How is the Cost of Business Insurance Determined?

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UPDATED: Jun 29, 2022

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Written By: Jeffrey JohnsonUPDATED: Jun 29, 2022Fact Checked

There are several factors that drive the cost of business insurance. In order to save on your business insurance cost, you need to know what these factors are and how they drive the calculation your premium rates.

How The Cost of Business Insurance is Determined

An insurance company hires actuaries to predict their costs of insuring a particular business based on the risks of loss that the organization is exposed to. When looking at how much risk a particular business presents, the insurance company will look at the likelihood of loss, and the potential cost of a claim. For example, a business with a high risk of fire with expensive inventory will cost more to insure. The more risky and costly the business is to insure, the higher the premiums will be. Business insurance cost is based on risk projections, which means you may be able to save money by reducing the chances your business suffers a loss.

What Factors Determine Your Business Insurance Cost

Some specific factors that can influence the cost of business insurance include:

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  • Type of business- Of course, some types of business have more risk of injury, damage and loss than others. The cost of business insurance can be affected by the type of business and the risk that are inherent to that business. t
  • The location- The location of your building premises can affect your premium rate. Are you located in a high crime area? Are you located in a rural area, 10 miles from a water source for fire trucks? Are you located in a flood plan or tornado alley in the Mid West? Remembered, actuaries have already calculated the loss experience for certain zip codes and regions of the country. Therefore this is taken into consideration when calculating the cost of your business insurance. t
  • The size (both physically and in terms of volume of business) – The size of your company factors in the cost of business insurance rates. Do you carry millions of dollars of inventory on premise? Do you have a mega building to insure? How many employees are staffed? t
  • Competition for the business- If there are many companies wishing to provide insurance for your type of business, you will be in a better position to shop around for a good price. t
  • Number of Previous Claims- If you have filed any past business insurance claims, the cost of your policy can go up.t
  • The Class or Category of the Business- Some types of package coverages such as business owner’s policies (BOP) are underwritten by class of policies rather than as individual companies. If your business fits in a certain classification the whole group of businesses in that class is underwritten together so that rates are set for all of them rather than considering each individual company. This leads to more efficient underwriting and helps to keep the rates low if your business meets the requirements to be accepted in one of the classifications. It also means that such policies have less flexibility than you would have if you purchased individual policies for each type of coverage. Since BOPs are normally written for small to medium size businesses, this factor can help contain small business insurance cost.

How to Save Money on Business Insurance

Knowing how the cost of business insurance is determined may help you save money. There are a few things you can do to drive your premium rate down:

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  • Move your business location- This is not so easy if you own a large brick and mortar building with huge inventory business. However, if you are just starting out and have a choice where to place your business, ask your agent for several quotes for several locations. You may find one is much more favorable than another. t
  • Maintain a good loss ratio- Do not report claims that are small, rather self insure those that are under or close to your deductible. This will keep claims off of your record.t
  • Have safety procedures in place- Ask the insurance company about any risk reduction measures that you can take to avoid the chance of expensive damage. Adding safety measures to your business will help you avoid damage, and may lower the cost of your policy.
  • Know how much you need- Assess the value of your business and the risks that you face before shopping, and only buy the amount of business insurance you need.t
  • Get competitive quotes- As stated above, if you have a lot of insurance companies vying for you business, you are more likely to get a better price. Therefore check around!

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Jeffrey Johnson is a legal writer with a focus on personal injury. He has worked on personal injury and sovereign immunity litigation in addition to experience in family, estate, and criminal law. He earned a J.D. from the University of Baltimore and has worked in legal offices and non-profits in Maryland, Texas, and North Carolina. He has also earned an MFA in screenwriting from Chapman Univer...

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Written by Jeffrey Johnson
Insurance Lawyer Jeffrey Johnson

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