From an insurer’s standpoint, every business is unique in the risk that it poses. In order to properly rate a risk, the insurance company must take many things into consideration in an attempt to determine the likelihood of a claim and if there is a claim, the severity of it. The following are the top factors that insurers consider that could cause a business to pay higher insurance premiums. These also represent your best opportunity to keep your insurance costs under control or even reduce them.
1. Loss History
Past claim history plays a major role in the insurance premiums of a business. The insurer will often consider a business that has had several small claims a greater risk than a business that has had one large claim, thus charging a higher premium. A business owner might be better off absorbing small losses and saving the insurance for larger claims.
2. Credit History
Although most insurance companies do not have the ability to apply credit scoring to commercial risks, they do often research the credit history of the company as well as the owners. A poor credit history could be a red flag to the insurer that the business owner is either financially irresponsible or more likely to file a claim since their finances might not be solid enough to absorb small losses on their own. Some insurance companies won’t even consider a commercial applicant that has had a bankruptcy in the past. Cleaning up your personal credit and establishing solid business credit before adding coverage or changing insurance providers could provide substantial savings.
3. Driving History
For commercial auto policies, having employees with poor driving histories will result in higher rates unless the company agrees to exclude those drivers. This could come into play even on a package policy because many commercial package policies provide hired and non-owned auto coverage. You may want to consider this in your hiring practices.
The length of time the company has been in business is also taken into consideration. If it’s a start-up business, the insurer will want to know how much experience the owner has in the same or similar business. If the owner is not experienced in the type of business they are starting, the insurer may apply a surcharge or even refuse to insure them. Having a partner or senior executive/manager with related experience can alleviate this.
The location of the business is another important factor in the determination of rates. A business located in a high crime area or in a remote area not easily accessed by the fire department poses a higher risk of loss. Investigate the impact in your insurance premiums as part of your due diligence when considering a new location. You may be able to offset higher rent with lower insurance premiums.
6. Building Characteristics
If the building is older and has not had updates to major systems such as electrical, plumbing, heating, and the roof, the insurance company may apply a surcharge. A frame building will have higher rates than a brick building, and lack of protection systems such as fire alarms, a sprinkler system, and proper exits may even deem the building uninsurable with some companies.
7. Continuous Coverage
One of the most important things a business owner can do is carry adequate insurance and avoid a lapse or gaps in coverage. Prior cancellation for non-payment is especially unfavorably looked upon and could make the business ineligible for coverage with some insurance carriers. Keep this in mind if you ever get in a cash flow crunch and have to start prioritizing bill payments.
8. Safe Working Environment
Companies that do not provide a safe working environment for their employees and do not enforce safety rules are going to pay higher rates because their risk of injury to an employee or visitor is greater.
9. Employee Wellness
Although most group health plans don’t require physicals and medical history for individual employees, insurers recognize that healthier employees cost them less, and they’re willing to pass some of that savings on to employers who implement employee wellness programs. These may include offerings such as on-site exercise facilities, partially or fully subsidized gym memberships, stop-smoking programs, weight loss support groups, and more. While the costs may not be fully offset by reduced health premiums, they almost certainly will by reduced absenteeism, increased productivity, and improved employee retention. Healthy employees are also more likely to be happy employees.
10. Use of Insured Subcontractors
The insurance company might require proof that the business owner only uses subcontractors who carry their own adequate insurance. This is because the business owner could be held liable for the subcontractors’ operations if they are uninsured, thus forcing the insurance company to provide insurance for which they are not collecting a premium.
11. Reporting Correct Information
Many business insurance policies are based upon annual sales and/or employee payroll.
At inception of the policy, sales and payroll figures must be estimated for the next year. At the end of the policy period, an audit is performed to determine actual figures. If the figures were underestimated, whether or not by intention, additional premium will be due.
12. Ask Your Agent
Perhaps the single most effective thing you can do to reduce your insurance premiums is simply ask your agent. While they may make more money on higher premiums, they also want to keep your business, and telling you how to lower your costs is one of the most effective ways they can do that. If you haven’t had that conversation with your agent recently, set up a call or meeting right away.
While the exact formulas insurers use to calculate your premiums may be complex and somewhat mysterious, understanding some of the major factors insurers consider may provide you with multiple ways to save on your premiums.
Scott Allen is Vice President of Marketing for OneCoach, a business growth coaching and consulting firm that helps successful entrepreneurs achieve even more. He is coauthor of The Virtual Handshake: Opening Doors and Closing Deals Online, The Emergence of The Relationship Economy, and a contributor to over a dozen books on entrepreneurship, marketing and social media.
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