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How are insurance premiums set

10 minute read

How are insurance premiums set

By: Sovereign Insurance

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Selecting a business insurance policy isn’t something most companies feel they have enough time to do while actually running their day-to-day operations. When it comes to purchasing insurance, the most common thought is ‘how much is it going to cost?’ But most people don’t know much about the work that goes into generating their insurance quote. It’s time to demystify insurance prices, so here we outline how premiums are set.

Who’s involved in setting your premiums?

There are three key players that crunch the numbers and evaluate risks, which collectively contributes to how premiums are set.

  • Actuary: An actuary estimates the amount of losses an insurance company can expect to face in the coming year based on the experience of previous years. Using a number of data sets, the actuary establishes benchmark rates for the policies to ensure the company can fulfill their promise to pay in the event of an insured loss. The actuary will apply statistical methods, risk theory and external trends such as inflation in order to calculate premiums within groupings of clients sharing predictive attributes of risk. They also track payment statistics to assess the insurance company's ability to pay its claims and forecasts the potential financial impact of catastrophes.
  • Underwriter: An underwriter chooses who and what the insurance company will insure based on a series of assessments. The underwriter has specialized knowledge in risk and will adjust the benchmark rates provided by the actuaries based on their review and understanding of specifics of the insured’s business and the risk mitigation practices the owners and employees put into practice at their operations. The underwriter assesses the risk of the policy coverage the client requested and looks for proactive solutions and alternative coverages that may reduce or eliminate the risk of future claims.
  • Adjuster: After a loss, the insurance adjuster works with clients to get their business up and running again as quickly and efficiently as possible. They inspect damage to determine how much the insurance company should pay for the loss. The adjuster will also examine information gathered by a variety of investigators as needed and develop a set of recommendations for the payout. The collective insights that they garner from adjusting losses is fed back to the actuaries to help inform their understanding of which attributes of risk are predictive of loss.

"Insurance premiums are set by the likelihood of the insured having a loss or a setback out of their control and are based on specific attributes of risk that are deemed to be predictive of loss. Companies that take measures to reduce their risks have a good chance of also reducing their premiums."

How are premiums determined?

Insurance premiums are set by the likelihood of the insured having a loss or a setback out of their control and are based on specific attributes of risk that are deemed to be predictive of loss. Companies that take measures to reduce their risks have a good chance of also reducing their premiums. Working out of buildings with fire resistance construction materials, installing sprinklers and continuously maintaining the quality of equipment are some straightforward steps that any company can take to reduce their risk.

It’s important for you to let your insurer know the steps you’ve taken to mitigate your businesses risks. Transferring the information through your broker is the best way to relay this information. Develop a thorough risk management plan that documents all of your organization’s risk management processes and procedures, including risk identification, risk analysis, risk response planning, and risk monitoring, controlling, and reporting. Include as much detail as you can.

The more serious the risk factors your business faces, the more expensive your insurance may eventually be. For example, a construction company can expect to face a higher premium than, say, a florist. If a company relies on expensive equipment or systems that might be attractive to thieves, the premium could also be higher. Heavy industrial equipment costs more to cover than ordinary office equipment and common electrical goods.

How can businesses manage their premiums?

Companies that have implemented robust risk management strategies that mitigate or reduce their losses can expect pricing that is better than their peer group who have not taken such steps. Most importantly they can expect stability in their premiums over time – insurers look to partner with and reward organizations that are aware of their risks and take a proactive approach to mitigating them.

Create structured workplace training sessions or, depending on your line of business, send employees on offsite courses. If you’re a construction company, having all your workers up to date on health and safety and equipment best practices is essential.

If you’re an office-based company, consider sending your employees on a cybercrime awareness course. Hackers rely on human error and gaining the trust of individuals, so educating the workforce could significantly reduce the chance of a breach and show your insurance company that you’re taking emerging risks seriously – because regardless of the impact on your premiums, you should be.

For manufacturers, simple housekeeping is an effective strategy. Using a Hot Works Permit ensures that areas are kept clear of debris or cardboard waste and reduces the amount of fuel for a fire, if one happens to start. Proper fire equipment, such as sprinklers designed for the occupancy, can put a fire out before it gets out of control, minimizing the down time of a business.

Employees who are properly trained can recognize a problem on the assembly line or during the production process. Employees with the knowledge of what can go wrong during production can take steps to avoid a problem that could otherwise result in prolonged downtime.

Cost vs. value

While lower premiums are clearly great (who doesn’t like cutting costs?), getting good value from your policy is even more important. There’s no point paying less for a policy with features that leave you exposed or doesn’t fit your business needs. Paying a bit more to get the coverage that protects your business and the risks that are unique to you will also prove more valuable over the long-term.

Work with your broker and insurer to understand the risks faced by your specific operations and where any hidden exposures may lie. And be proactive and analyze your own risks – no one knows your business better than you do.

While the cost of your premiums needs to fit within your budget, finding the right partner is equally (if not more) important. Partnering with an insurer who’s invested in you for the long-term has so many benefits. The better your insurer understands your business, the more able they’ll be to put in place the protection and risk solutions you actually need.
With so much competition out in the insurance marketplace, it’s a good idea for any business owner to shop around for the best partner. A partner who will be there for your business as it grows, who won’t arbitrarily adjust rates each year and who will listen and understand the individual nuances of your operation. It makes good business sense to align with good partners for the long run.


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