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How are insurance premiums calculated?

28/10/2013

When insurers calculate insurance premiums, there's a lot of different factors involved

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 a few tips to help you reduce what you pay.

5 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.

To help demystify the whole subject of business insurance premiums, here's a list of the most common questions you're likely to be asked, and how these are used to calculate what you pay:

  • 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 too.
  • 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.
  • Information about the way you do business. This one might seem a bit vague but it makes sense when you think about it. Basically, your broker or insurer is trying to establish whether you carry out business in a risky or risk-free way. 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 can show you're a conscientious professional, insurers are more likely to go easy on the cost.

I want my insurance premiums to be lower. What can I do?

Sadly, 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. If you think they don't quite know how it is, tell them.

Here are a few areas where it's important that you and your broker are on the same page:

  • If you take steps to manage risk in your business, make sure your broker knows about it. If you're carefully monitoring and assessing projects, and using clear and specific contracts, your risk level is greatly reduced, your premium could be too.
  • 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.
  • Every time your business changes, assess your insurance. 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: it could make a difference.

No magic here 

So, there you have it.

Now that you've got a better idea of how insurers conjure up those figures, hopefully there might be something you can do to make yours disappear (well, get smaller).

And if your insurance premium is bang on the money, it's at least nice to know where these numbers are coming from. We think there's a lot to be said for peace of mind.

Image used under license from Shutterstock.

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