How is an insurance premium calculated?

If you’re new to business insurance (or insurance generally), you might first want to know what exactly a premium is. The short answer is that it’s your cost to purchase insurance coverage. You might pay your premium monthly, quarterly, annually, or at some other interval, but your payment is for some or all of what you owe for the policy period (typically a year).

It’s important to know that your insurance coverage can be interrupted if you fail to make a required payment. If you suffer a loss during that time, it likely won’t be covered.

You should also know that insurance policies typically also have a deductible. That’s an amount you pay toward a claim before your insurance coverage kicks in. For example, if your commercial auto policy has a $1,000 deductible and you report a claim for $9,000, you pay $1,000, and your insurer covers the remaining $8,000.

Your deductible also affects your premium, as we explain later in this article.

When purchasing coverage for the first time, you might notice that quotes can vary between different providers or even between similar businesses. This happens because each insurer uses its own formula to evaluate how your personal details and coverage choices influence your risk profile.

Understanding these drivers from the start helps you feel more confident when reviewing a policy. It also ensures you have a solid answer to the question “What is an insurance premium?” before your coverage begins.

The way an insurer calculates a price depends heavily on the specific coverage you need. For example, workers' compensation insurance relies largely on payroll and job risk, while professional liability insurance focuses more on your industry and the types of services you provide.

Each policy type addresses different risks, so the factors that determine your cost will vary from one to the next. Because of these variables, the calculation of insurance premium totals can look very different for a general liability policy compared to a commercial auto policy.

As a reliable business insurance provider, we follow an industry-standard process for calculating premiums for insurance policies that’s fair, accurate, and appropriate to the risks covered. We make our determination based on the type of policy and several business insurance premium factors.

So, regarding how insurance premiums are calculated, we take the following steps:

• We consider the size of your business (e.g., payroll, revenue, headcount, building/operating space).
• Our team notes how long you’ve been in business.
• We look at where your company is located.
• Our calculations include your industry.
• Our team reviews your company’s claims history.
• We consider the risk inherent in the work your employees do.

For small business owners and independent professionals, a premium in insurance is a direct indicator of how an insurer views your daily operations and industry exposure. Your specific business activities and your commitment to risk management directly influence the final cost of your coverage. Having a clear understanding of these factors allows for better financial planning and ensures you are fully prepared when it is time to apply for or renew your business insurance.

Choosing a higher deductible for an insurance policy typically results in a lower premium. That’s because by saying you’ll pay more toward any claims, you’re accepting more of the financial responsibility for incidents.

You might think of it like buying a house. The more you put down, the lower your monthly payment will be. In insurance, you don’t put anything down upfront but agree to pay a particular amount toward each claim.

When researching comprehensive coverage options, it’s crucial to carefully consider your deductible and premium. It can be tempting to choose a high deductible to get a lower premium. However, you’ve got to be able to pay that amount if an incident occurs resulting in a claim. Ultimately, the key is to find a good balance between your deductible and insurance premium. This balance is a central part of the overall calculation of insurance premium costs for most business owners.

Most insurance providers review and update your rates annually at the time of your policy renewal. However, a provider might recalculate your premium sooner if you request a policy change or if a mid-term audit reveals significant changes in your payroll or revenue. Understanding how insurance premiums are calculated and that reassessment happens annually helps you prepare for these shifts. Keeping your insurer informed of changes in your business ensures your premium stays accurate throughout the year.

Understanding when and why premiums change is important. Insurance policy premiums can change during the policy period, at the end of it, or when you renew your coverage. But it’s important to note that premiums only increase (or decrease) for a handful of clearly defined reasons.

Some of most common causes of insurance premium changes are:

• Policy endorsements. These are modifications to your coverage, such as adding or removing a driver on a commercial auto policy. These changes can affect your insurance cost.
• Incomplete and inaccurate submissions. If our subsequent research reveals information you didn’t disclose on your application—like vehicle accidents or doing work at heights—we might increase your premium.
• Audit results. Some policy premiums are set based on information that can subsequently change. For instance, payroll is one factor in the cost of workers’ compensation coverage. Since payroll can vary significantly during the policy period, insurers conduct audits at the end and require you to pay additional premium or provide you a refund if appropriate.
• New price at renewal. Factors like increased claims costs in an industry or geographic area, economic changes like inflation, or your company having filed one or more claims in the past policy period can cause higher premiums when you renew your coverage.

We notify you by mail and email of any premium changes during the policy period.

Insurers also commonly reassess factors like your claims history and changes in your business assets during the renewal process, which can lead to pricing variations over time. This is a key reason why people ask, "How is an insurance premium calculated?" Being aware of these long-term risk factors allows you to have more informed conversations with your provider and helps you determine if your current pricing accurately reflects your evolving needs.

Having financial protection for a business is critical, but owners understandably want to minimize their insurance costs. Being familiar with an insurer's process for how to calculate insurance premiums is essential.

If you want to know how to lower your insurance premiums, there are several steps you can take. One is to choose a higher deductible. As mentioned above, that’s an action you should only take after careful consideration and confirmation that you can cover the higher deductible any time (and every time) you need to file a claim.

You can also influence your insurance premiums in the long term by operating as safely as possible. Your claims history affects your insurance rate, and all other factors being equal, businesses with fewer claims have lower premiums.

In addition, having all your coverage with one company (i.e., bundling) and paying annually rather than monthly are other ways to save. It’s also helpful to review your policies regularly to ensure you have all the coverage you need but not more than you need. Scaling back, if applicable, can lower your insurance costs.

What is an insurance premium? What’s the role of premiums in insurance? How is an insurance premium calculated? If you ever have questions about the premium for a biBerk insurance policy, we encourage you to reach out to us. We’re happy to explain why your premium has changed.

Here are answers to a few frequently asked questions about premiums from business owners and decision-makers for your convenience:

You can view that information by logging in at the Make a Payment page using your policy number and associated phone number.

Failing to pay your premium will result in a cancellation of your policy, putting your business at risk of taking on a significant expense if an incident occurs.

Insurers look at your company size, your location, the specific nature of your industry, and other factors to determine your rate. They also evaluate your claims history and payroll to assess the total financial risk they are covering.

Working at heights, such as in the roofing industry, often leads to higher costs due to the risk of serious falls. Conversely, businesses that work primarily on the ground or in low-risk environments generally pay less for their coverage.

When you choose a higher deductible, you agree to pay more out of your own pocket when a claim occurs. Because you are taking on more of the financial risk yourself, the insurance company reduces the cost of your premium.

Many people wonder why insurance premiums change. Your rate might go up because of things like an increase in your total payroll or a change in your business operations. External factors like rising inflation or higher industry-wide claim costs can also result in a price adjustment at renewal.

This question addresses a common misconception about insurance premiums, specifically that they can’t change once you purchase your policy. The reality is that your premium can be adjusted if you make changes to your coverage, such as adding a new vehicle or an additional driver.

A history of frequent or expensive claims indicates a higher risk level, which usually leads to increased premiums. Maintaining a safe work environment and avoiding claims can help you secure lower rates over time.

It’s important to understand the insurance premium vs. deductible distinction. A premium is the fixed amount you pay regularly to keep your insurance policy active. A deductible is the specific amount you must pay toward a covered loss before your insurer begins to pay for the rest of the claim.

Most premiums are set for a one-year policy term and are reevaluated during the renewal process. However, changes can happen mid-term, for example, if you enhance your coverage.