How Insurers Assess Your Risks

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Like many small business owners, you may find the insurance application process confusing. You may have no idea what factors insurers consider before they decide to issue a business insurance policy. Yet, the underwriting process is more straightforward then it seems. Moreover, there are steps you can take to lower your risk of losses and make your business more attractive to insurers.

Assumption of Risks

Insurers are in the business of assuming risks. When an insurer issues an insurance contract, it agrees to assume certain risks on behalf of the policyholder in exchange for a premium. Insurers decide which risks to assume based on probabilities. They make money by insuring a large number of policyholders with similar characteristics and a low probability of generating losses.

To remain in business, an insurer must be choosy about the types of risks it assumes. Otherwise, it could pay out more money in claims and expenses than it collects in premiums. If its investment income does not cover the shortfall, the insurer could become insolvent. 

Each insurer decides what types of risks it wants to insure and what coverages it wants to sell. Once it has decided on a market strategy, the insurer creates underwriting rules. The insurer's underwriters must follow these rules when selecting applicants and renewing policies.

What Underwriters Look For

When you submit a business insurance application to an insurer, an underwriter will assess your company's risks. To an underwriter, an insurance applicant represents a risk of future claims. The underwriter will analyze your business to gauge its susceptibility to future losses. If your business meets the insurer's underwriting standards, the underwriter will issue a policy.

Insurance underwriters use both objective and subjective information when reviewing insurance applications. Examples of objective information include your experience rating worksheet, your claim history, and a motor vehicle report. An example of subjective information is a notation on your insurance application by your insurance agent stating that your company's building is in excellent condition.

An underwriter may obtain both objective and subjective information about your business from a single source. For instance, suppose your insurer conducts a physical inspection of your premises. The report reveals that your building has a metal roof (an objective fact) and that your housekeeping practices are satisfactory (a subjective opinion).

What aspects of your business do underwriters consider when gauging your company's risks? The answer varies somewhat depending on the type of insurance you are seeking. For instance, a property underwriter will consider your building's construction, occupancy, protection, and exposure (COPE). An auto underwriter will evaluate your employees' driving records. There are also a number of factors that commercial underwriters consider no matter what type of insurance you are buying. Here are some examples:

  • Your company's business location
  • Your company's loss history
  • The nature of your company's business operations
  • The number of years your firm has been in business
  • Annual sales or revenue generated by your business
  • Type of business organization (sole proprietorship, corporation etc.)
  • Whether your firm has a formal safety program
  • The name of your previous insurer
  • Whether any insurance has been declined, cancelled, or non-renewed within the last 3 years
  • Whether you or any company principal has been indicted or convicted of fraud, bribery or arson
  • Whether you have any uncorrected fire or safety code violations
  • Whether you've suffered any bankruptcy, foreclosure or repossession within the last 5 years

Lowering Your Risk

There are several things you can do to lower your company's risk of losses. These risk reduction strategies can make your business more attractive to insurers. They can also help reduce your premiums.

One important step is to institute a formal safety program (if your company doesn't already have one). Contact your insurer if you need help setting up your program. Educate your workers about your program once it is in place. Encourage them to help you enforce it.

Secondly, make sure that your workplace complies with all applicable OSHA standards. If you have questions about the standards, contact the agency for assistance. You should also consider utilizing OSHA's free resources for small businesses. For instance, you can ask OSHA to arrange a free safety inspection of your premises. You can also request a free health hazard inspection by NIOSH.

A third way to reduce your company's risks is to solicit advice from your insurer's risk control department. A risk control representative may visit your premises and offer suggestions about ways to reduce accidents. Listen to the advice and make whatever changes are feasible.

A fourth loss reduction strategy is to analyze your previous claims. Consider how the accidents occurred and what you could have done to avoid them. Next, make whatever changes are necessary to avoid similar losses in the future. For example, suppose that one of your workers rear-ended a passenger car while driving a company-owned vehicle. When the accident occurred, your worker was talking on a cell phone. You can help prevent future accidents caused by distracted driving by prohibiting employees from using their cell phones while operating a vehicle.

You should also consider ordering motor vehicle reports in order to monitor your workers' driving habits.