality, and more. It’s a business tool that you can leverage to build the foundation that you need for lasting success.

Business insurance premiums can seem like a mysterious thing. Yet, some of the most common questions we receive are about how insurance premiums are determined and what you as a business owner can do to control those expenses over time. While we can’t tell you exactly how every carrier calculates your final premiums, we can provide a high-level overview of the things that impact insurance premiums and advise on what you can do to control those expenses over time.

Two general areas factor into your final insurance premiums each year— external market trends and factors that are internal or related directly to your organization. External factors are trends and events taking place in the general market, such as:

  • interest rate environment
  • inflation
  • social movements
  • supply chain issues
  • large-scale catastrophes

Such external trends aren’t directly connected to your business specifically. Instead, they are happening across the marketplace and will likely impact insurance premiums for all policyholders because they have a significant impact on the insurance industry as a whole.

For example, if inflation causes the cost of construction materials to rise significantly (as it did in 2021), the cost to repair and replace a building after a loss grows with it. This then causes an increase in your insurance premiums to account for the rising construction costs.

business insurance premium factors table
Internal factors, those are that are directly related to your specific business that impacts your annual premiums, are things such as:

  • size of your business
  • industry you operate in
  • business location
  • coverages that you need
  • claims history
  • risk management practices

Of all of the factors that contribute to determining your business insurance premiums, your loss history and your risk management practices are most within your control – and significantly impact the premiums you can expect to pay.

Business insurance carriers view effective, robust risk management practices as a highly favorable factor because the more effective you are at managing your operation, the less likely you are to experience a loss, which contributes to the company’s profitability. Risk management essentially means that you have the proper controls to lower the likelihood of something negative happening in your business. Examples of this include handbooks, operating procedures, safety and return to work programs, human resources procedures, and so on. Demonstrating your ability to control for such factors helps your business insurance carrier feel comfortable providing you with better insurance rates because the likelihood of loss is lowered.

Another positive consequence of strong operational management is a reduction in claims. When you have a history of few or no losses, business insurance premiums tend to be lower because you have less risk of a loss. In addition, with few or no losses over time, you’ll be more able to contain your insurance expenses and create more predictability in your budget.

But the benefits of risk management go beyond more favorable insurance premiums. Implementing the appropriate structures and processes within your business can help you more easily grow, gain efficiencies, improve quality, and more. It’s a business tool that you can leverage to build the foundation that you need for lasting success.

The Last Word

It can seem like you have no control over your annual insurance premiums. Still, you can do things within your organization and work with the right insurance professional to manage your risks and costs properly. 

 If you’re exploring how to manage your insurance more effectively or have questions on how well your insurance program covers your business, we’re here for you. Schedule your consultation today.

Additional Resources

a woman controlling her home via her phone

Personal Cyber Insurance Explained

Typically offered as an endorsement to a homeowners policy, personal cyber coverage can provide financial protection for losses resulting from cyber incidents—including fraud, identity theft, and data breaches. This article explains the growing need for this coverage and outlines the key types of personal cyber insurance available.

Read More

Loading...