Why do my insurance premiums change every year?

In most cases, insurance policies are in force for one year and need to be renewed to continue coverage.  Insurance companies base their rates in part on cost of living as well as other factors to determine how much premium to charge.  At our technology insurance agency, we like to explain to our clients what factors an insurance company looks at when creating rates. Understanding the why and how of an insurance premium make our clients better consumers.  Being an educated consumer will help you become a better business owner.

There are two categories to look at when understanding insurance premiums; inside factors and outside factors.  Inside factors are within the insurance company.  The salaries they pay their employees the benefits they provide and the overall cost of doing business.  Every business in every industry has to account for annual cost of living increases. Did you know one primary way a state funds itself is through insurance taxes?  The Federal and state governments tax insurance companies.  The taxes help fund counties and municipalities, fire department and police.   Insurance companies have internal departments to account and try to control these costs so they can keep their premiums low.

Outside factors affect the insurance company as a whole.  The way the stock market performs, new laws that are passed, and catastrophic claims are all factors that the insurance company has no control of and affect the premiums.  The insurance carrier accepts your premium and puts it aside in their claims pool.  When a claim happens they pay out.  While that reserve is still sitting there most insurance companies invest in the stock market, bonds and other investments to maxims their profit.  So when the investments do well, the premiums go down when times and when the investments don’t do so well, there’s a good chance premiums will go up.

Premiums can increase following a catastrophic claim.  For us on the east coast we recently experienced Hurricane Sandy.  Its wide range of damage affected many people.  Homes and business where lost, property was damaged and people where injured.  Insurance is here to indemnify, to provide somebody with protection, especially financial protection, against possible loss, damage, or liability, and help give people their lives back.  A large payout like this empties the insurance company’s claims pool.  In response they will adjust premiums to replenish the pool.

There is another factor that has a large influence on insurance premiums, you, the business.  Your business is seen as a risk to an insurance company.  Your business is at risk from an accident or lawsuit.  To measure the risk of each business, insurance carriers will look at several pieces of information.  Your revenue, the number of employees you have, payroll and square footage of your business location.  The revenue and square footage of a business tells how large of a company you are.  It will tell them how much of your product you are selling or how many people are coming into your store.  Your payroll will tell how many employees you have and projects you are working on. They also want to know what you do, what type of industry are you in.  If you are a contractor you are more likely to be involved in a worker’s compensation claim than a person sitting behind a computer all day.  Each year these factors will change, to measure the change an audit may be done asking for financial records.  These changes will inevitably change the price the insurance company charges you.