Selecting a business insurance policy isn’t something most companies feel they have enough time to do while actually running their day-to-day operations. When it comes to purchasing insurance, the most common thought is ‘how much is it going to cost?’ But most people don’t know much about the work that goes into generating their insurance quote. It’s time to demystify insurance prices, so here we outline how premiums are set.
Who’s involved in setting your premiums?
There are three key players that crunch the numbers and evaluate risks, which collectively contributes to how premiums are set.
- Actuary: An actuary estimates the amount of losses an insurance company can expect to face in the coming year based on the experience of previous years. Using a number of data sets, the actuary establishes benchmark rates for the policies to ensure the company can fulfill their promise to pay in the event of an insured loss. The actuary will apply statistical methods, risk theory and external trends such as inflation in order to calculate premiums within groupings of clients sharing predictive attributes of risk. They also track payment statistics to assess the insurance company's ability to pay its claims and forecasts the potential financial impact of catastrophes.
- Underwriter: An underwriter chooses who and what the insurance company will insure based on a series of assessments. The underwriter has specialized knowledge in risk and will adjust the benchmark rates provided by the actuaries based on their review and understanding of specifics of the insured’s business and the risk mitigation practices the owners and employees put into practice at their operations. The underwriter assesses the risk of the policy coverage the client requested and looks for proactive solutions and alternative coverages that may reduce or eliminate the risk of future claims.
- Adjuster: After a loss, the insurance adjuster works with clients to get their business up and running again as quickly and efficiently as possible. They inspect damage to determine how much the insurance company should pay for the loss. The adjuster will also examine information gathered by a variety of investigators as needed and develop a set of recommendations for the payout. The collective insights that they garner from adjusting losses is fed back to the actuaries to help inform their understanding of which attributes of risk are predictive of loss.
"Insurance premiums are set by the likelihood of the insured having a loss or a setback out of their control and are based on specific attributes of risk that are deemed to be predictive of loss. Companies that take measures to reduce their risks have a good chance of also reducing their premiums."
How are premiums determined?
Insurance premiums are set by the likelihood of the insured having a loss or a setback out of their control and are based on specific attributes of risk that are deemed to be predictive of loss. Companies that take measures to reduce their risks have a good chance of also reducing their premiums. Working out of buildings with fire resistance construction materials, installing sprinklers and continuously maintaining the quality of equipment are some straightforward steps that any company can take to reduce their risk. It’s important for you to let your insurer know the steps you’ve taken to mitigate your businesses risks. Transferring the information through your broker is the best way to relay this information. Develop a thorough risk management plan that documents all of your organization’s risk management processes and procedures, including risk identification, risk analysis, risk response planning, and risk monitoring, controlling, and reporting. Include as much detail as you can.
The more serious the risk factors your business faces, the more expensive your insurance may eventually be. For example, a construction company can expect to face a higher premium than, say, a florist. If a company relies on expensive equipment or systems that might be attractive to thieves, the premium could also be higher. Heavy industrial equipment costs more to cover than ordinary office equipment and common electrical goods.
How can businesses manage their premiums?
Companies that have implemented robust risk management strategies that mitigate or reduce their losses can expect pricing that is better than their peer group who have not taken such steps. Most importantly they can expect stability in their premiums over time – insurers look to partner with and reward organizations that are aware of their risks and take a proactive approach to mitigating them. Create structured workplace training sessions or, depending on your line of business, send employees on offsite courses. If you’re a construction company, having all your workers up to date on health and safety and equipment best practices is essential. If you’re an office-based company, consider sending your employees on a cybercrime awareness course. Hackers rely on human error and gaining the trust of individuals, so educating the workforce could significantly reduce the chance of a breach and show your insurance company that you’re taking emerging risks seriously – because regardless of the impact on your premiums, you should be. For manufacturers, simple housekeeping is an effective strategy. Using a Hot Works Permit ensures that areas are kept clear of debris or cardboard waste and reduces the amount of fuel for a fire, if one happens to start. Proper fire equipment, such as sprinklers designed for the occupancy, can put a fire out before it gets out of control, minimizing the down time of a business.
Employees who are properly trained can recognize a problem on the assembly line or during the production process. Employees with the knowledge of what can go wrong during production can take steps to avoid a problem that could otherwise result in prolonged downtime.
Cost vs. value
While lower premiums are clearly great (who doesn’t like cutting costs?), getting good value from your policy is even more important. There’s no point paying less for a policy with features that leave you exposed or doesn’t fit your business needs. Paying a bit more to get the coverage that protects your business and the risks that are unique to you will also prove more valuable over the long-term.
Work with your broker and insurer to understand the risks faced by your specific operations and where any hidden exposures may lie. And be proactive and analyze your own risks – no one knows your business better than you do.
While the cost of your premiums needs to fit within your budget, finding the right partner is equally (if not more) important. Partnering with an insurer who’s invested in you for the long-term has so many benefits. The better your insurer understands your business, the more able they’ll be to put in place the protection and risk solutions you actually need.
With so much competition out in the insurance marketplace, it’s a good idea for any business owner to shop around for the best partner. A partner who will be there for your business as it grows, who won’t arbitrarily adjust rates each year and who will listen and understand the individual nuances of your operation. It makes good business sense to align with good partners for the long run.
Definition: Underwriting risk refers to the potential loss to an insurer emanating from faulty underwriting. The same may affect the solvency and profitability of the insurer in an adverse manner.
Description:
Underwriting is a critical risk mitigation mechanism adopted in the insurance industry. The process helps in deciding the appropriate premium for an insured. The underwriter needs to match the premium received with the claims paid with an eye on profitability. In the event of a dichotomy between the two, with the premium received not sufficient enough to cover the claims, the insurer is confronted with the probability of loss.
The premium charged by the insurer must incorporate the risk premium that covers not only the claims but also the capital requirements, also called the solvency requirements. In the event that the matching is not done in a pragmatic manner, the underwriting risk arises.
Definition: Risk assessment, also called underwriting, is the methodology used by insurers for evaluating and assessing the risks associated with an insurance policy. The same helps in calculation of the correct premium for an insured.
Description: There are different kinds of risks associated with insurance like changes in mortality rates, morbidity rates, catastrophic risk, etc. This assessment is implemented through various techniques like: simulation, parametric, stress testing, deterministic, benchmarking, stochastic models, etc.
Underwriting is a word you may see if you’re looking at buying insurance. Here’s what it means and how you could use it to save yourself some money.
Are you applying for life insurance? It’s a good choice and a great way to help financially protect your family. But did you know your application goes through underwriting before you can buy the policy? Naturally, you might be wondering, what “underwriting” actually means.
In this article, we’ll give a breakdown and answer your questions:
Underwriting is the process of assessing the risk you present when you apply for insurance. The amount of risk affects:
- the amount of insurance coverage you’re then eligible for and
- how much you pay for your premiums each month.
Insurance companies use the underwriting process for various types of insurance.
1. Apply. When you apply for life insurance, your completed application goes to the insurance company's underwriters.
2. Review. Underwriters review the application using a variety of tools, including their comprehensive underwriting guide, called a manual. This manual includes guidelines for assessing risk factors such as your medical history, driving record and alcohol use. For example, a heavy drinker could be a riskier applicant than a non-drinker.
Generally, the more coverage you apply for and the older you are, the more “evidence of insurability” you need. That’s proof that you’re a lower risk. You provide evidence of insurability by answering questions and undergoing various medical tests.
While requirements differ depending on your situation, underwriters commonly use these tools:
- An attending physician statement. This is a summary of your medical history prepared by your doctor. A third party requests the report to ensure it’s objective and may check it for completeness.
- A paramedical exam. For this, a third-party paramedical examiner gathers information on your medical history and checks your height, weight, blood pressure and pulse.
- Vitals. A measure of your height, weight, blood pressure and pulse, taken by an approved paramedical firm.
- A tele-interview. This interview gathers information on your lifestyle and medical history over the phone. Sometimes, a tele-interview and vitals can replace a paramedical exam.
- A blood test/profile. For this, you submit a blood profile and a urinalysis (an evaluation of your urine) for insights on your health.
- A mature focus interview (MAFI). Insurance companies often require a MAFI if you’re 71 or older. That’s because your risk of health problems increases over time. The MAFI examines your daily living habits and tests your cognitive and mobility skills.
Sometimes an underwriter may also ask you for more documents. They may ask to see a motor vehicle report or a financial inspection report.
3. Decide. The underwriting process will determine:
- if you’re approved for insurance,
- how much life insurance coverage you can get, and
- what you’ll pay per month for your premiums.
Depending on the outcome, you can decide if you want to buy the insurance at the price and terms provided.
You may have your life insurance application approved within hours or days. Or, it could take weeks or even months. The length of time depends on the type of life insurance policy you’re purchasing, and a number of other factors.
You can’t change some risk factors, such as your age or your family history. But there are other factors that you can change.
- Nutritious food and regular exercise have financial as well as physical benefits. Life insurance premiums are typically lower for healthy people with healthy lifestyles. That’s because being overweight can increase your risk of illnesses such as diabetes and heart disease. The closer you are to the healthy weight range, the better your chances of paying a lower premium.
- You can improve your chances for a better rate by making other healthy lifestyle choices. For example, you can drink alcohol in moderation and avoid smoking. Even driving safely can help bring down your rate.
Not always. Insurance policies that don’t require underwriting are sometimes called “guaranteed issue” policies. They can be a very good choice if you’re in poor health. But if you’re in good health, you could be better off with a policy that calls for underwriting. A small investment of your time (and maybe a little of your blood) could result in a big saving.
The right life insurance product for you depends on your personal situation, needs and goals. So it helps to talk to a professional, like an advisor, for guidance. An advisor can look at your situation to help you decide which type of insurance meets your needs. Then, they can help you through the application and underwriting process.
This article is meant to only provide general information. Sun Life Assurance Company of Canada does not provide legal, accounting, taxation, or other professional advice. Please seek advice from a qualified professional, including a thorough examination of your specific legal, accounting and tax situation.
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