why business insurance rates vary so much

How do insurance companies determine prices that they offer?

While every insurance company comes up with their price by following the same basic formula there are some subtle differences. In general, the process to determine your price is referred to as the underwriting process. As I mentioned, the formula will vary a bit between each insurance company but there are a few factors that are consistent across insurance companies. Below is a breakdown of the most common pricing factors for the two most popular forms of coverage, Workers’ Compensation and Liability insurance.

Workers’ Compensation Insurance

Industry Rate:
The type of industry that your business operates in will directly impact your price. Ultimately carriers will use their historical information to determine how likely an accident is to occur in a given industry.

Employee Job Duty:
If a company has employees that perform duties outside of traditional industry tasks the risk for those employees will be calculated differently. For example, a large restaurant may have a bookkeeper - their risk will be determined using an accountant's risk as opposed to a traditional restaurant employee’s risk.

Size of Payroll:
Traditionally the payroll for the business is used to determine total risk. This is done because the potential amount of money a insurance company will need to pay will be dictated by the amount of missed salary.

Number of Employees:
The more employees that a company has the more opportunities there are for an employee to be injured on the job.

Previous Claims History: If your business has had claims in the past insurance companies typically assume your business will be more likely to have an additional claim.

Liability Insurance

Some of the info below may look a bit familiar. In general, Workers’ Comp and Liability insurance use several of the same factors.

Industry Rate:
The type of industry that your business operates in will directly impact your price. Ultimately carriers will use their historical information do determine how likely an accident is to occur in a given industry.

Annual Revenue:
The amount of revenue that your business brings in can be used as a strong indicator of the total risk exposure of your business.

Business Location:
Insurance companies will want to know a ton of detail about where you conduct your business, they will even want to know the specific type of material used in the construction of your building. These factors will help determine how likely an accident is to occur at your place of business.

Years in Operation:
The longer that your business has been operational the more expertise it is assumed you have and the more expertise you have the less likely your business is to make a mistake that would result in a claim.

Previous Claims History:
If your business has had claims in the past insurance companies typically assume your business will be more likely to have an additional claim.

Are all policies created equally? Do you get more coverage if you pay more?

While all Workers' Comp and Liability policies will generally cover the same type of risks there can absolutely be differences in both coverages and cost when looking at the details:

Limits of Coverage:
The most common differences in policies will be the limits in coverage. These limits represent how much coverage a carrier will offer if you file a claim - this means how much will an insurance carrier pay for a legitimate claim, even if the actual expense of the incident exceeds the limit. The higher the limits the more expensive the policy will be, in essence as the insurance company is exposing themselves to more risk they expect the insured to pay more for premium.

Add Ons:
For Workers’ Comp the only factor for price will be the limits, but liability can have numerous other factors. Depending on the type of business you are in the potential additional coverages you can buy will vary. For example a restaurant can add spoilage coverage, which will allow them to file a claim if the food on hand spoils.

If you have specific questions about the potential coverage available to your business I encourage you to connect with our team. There are also other add-ons that are not specific to your industry, such as terrorism coverage, which any business can purchase to cover their business in case it is impacted by terrorism.

Why are the prices so different between carriers?

The short answer: different data. We have listed off several different categories but the impact that each of those categories have on your policy will greatly depend on how businesses that look like yours have performed for that specific insurance company. To be clear, the amount of risk associated with a specific industry, zip code, or number of employees will be dictated by how many actual claims an insurance company has had from companies that fit that description.

What does this mean for my business?

This reinforces the need to make sure you shop all of your options before purchasing a policy. A specific insurance company may have had an inordinate number of claims that look like your business in the previous year which will impact your policy. At Talage, we built a means for you to shop and compare insurance online in a matter of minutes. This way, you get to compare options from different insurance companies at once, giving yourself an opportunity to look for cost savings.