When you stare suspiciously at the insurance premiums quoted for your business cover, does it feel like your insurer is pulling numbers out of thin air?
Sure, you want to know what you'll be paying; that's important. But it's good to know why you're paying it too. Especially if you know someone whose professional insurance premiums are lower.
Here's our helpful guide to why insurers charge what they do. And how to make sure you’re paying the right amount.
Who decides my premium?
Insurance companies employ people called actuaries to assess risks and help them come up with a baseline for what they should be charging. It’s a careful balancing act, making sure that customers like you are not paying over the odds. But still having enough in the pot for all claims.
Business insurance is a lot more complicated than personal insurance. Because there are so many different things to factor in.
All cars are pretty much the same, all houses much of a muchness.
But all businesses are unique and complex.
So, calculating business insurance premiums is done on a much more individual basis. That’s why, although they exist, price comparison sites are not as widely used. And why using brokers is favoured by many business owners.
4 key questions used to calculate insurance premiums
When your broker or insurer calculates your insurance premium, it's likely you'll be asked a lot of questions.
These questions might seem tiresome or irrelevant, but don't be tempted to skip over any or give simplified answers. The wrong information could actually cost you more.
So let’s demystify some of these questions…
What do you do? Although any business can have a claim made against it, certain professions are considered higher risk than others. Architects, for example – property costs a lot and a mistake will result in a more expensive claim.
What's your annual turnover? The amount a business makes in a year is a pretty good estimate of the value and volume of work it carries out. Generally speaking, the more work you do, the greater the risk of a claim, and the more you'll pay.
How much are your contracts worth? If your contracts are worth a lot of money, this generally implies a high settlement figure if there's a claim. For example, if you play a key part in a £50m contract, and your mistake could bring it down, your insurance will be pricey. Insurers don't just consider your portion of a contract (the amount you're charging your client), but the value of the contract as a whole.
What level of cover do you want? Very simply, the more cover you have, the more you'll pay. This one's just common sense, really.
Risky business
Once you’ve answered the basics, your insurer will probably want to know more intricate details about you and your business.
You’ve heard us talk quite a bit about risk. That’s what insurance is all about.
Your broker or insurer will want to establish whether you carry out business in a risky or risk-free way. You wouldn’t want to insure a boat with a hole in it. So, understandably, business insurers won’t insure a company that’s not being well maintained.
For example, are you properly qualified and experienced for the work you do? Are your contracts carefully worded, and, if relevant to your business, do you have proper sign-off procedures in place? Do you take proactive steps to try to minimise your risks?
If you want to be insured at all, you have to be able to show you're a conscientious professional. It goes without saying they’ll want to know your claims history too.
Some things you just can’t change
It’s worth mentioning that your insurance premium isn’t always about you and you alone.
You might come to renew one year and find that prices have gone up. Even if you’ve not made any claims. So, why?
If there is suddenly an influx of claims for a certain occupation, which does happen. That’ll be reflected in everyone’s insurance premiums in that industry.
Architects are a good example of this. The issues with cladding and fire risks in recent years caused a lot of expensive claims to come through to insurers, resulting in higher premiums all round.
There are other aspects that can affect your premiums too, like Government Insurance Premium Tax.
How do I know if my insurance premiums are accurate?
If you've given your insurer an accurate and detailed picture of your business, you're probably paying the right amount.
However, if your broker or insurer doesn't quite get the way you're doing things, you could be paying a little bit more than you need to. Or perhaps you’re not paying enough to protect your business sufficiently. If you think they don't quite know how it is, tell them.
Every time your business changes, assess your insurance.
Make sure your insurer has the right idea about your business activities. If you spend about 70% of your time at a desk, and the other 30% working on an external site, your premium could be lower than if your insurer thinks it's a 50/50 split between these two.
Do you still need £10m cover now that you only work part-time? Have you taken up new business activities or stopped offering certain services? Whatever it is, let your insurer know.
Any changes to the way you do business could make a difference to your premium. And not only that, if your insurer isn’t up to date with what you’re doing, they could refuse to help if you have to make a claim.
No magic here
So, there you have it.
Now that you've got a better idea of how insurers conjure up those figures, hopefully you’ll be feeling more confident that you’re paying the right price for your protection.
We think there's a lot to be said for peace of mind.
Ultimately, business insurance can be a bit of a minefield. And the most important thing to remember is that it’s not all about what you’re paying, it’s about whether you have the right type of insurance and the right levels of cover to keep your business doing its thing.
Having a business insurance broker is hugely valuable, as they can help you navigate the process, and ensure you’re getting exactly what you need and nothing you don’t.
Want to know more about how a broker can help? Give us a call on 0345 222 5391.
Image used under license from iStock.
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