How Insurance Premiums Are Calculated for Small Businesses
Understanding how insurance premiums are calculated can help small business owners make informed decisions about coverage options. This guide breaks down the key components that impact your insurance premiums so you can better understand what you’re paying for and why.
What Is an Insurance Premium?
Your business insurance premium is essentially the amount you pay to a provider for an insurance policy. The amount itself can vary significantly depending on several factors, and is a regular, repeating expense that may be paid monthly, quarterly, or annually, according to your specific policy.
For businesses, insurance premiums are an important part of managing risk and ensuring financial stability. In the event of a covered loss or damage, your insurance premium helps cover the costs associated with repairs, replacements, and other expenses, saving you money in the long run. A number of policies are often legally required depending on your size and industry, such as workers’ compensation, liability insurance, and property insurance.
Factors That Determine Your Insurance Premiums
The amount you pay is determined by various risk factors evaluated by your insurance provider. Let’s take a closer look at what those factors are.
1. Industry Risk Profile
Your industry is one of the most significant factors in calculating your insurance premiums. Businesses in high-risk sectors, such as construction or manufacturing, are more likely to face accidents or claims, which increases the cost of insurance. For example, construction companies have a comparatively high rate of workplace injuries, making them inherently riskier to insure compared to a low-risk industry like consulting.
2. Business Size and Revenue
The size of your business often translates to the level of risk it brings. A larger team means a higher likelihood of workplace injuries or human errors that could result in claims. Revenue also plays a role; higher revenues often equate to higher risk exposure, which can drive your premiums higher.
3. Claims History
Just like your auto insurance policy is influenced by past accidents, your business insurance premium is affected by your claims history. Businesses with frequent claims are seen as higher risk, leading to increased premiums. On the other hand, a clean claims record can qualify you for discounts and lower premiums.
4. Location
The location of your business also impacts your premiums. Businesses in areas prone to natural disasters (hurricanes, earthquakes, or floods) often face higher rates due to the increased chance of property damage. If you’re unsure about location-based risks, tools like FEMA’s Risk Map can help you assess your regional threat level.
5. Property and Equipment Value
The more valuable your property or equipment, the higher your premiums will likely be. Insurers calculate the cost of replacing or repairing these assets in the event of damage or theft, and this value is reflected in your rates. For example, tech companies with expensive servers and high-end equipment can expect to pay more compared to service-based businesses operating from simpler setups.
6. Coverage Limits and Deductibles
The more extensive your coverage, or the higher your policy limits, the more you’ll pay in premiums. A key trade-off here is your deductible—the amount you pay out of pocket before insurance kicks in. Opting for a higher deductible typically reduces your insurance premiums, which we’ll discuss more below.
7. Safety and Risk Management Measures
Implementing safety measures doesn’t just protect your business—it can directly impact your premiums. Insurers reward proactive risk management practices, such as installing fire suppression systems, conducting regular employee training, or adopting cybersecurity measures. Businesses that show they prioritize safety can often benefit from lower insurance costs.
Why Higher Deductibles Lower Your Insurance Premiums
One effective way to control costs is to opt for a higher deductible, which is the portion of a claim you pay before your insurance provider covers the rest. For example, if you have a $1,000 deductible and file a claim for $5,000 in damages, you would pay the first $1,000 and your insurer would cover the remaining $4,000.
Generally speaking, the higher your deductible is, the lower your premiums will be. The higher deductible reduces the financial risk to the insurer, and as a result, they reward you with lower premiums. However, it’s crucial to ensure your business has enough cash reserves to cover the deductible amount in a worst-case scenario.
Choosing the Right Insurance Partner
Understanding how insurance premiums are calculated is just one part of protecting your business. It’s equally important to find an insurance partner that understands your unique needs. That’s where Bethany Insurance comes in.
At Bethany Insurance, we specialize in providing insurance solutions for small businesses. Whether you’re looking for comprehensive coverage or just starting to explore your options, our team is here to help. Contact us today for a quote and see the difference a dedicated insurance partner can make.
