What affects pricing of business insurance?
There are a variety of factors that affect the price you pay for business insurance. These include the types of services you provide, the size of your business and the amount of coverage you require. While some insurance coverages are necessary, others might be optional, so the price you pay for insurance will reflect the amount of coverage you are purchasing.
Having a trusted insurance professional who can advise you on what risks you currently have, and understand your risk tolerance is important for any business owner. For example, a start-up business may only purchase the minimum insurance required to begin operating, as they are more comfortable retaining more risk. As a business insurance cost grows and becomes more established, their risk tolerance will likely change and be reflected by purchasing more coverage.
The type of business you operate
Describing the type of business you operate might sound like a subjective question with infinite possibilities. While this is true, when it comes to how insurance companies view your business it is actually very systematic. Most insurance companies will utilize a classification system like NAIC to categorize your business, which affects pricing. For example, in specialty trades a class such as woodworking will carry a different pricing factor than tutoring. In many cases, these rating factors are based on hundreds of years of claims data for that specific industry code. This is why insurance companies are hesitant to insure businesses in an emerging industry, such as cannabis, because there is not as much historical data to determine the risk.
The products you manufacture and sell
If you manufacture or sell any form of products/goods, this creates risk for your business which can be transferred to an insurance company in the form of a liability policy. Different types of products carry substantially different risks. If the product were to result in personal injury to an individual or organization, they may take action against your firm and make the argument you are liable for their losses. Whether the claim has merit or not, your insurer will have to defend this claim and this is factored into the price of your business insurance policy. Imagine a scenario where you manufacture and sell medical equipment to local clinics, if the medical equipment were faulty and resulted in a patient being injured they will likely sue the clinic and the equipment manufacturer. This is why products you manufacture are factors that insurance companies seriously consider when pricing your policy.
The size of your business
The size of your business can be defined in several different ways, but two common criteria are much revenue you generate and your number of employees. Depending on what type of business you operate, having more employees can significantly increase your risk and the amount you pay for insurance. For example if you are a concierge property insurance cost that provides wine tours, every new staff member means more customers being toured at any given time, resulting in significantly more risk of a potential claim scenario. Sometimes insurers will even ask information on the average contract size or sale. This because some organizations work with only a few clients on very high value deals, which may create more opportunities for dispute than a small value transaction would. In this case the insurer may inquire to learn more about this specific business relationship and price your business insurance policy accordingly.
Conclusion
The nature of insurance is that you are transferring risk to the insurer for an agreed premium. While some insurance coverages are necessary, others might be optional, so the price you pay for insurance will also reflect the amount of coverage you've purchased. This is why it's important to have an trusted insurance advisor who deeply understands your business, as they will be able to explain what factors are influencing the price you pay. They will be able to advise you on what coverages are necessary, and which coverages are optional based on your risk tolerance. As a business owner, having an experienced insurance professional is critical to protecting one of your most valuable assets, and allowing you to focus on what you do best - growing your business.
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