News & Events
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Are you a Good Risk? How Insurance Companies Evaluate Your Business
The decision to purchase business insurance coverage for your company is an important one. The most important step, however, is the evaluation process. When an insurance company evaluates your business, it decides not only whether to insure your business, but also how much it will cost and the scope of the coverage. This process determines if your business is a “good risk”.
Evaluating Your Business
The evaluation process that insurance companies use to determine if your business is a good risk or not is called risk assessment. During this process, your insurance broker will review your business with you, looking at the processes and procedures that your company employs and determining the probability of a negative event. This information gathering also extends to your employees, how they perform their jobs, and if they exhibit any risky behaviors at work that could lead to issues later.
During the evaluation, the insurance company will also review the policies and procedures you have in place to protect your business and your employees. These are collectively called risk control, and having a comprehensive risk control plan in place is an important consideration when an insurance company is determining if your business is a worthwhile risk.
Employing the Algorithm
Once the information about your business has been gathered, it is then entered into a computer program which compares your assessed risks to a predetermined risk algorithm. This algorithm establishes a standard of risk based on data that the insurance industry has acquired over time. By comparing your business risk data to this standard of risk, the insurance company can determine how likely you will be to file a claim against your policy and what type of claim it might be. This gives them the information they need to gauge whether it will be profitable for their company to insure your business or not.
Risk Assessment and Premium Rates
Profit is the primary goal for any insurance company, and business insurers are no exception. When an insurance company evaluates a company for a potential policy, it is looking for indicators that the business will be a good investment for them — meaning that they will make more money through the payment of premiums than they lose paying out large amounts for claims. The higher the risk your business practices pose, the higher your premium will be, and in some cases of extreme risk, an insurance company may refuse to provide coverage at all.
Beyond the financial risks to your business if you are uninsured, a lack of coverage can also affect your ability to pursue contracts and attract new customers and partners. Investors may withhold new funding or withdraw current funding if your business is underinsured. The evaluation process and risk management policies of your business have an enormous effect on the cost of obtaining insurance, the amount of insurance you can obtain, and whether you can obtain a policy at all. Having a good understanding of the evaluation process, as well as what constitutes a good risk and how to improve your risk assessment, will put your business in a more positive position, insurance-wise.
Poms & Associates offers business insurance and brokerage services, and provides the most current information on a range of business insurance policies. For more information about business insurance policies, as well as how Poms & Associates can assist you in evaluating your business and selecting the right business insurance policy, please visit our website or contact us.
Gabriella Messina is an author who has written online content for a variety of business and insurance related topics, including business insurance basics, workers’ compensation, liability insurance, and malpractice.