Insurance companies charge a certain amount of money for the risk they accept to cover a business against potential hazards. If your business has advanced risk management and control mechanisms, the insurance company will charge a lower insurance premium because the undertaken risk to provide coverage is lower than a business with poor control mechanisms.
How Insurance Premiums Are Determined
Often, insurance quotes are slightly lower than the premiums that are actually charged. This happens because insurance companies love statistics and base actual premiums on insurance score.
The insurance score represents the probability of filing a claim against your insurance policy based on your credit rating. A positive correlation between credit ratings and insurance claims has been identified. For instance, customers with poor credit score are more likely to file for an insurance claim than customers with higher credit scores. The underwriting department runs a statistical analysis on your application and determines the insurance premium taking into account your credit rating. The higher the probability of a claim, the higher the premium charged on your insurance policy.
Actuaries calculate the loss distribution and determine the level of sufficient funds to provide coverage. Insurance premiums are primarily calculated taking into account the risks of your industry. Apparently, different industries have different risks. Likewise, different businesses are more or less likely to be affected by macroeconomic variables including the volatility of the stock market, real estate, liquidity, credit availability, foreign exchange, labour markets and supply chain stability. All these factors are considered to determine the premium charged per insurance policy per customer.
What Are the Practices that Can Raise Your Business Insurance Premium?
Business owners often implement practices that do not comply with federal laws and regulations regarding workplace safety, employee training and so on. Generally, failing to comply with the laws raises insurance premiums.
The most common practices that may raise your business insurance premium are:
Failing to comply with workplace safety rules. This increases the risk for workplace injuries is higher. Failing to provide ongoing employee training. This increases the risk of litigation and bad claims. Failing to upgrade equipment to reduce or eliminate on-the-job injuries. Failing to comply with employment laws and regulations. Typical practices include working with contractors to avoid worker’s compensation or hiring illegal workers and apply discriminatory practices, ignoring federal laws. Failing to acknowledge risks related to natural phenomena, including earthquake, lightning, hurricane, thunderstorm, tornado, floods etc. Especially in this case, the difference between insurance quotes and premiums charged is covered by a higher insurance premium because the risk undertaken by the insurance company is extremely high. Failing to document any business process, employee training, equipment maintenance and so on. This deprives your business from premium discounts. Failing to purchase a comprehensive insurance policy against potential hazards. This can lead to substandard insurance policy and higher premiums. Failing to establish a mutually beneficial, long-term relationship with one insurance company. Changing insurers often makes it hard to build a good history and capitalize on premium discounts. Failing to make timely payments, allowing policies to lapse. This makes your business look unreliable and therefore the insurance company undertakes a higher risk. Failing to report timely or accurate claims. False claims reporting generally leads to higher insurance premiums. Self-insuring also leads to higher premiums. Often, business owners self-insure their workers for an amount that doesn’t cover the risk accepted by the insurance company. However, if you file for a claim for a self-insured worker, you will be required to pay a higher premium that will cover the risk of the coverage provided.
In conclusion, your insurance company calculates your premium taking into account any unexpected loss. Typically, bigger exposures have a disproportionate impact on total risk. Make sure to comply with the laws and effectively implement practices that are valid in your state. Otherwise, you will be required to pay higher premiums.
Sources:
http://www.investopedia.com/terms/i/insurancescore.asp#axzz1bp6c3EkS
http://www.investopedia.com/articles/pf/05/insurescore.asp#axzz1bp6c3EkS
http://businessinsure.about.com/od/insuringyourbusiness/a/raisepremiums.htm