Starting a Business? Know the Risk Factors that Go into Pricing Your Business Coverage

Understanding the factors insurance companies use to price a Business Insurance policy is critical to making the best choices when finding the right coverage for your needs. If you’re planning to start your own business, consider the following factors that can affect the price of your business insurance:

1. Type of Business: How is the Business Legally Structured? As a sole proprietor, you are personally liable for all business losses and debts, so you may need to get more liability coverage, but you won’t need workers’ compensation. An incorporated or limited liability company (LLC) poses fewer risks to individual owners.
2. Location, Location, Location: Choosing a business location is perhaps the most important decision a startup will make—both from a business perspective and an insurance perspective. Businesses in high-crime areas or areas susceptible to severe weather, such as flooding or tornadoes, will pay higher rates.
   How to save money: Find the right location. If you have a choice regarding where to locate your business, ask your agent for several quotes for the locations you’re considering. Insurance in some areas may be significantly less costly than in others.
3. Facility Size and Characteristics: A large office or factory building will likely cost more to insure than a smaller space. Insurers also consider construction materials, so a frame building will generally have higher rates than a brick building. They may also apply a surcharge for an older building without updates to major electrical, plumbing, heating, and roof systems.
   How to save money:  One way to ensure more favorable rates is to set up your business in a building with state-of-the-art fire alarms, sprinkler systems, and proper exits.
4. The Value of the Business: The value of your business lies not just in office furniture and equipment but also in its revenue and expenses. When applying for Business Interruption Insurance (BI), which covers lost net profits and continuing expenses after a catastrophe, the amount of coverage and, therefore, the premium costs will be based on your estimate of the company’s future revenues and expenses. An insurer will consider everything when pricing a policy, so keep accurate records and provide a complete inventory of your stock if applicable.
5. Business Owner’s Experience: An insurer will want to know how much experience the owner has in the same or a similar business before selling them a policy. If you’re new to the industry, the insurer may apply a surcharge or decide not to insure you.
   How to save money: Bring a partner or senior executive with related experience on board.
6. Number and Training of Employees: Depending on the state and the number of employees, most businesses must have Workers’ Compensation Insurance—so the more workers, the higher your Workers’ Comp premiums. However, providing proper job training can help reduce insurance costs—in many cases, a well-trained worker is less likely to have an accident. As a rule, insurers will evaluate a company for possible workplace liabilities before issuing a policy, so previous harassment or prejudice suits against the company will impact the business liability insurance price.
   How to save money: Implement safety procedures. Ask your insurance professional about risk reduction measures that can help reduce property loss, liability, security breaches, and workplace injuries. Work with your insurer or human resources manager to establish a healthy workplace atmosphere and protect your company against lawsuits.
7. Claims History: An insurer looks at two things: the frequency and the severity of previous claims.  So, if a business has had several small claims or one costly claim, chances are you will see higher premiums.
   How to save money: Maintain a good loss ratio. Don’t report small claims; rather, self-insure those under or close to your deductible. This will keep claims off your record.
8. Credit-Based Insurance Score: A poor credit history indicates to the insurer that the business owner may be more likely to file a claim, which can negatively affect your business insurance premiums.
   How to save money: Check your credit. Knowing where you stand financially will help you take steps to improve your business credit and, ultimately, keep your insurance rates lower.

Worters advised business owners to keep their insurance professional informed about any changes in their business. “This includes major purchases, changes to your building, the nature of your operation, and the number of employees. While companies can’t expect to eliminate all risks, they can try to recognize what they are and take the necessary steps to reduce them.”

Source: Insurance Information Institute