If insurance for your business could be bought off the shelf in supermarkets, the checkout process would be very different from just scanning a barcode. It would be more like choosing an item from the shelf, being asked a number of questions at checkout, and then being charged a price based on the answers you provide (called a premium).
There are several factors which impact the premium of insurance but generally, it is calculated based on risk and your likelihood of making a claim. Many factors are considered when determining this risk, and while they vary depending on the type of policy you need for your business, there are some common factors that are considered for every type of insurance. Here are some of those factors:
This is one of the biggest factors contributing to your premium. Not only do premiums vary based on the business type & industry, but businesses in the same industry offering different services will also find differences in the cost of their insurance. For example an accountant who only provides bookkeeping services will find their Professional Indemnity premiums very different to an accountant who also provides auditing & taxations services. Similarly, a hospitality business such as a café may find their Public Liability insurance premium varies greatly to that of a massage therapists’ room.
Your location will impact your insurance premium, and this is regardless of whether you operate out of a physical business site or online. If you have a physical business premise, and take out cover for the buildings and/or contents, then your premium will be driven greatly by your exact location – two similar businesses in the same suburb but different streets may even find their premiums are different.
If you’re a service based business who has clients interstate, your premium will also vary based on where your clients are located. For example, if your business is located in Queensland, but you service clients in New South Wales, then the Stamp Duty on your premium will be calculated based on the percentage of your business activities in each state.
The size of your business
When getting a quote for insurance you may be asked to declare the total revenue your business makes each year. The bigger your business, and the more revenue you turn over, the higher your premium might be - this is simply because your policy is covering you for a higher amount. In some cases however, the size can be a secondary consideration to the services you provide – for example, a smaller business might have a higher premium than a larger business if the activity they undertake is considered ‘higher risk’.
Here’s an example of how location and revenue can all impact the premium of Professional Indemnity insurance for 3 similar businesses.
Anne is a Physiotherapist in Carlton, Victoria with an annual turnover in excess of $30,000. For $5 million of PI cover, and $20 million Public Liability (PL) cover, Anne’s premium was $469.70.
Anne’s Cousin, Annabella, is also a Physiotherapist, however she is based on the Gold Coast, QLD and has an annual turnover of less than $30,000. Annabella requires a higher level of PI Cover due to her contractual requirements. Her PI limit is $20 million, and $20 million PL. Annabella’s PI premium is $537.79.
Anna and Annabella’s Uncle Albert has a Physiotherapy Clinic in NSW, with 5 physios working for him and a turnover of more than $30,000 annually. His premium based on $5 million PI and $20 million PL is $2,464.34.
Your claims history
Your premium will probably be higher the more claims you make – while the intention of this isn’t to penalise you for making a claim, premiums are generally driven up overall from increases in claims.
When taking out PI insurance, you will also be asked about your employees – the number of employees; their experience level. This gives insurers an indication of how likely your business is to make a claim based on the actions of your employees. If your employees are contractors, it’s also worth clarifying with your broker whether your policy coverage will extend to them or not.
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