If you’re a small business owner, figuring out how general liability insurance premiums are calculated can help you avoid paying more than you should. Insurance companies must determine the correct amount of premium to charge to insure your business and assume your insurable losses. The premium ultimately charged is a result of calculations based on years of actuarial data of insuring all types of business. Your premium can’t be relegated to some random number—insurers consider several factors to decide how much risk your business operations pose and how much to charge. Let’s break it down so it’s easy to understand.
What Does This Mean for Your Insurance Costs?
For workers’ comp, the cost is based on your payroll. With general liability, premiums can depend on several things—your payroll, sales, building size, and sometimes flat fees. Since these factors change from year to year, the audit is a way to make adjustments. If your business grows, you’ll probably owe more because there’s more risk to cover. If you scaled down, you might get some money back. It’s about matching the cost of your insurance to the size and scope of your business.
The Basics of Premium Calculation
Most insurers start with a base rate, which is determined using standardized risk classifications. They might use databases like ISO (Insurance Services Office) or NAICS (North American Industry Classification System) to group businesses into categories based on common hazards faced by all in that category. Your industry classification is the foundation, and then factors like revenue, payroll, and location are added to calculate your final premium.
What’s a “Premium Basis”?
The premium basis is the variable insurers use to rate, it’s also known as exposures. It’s often tied to things like area, units, gross sales or payroll. So, for example, if you have $250,000 in annual payroll, they’ll multiply that by a specific rate to figure out how much to charge you. It’s just a way of standardizing the rating basis amount across different industries while realizing the bigger operation or higher revenue directly correlates to the premium cost so that bigger businesses pay more because they face more exposures to loss.
Insurance Premium Calculation Methodology
Insurance premiums can vary quite a bit from one company to another because each one uses its own way of calculating rates. This methodology is also called “Premium Principles.” Essentially, these principles determine the pricing factors that go into setting your premiums. They’re approved by the board of directors at the insurance company and must be applied fairly across all customers. However, these specific details are usually kept private and aren’t shared publicly.
Workers' Compensation Insurance Pricing Rules
When it comes to Workers' Compensation insurance, companies have to follow a set of rules to determine how much they charge. These rules include:
- Linking Risk to Cost: The more risk your business has, the more your premium will be.
- Reasonable and Adequate Coverage: The cost should be fair for the level of coverage you’re getting.
- Fair Treatment: Everyone with similar risks should be treated the same way.
- Encouraging Safety: The pricing should motivate you to maintain safe work environments.
To get an accurate premium, insurance companies need specific information from you, such as employee wages and other relevant business data. You have to provide these details when you start your policy and update them at every renewal annually. If there are major changes in operations, a significant rise in payroll or revenue, you need to inform your agent or insurer. Typically, your company will be contacted before the renewal to update this information.
Why Does My Neighbor Pay Less for the Same Insurance?
There are so many variables and formulas used by insurance companies. Even if you and a neighboring business are in the same industry, factors like revenue, payroll, management, safety precautions, quality control, and claims history can cause big differences in premiums. Maybe your neighbor has a strong loss control program in place that helps to prevent losses from occurring and has fewer claims on record. Even small differences can add up to a much lower (or higher) premium.
What Affects Your General Liability Insurance Premium?
Here, we have categorized the factors which will play a predominant role in deciding your premium. These factors are not necessarily for all kinds of companies per se but are a general picture of the kind of influences which can give us a clue on the variables in insurance premium calculations.
Your Industry Type
Every business is grouped into categories based on the type of work it does, and the level of risk involved. Your industry is the main factor affecting your liability premium. These classifications are based on the nature of the business itself and the risks posed in the operations. So, for example, construction is usually considered a higher risk business because of the things that can go wrong while physical work is being performed. A client’s property can be damaged during a job while a marketing agency might be considered lower risk because it’s in an office setting. Insurance companies use industry codes to classify your business and determine a base rate. This starting point makes it easier to compare the level of risk across different businesses in the same industry.
Revenue and Payroll
Your premium is often based on how much your business earns or pays out in wages. Why? Because a higher revenue or bigger payroll usually means more employees and customers, which increases your exposure to potential claims. It’s like this: a small café with a few employees has less risk than a bustling restaurant with a full staff, so the café will probably pay less for insurance.
Location
Where you’re based matters a lot. If your business is in a busy city area, your premiums might be higher compared to a quiet, rural location. Insurers look at the litigiousness of a metropolitan area. This matters because general liability covers third-party injury or property damage, and these cases end up in our court systems. Juries in certain areas of the country may be more likely to award higher verdicts than in other parts of the US.
Claims History
Whether we like it or not, a record of past insurance claims is unfortunately an indicator of future liability claims if changes in the operations are not made. It’s a sense that such claims might be misuse of insurance coverage when better loss prevention actions are needed. Unless you institute a change in how your business operates, insurers will see you as a higher risk and you will pay higher premiums. On the flip side, if you have a clean claims record, you might get a discount. So, keeping claims low is not just good for your business—it’s good for your wallet too.
Years in Business and Experience
The longer you’ve been in business and the more experience your management team has, the better the chances of lowered premiums as long as your loss history is favorable. Newer companies or those with less seasoned managers often pay more because they’re seen as more likely to make costly mistakes. A well-established business with experienced leadership can often score a lower rate.
Tips to Lower Your General Liability Premium
- Double-Check Your Classification: Make sure your business is classified correctly. If your operations have changed, you might be able to get a better rate.
- Keep Claims Low: Fewer claims mean lower premiums. Train your staff and implement safety measures to reduce accidents and injuries. Site inspections, regular maintenance, and loss avoidance methods are necessary.
- Upgrade Your Building: Investing in safety features or moving to a newer facility can lower your rates to a good extent. It is also important to ensure it is maintained well, repair sidewalks and parking areas if you’ve had some trip and fall claims.
- Shop Around: Always compare quotes from insurers to find the best rate for your business needs. As more insurance providers enter the market, there are plenty of choices, but read the fine print before you opt for a policy you like.
The Bottom Line
General liability insurance is crucial for protecting your business, but it doesn’t have to eat up your entire budget. Understanding what goes into your premium calculation can help you manage costs and make smarter decisions about your coverage. We have covered major points in our article here and hope you shall benefit from it in the coming years as the insurance market seeks newer technologies like AI to calculate premiums. This will make the process of premium calculations easier, but the human element still will remain an essential part of premium calculation.
When you partner with the right insurance provider, it’s not just about buying a policy—it’s about building a safety net for your business. At Insurance Advisor, we focus on finding coverage that fits your unique needs without breaking the bank. Let us help you navigate the complexities of general liability insurance so you can focus on growing your business with peace of mind. Give us a call or write us an email, one of our agents will get back to you to get your business insured.
Frequently Asked Questions (FAQ) about How Are General Liability Insurance Premiums Calculated?
1. Why do similar businesses have different general liability premiums?
Usually, they’re done once a year at the end of your policy term. But if your business changes a lot—like adding new services or growing fast—an audit could pop up mid-term to make sure your coverage is still a good fit.
2. How often are general liability premiums adjusted?
Most of the time, premiums are reviewed annually at the end of your policy term-it’s called an audit. But if there’s a major change in your business—like you hired a bunch of new people or expanded your services—you should report changes to your agent to make mid-term adjustment.
3. Can seasonal businesses expect a change in their general liability premiums?
No, not really. Policies are based on annual exposures, it doesn’t matter when most of your sales take place, as long as the annual revenue number is accurate. Now if you’re talking about a seasonal business that only operates for a couple months of the year, then yes, they would not need an annual policy, only one to cover when operations are ongoing.
4. What happens if I don’t report a big change in my business?
If you don’t let your insurer know about things like higher payroll or revenue, it will be determined at audit. The audit takes your projected revenue when you bought the policy and your actual revenue at the end of the policy term and make an adjustment to the premium for the past year. This could become problematic as you will need to pay your renewal premium at the same time as you’re catching up paying for last year’s audit. Timing and cashflow should determine if you make changes mid-term or wait for the audit. Keeping your insurer updated is the best way to avoid these headaches. Depending on what the change is, you’ll want to make sure your business is not performing any operations that are excluded in the policy, or you won’t be covered when a claim happens.
5. Can moving my business location affect my insurance premium?
Definitely. Your business address plays a big role in your premium. If you move to a spot with a more litigious society or tougher regulations, expect your rates to go up. On the flip side, moving to a safer, lower-risk area could lower your premium.