Does my loss ratio have any effect on my commercial insurance premiums?
Let's start with some basics. This is an oversimplification, but when you pay your insurance premiums, it goes into a large pool that the insurer then invests. Any returns gained from these investments are profits for the insurance company. If one of their clients files a successful claim, they pay out from that pool (find out How to File a Claim that Gets Paid Sooner). Now, the insurer naturally wants to maximize their returns, which means they want to pay out as little as possible from their pool of investable assets.
One of an underwriter's jobs is to set premiums that are competitively priced while still making sure the insurance company will be adequately compensated. When they're tasked with setting premiums for commercial accounts, they will look at things like building construction to determine its fire resistance, occupancy to determine what the building is being used for, and – more importantly for our topic – individual claims information and loss experience data for the client's class of business (see Business Insurance: Building, Contents, and Stock to learn more about insuring these physical assets). Naturally, the insurer wants to be compensated more for insuring riskier accounts. So, they will charge more to insure a high-risk or expensive property.
Now, here's where your question comes in. Underwriters will treat your loss ratio or claims information as a proxy for how prone your business is to losses. If you have a high loss ratio, measured by frequency and severity over time, you will be deemed a high-risk client and will be charged a higher premium accordingly. Conversely, a low loss ratio will get you categorized as a good risk and you will likely see a premium discount as a result.
So, to summarize: your loss ratio affects how an insurance company sees your risk levels. And a higher risk client will have to pay a higher premium for their insurance.
Written by Jacques Wong
Jacques grew up around the insurance industry and began actively participating in 2013. Since then, he has gotten a Level 2 license, won Insurance Council of BC awards in 2015 and 2020 for academic excellence in the insurance licensing courses. He educates insurance professionals through PNC Learning and as a Thought Leader at ReFrame Insurance.
In his day job as an insurance broker, he helps businesses with creative risk management solutions and strategic advice when it comes to insurance.
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