The calculation of the General Liability premium for your business depends on several factors. These are the rating factors that affect your overall liability risk.
The Insurance carrier’s overall loss experience
An important factor is the insurance carrier’s overall loss experience for a certain type of business. I was a direct agent for an insurance company before I became a broker. One year they decided they wanted to write coverage for wholesale distributors. And they developed very aggressive pricing. So, we developed marketing programs to attract and write wholesale distributors. The very next year, that company decided that writing wholesale distributors was not profitable for them, so they non-renewed all of the distributors I had worked so hard to write business for. Not profitable means that they underestimated the losses compared to the attainable premium for that type of business class.
Behind the insurance market, there is a secondary market called the reinsurance market. There are companies that you have never heard of who invest in risk and sell that risk. This is somewhat like the secondary loan market, which buys up large lots of loans at a discount so that lenders can free up money to make more loans. It works the same for insurance. Carriers might sell chunks of risk at a discount to free up money to offer more insurance policies. The law requires that insurers have assets in a large proportion compared to the policies they hold. Suppose reinsurance becomes more expensive or unattainable, or the insurance company runs out of cash this year before they can purchase more “risk” from the reinsurance market, which may only open up next year. In that case, they may turn away business by quoting high. If a business is desperate and wants to buy high, the carrier may well take it; otherwise, they won’t.
An insurance carrier may decide to price aggressively because it needs to put the business on the books. They may be an existing company exploring a new market or a company positioning itself for a takeover or purchase. They may believe they will make it up in future years with higher and higher pricing. Also, the first year that an insurance product is offered, there are no losses to pay out, so it can be cheaper. Once there are losses, they have to look at both aspects of their P&L statement; profits vs. losses.
You may want or need the pricier policy. It may have features that you require. Or the carrier may be financially stronger, and you feel more comfortable with them. You may prefer an admitted insurance carrier because of the financial protection of the state guarantee fund that stands behind it, as compared with a non-admitted carrier, which does not participate in that program. The state guarantee fund is similar to the FDIC, which protects your money in case of bank failure. It protects you in the event of insurance company failure and inability to pay claims. If that were to happen, you get to pay the claims. All of these considerations go into the pricing of a liability policy. Where you fall in the pricing structure depends on your track record and your carrier’s track record, as well as several other variables.