Whether you're getting everything you need to be prepared to open a brand-new business or you've been operating for some time now and are thinking about switching up some parts of your business insurance coverage, you may be wondering what, precisely, determines how much your business insurance premiums are going to cost. This is one of the most common questions our Morison Insurance brokers are asked, and the answer is more complex than many expect it to be.
There is a large number of factors that are considered by insurance companies when they assess a business' eligibility for coverage and evaluate how much the premiums will be. The answer is more complex than some business owners suspect because each business is unique—and that means each business needs a bespoke business insurance package tailored to address the individual risk exposures and perils that are most likely to be encountered.
In this article, we'll discuss some of the most significant factors that impact business insurance premiums so you can get a better idea of the information being assessed and why.
Risk exposure is a term you'll often hear when talking about business insurance premiums because most of the information insurance companies need when assessing business insurance costs is related to determining the levels of risk your business is subjected to. It is a measure of your potential to experience losses in the future that could result from certain activities or occurrences. Suppose you own a restaurant on the banks of a lake or river, which has been known to flood. In that case, you have a much higher risk of exposure to overland flooding damage than a restaurant located up on a hill where flood waters would never reach.
Similarly, you risk being sued for alleged malpractice if you work in the medical field. While someone such as a hairstylist could be sued for a professional liability issue such as providing lousy advice or failure to deliver services as promised, the risk of that happening is much lower. The settlement costs are likely to be much lower because the impact of an ugly hairstyle is far less severe than the impact of an incorrectly-done root canal.
It's pretty apparent why insurance providers are so concerned with risk exposure—if your property is more likely to be damaged or you're more likely to have legal action brought against you. It's naturally more likely that you'll need to file an insurance claim to deal with the consequences should that risk materialize. Therefore, a higher level of risk exposure increases your insurance premiums to compensate for the eventuality that you'll need to file a claim. That's why pretty much all of the factors evaluated for your commercial insurance costs are different ways of calculating your risk exposure as it relates to various perils and common types of coverage.
A huge range of factors could affect business insurance premiums, but they may not all impact your specific business.
Here are eleven factors that apply to most businesses in some measure, though some may be more or less important for one particular business than for the next.
A retail store owner isn't exposed to the same types of risks as an electrician, and the perils that could befall a manufacturer who produces computer components will naturally be somewhat different than a brewer who produces beer. While all four examples have some risk exposures in common, they also differ in some areas. As a result, your business type is crucial in determining the cost of your business insurance. Some types of businesses come with higher levels of risk than others which may need a different type of coverage. Suppose you provide home services such as plumbing or flooring installation. In that case, there's a good chance that you could cause third-party property damage at some point in your career, but that's not something an online consultant would typically need to worry about.
The specific services you provide, or the types of products you fabricate or manufacture also affect your business premiums because there is much room for variation and differing risk exposures even within the same kind of business. An example is two food manufacturers, one producing non-perishable goods and another growing perishable food items. They are both food manufacturing businesses, but the one who manufactures perishable food is at greater risk of producing contaminated or improperly sealed food that could cause food poisoning and lead to significant expenses such as litigation, legal settlements, recalling the product, notifying the public, dealing with reputation management and so on.
We mentioned above that the location of your business can impact your risk of exposure to property damage, such as a business property located near a body of water and, therefore, more prone to overland flooding damage. Of course, that's just one example—there are many ways that the location of your business can increase (or decrease) your risk exposure. A densely-packed urban area may be more susceptible to a fire spreading between buildings, and commercial properties in areas with high crime rates are more likely to suffer theft and vandalism. Even proximity to sports stadiums or significant government buildings can increase your exposure to property damage caused by rioting or violent protests. Conversely, a business in the middle of nowhere with no visible neighbours could be considered at higher risk because there's no one to notice and call for help if something goes wrong.
This factor isn't directly tied to risk exposure levels, but it has a lot of influence on the cost of your commercial insurance premiums. Generally speaking, there are two main types of insurance policies: all-risk and named perils. All-risk policies offer coverage for all potential perils except those specifically listed on the policy as exclusions, and this is the most common type of coverage. Named perils policies, on the other hand, exclude all perils except those explicitly listed on the policy as being covered—in other words, the "named perils." Because the level of coverage differs, the premiums also vary.
Speaking of coverage, the kinds of business insurance policies you need or want to have included in your insurance package will also affect premiums because each additional policy or endorsement offers additional coverage. In your line of work, you may need a type of coverage that's unnecessary for other industries. For example, a construction or manufacturing business should have pollution liability insurance, but that's optional for a personal trainer or accountant.
Most people know that their insurance claims history impacts their insurance rates. The number and types of claims you've made in the past are a strong indication of the claims you may need to make in the future, especially property claims for a property you are still using or liability claims related to a service or product you are still providing because they tend to be very relevant when determining your level of risk exposure. That being said, any claims you've made throughout your career will be included in the assessment and can affect the final cost of your insurance premiums.
We've all heard the adage, "Practice makes perfect." The more experience and knowledge you have in your industry, the less likely you are to make mistakes or errors that will result in an insurance claim, so your years of experience impact your business insurance rates—the more experience you have, the lower your risk level and your commercial insurance premiums.
The annual revenue of your business is one of the most important factors that insurance carriers use to determine your commercial insurance costs, and not necessarily for the reason you may think. Some business owners assume insurance companies want that information because they're reflexively charging more to a company that makes more money simply because the company can afford it, but that's not the case. Annual revenue is significant because the more you net every year, the more you have to lose in the event of an insured peril, and the higher your claim will be. High revenue indicates a high volume of customers or clients patronizing your business. This means you are at greater risk of being found liable for incidents such as third-party bodily injury or property damage.
Regarding deductibles, it's not really about risk exposure—it's just basic math. A deductible is the amount of money you are responsible for paying to cover an insured loss before your insurance compensation kicks in. If you are responsible for a low deductible or none at all, your insurance premiums will be higher because the insurance company will have to pay more if you make a claim. On the other hand, if you are responsible for paying a higher deductible in the event of an insured loss, it will lower your premiums because you're taking a more significant portion of the financial burden when a failure occurs.
The number of people you employ matters most when insurance carriers evaluate your business for certain types of liability insurance, such as commercial general liability insurance and professional liability insurance, because, as a business owner, you have some level of responsibility for the actions of your employees. For example, if an employee left a vacuum sitting out in the lobby of your office and a client injured themselves by tripping over it, they would sue the business—not the individual employee—and you would need to claim on your commercial general liability policy. The logic follows that the more employees you have, the greater the risk that one of them will do something or be accused of doing something that causes injury to a third party or damages their property.
Generally speaking, your number of employees also falls into a broad range that indicates the size or "class" of your business. A small business with fewer than 15 employees faces less risk than a large company with more than 200 employees.
When considering the property aspect of business insurance, there's much more than just the location of the physical building that enters into the calculations. The design of the building and the materials it's built with can potentially have a significant impact on risk levels—after all, a wood frame building is going to be more susceptible to fire damage than a brick building, and a massive high-rise will naturally present many more opportunities for various types of damage than a small, single-story building.
But the type of building and its features also play a significant role in influencing commercial property insurance premiums because they indicate the cost of replacement and the necessary coverage limits you would have to have to get the compensation necessary to rebuild or restore the destroyed or damaged building. Even features you may not initially think of, such as upgraded hardwood flooring, can affect the replacement cost. The higher the coverage limits you need, the higher your commercial property insurance premiums will be.
If your commercial property suffers damage or destruction from a natural disaster or a fire, it's not just the building itself that will be lost. The belongings inside will also be compromised, including expensive equipment and tools necessary for your work. It could also include inventory and stock that will need to be replaced. And all those replacement or repair costs factor into the required coverage limits for your property insurance policy, impacting your business insurance premiums.
Making sure you understand the how your business insurance premiums are determined is important. Once you have that knowledge, reaching out to the expert brokers at Morison Insurance about a Business Insurance quote. We understand that every business is different so our expert brokers seek out the right coverage that fits each businesses specific needs. Get started on on a quote today by calling 1-800-463-8074. We look forward to hearing from you!
This content is written by our Morison Insurance team. All information posted is merely for educational and informational purposes. It is not intended as a substitute for professional advice. Should you decide to act upon any information in this article, you do so at your own risk. While the information on this website has been verified to the best of our abilities, we cannot guarantee that there are no mistakes or errors.