By Kari Dybdahl

Once a year we have to write a dreaded check to our insurance agent for insurance coverage. In my past article about the 4 Cs of insurance, I introduced that one of the Cs is cost. In the insurance world, we refer to the cost of insurance as the premium. Have you ever wondered how insurance companies come up with the premium amount for the coverage you purchase? When I attend the various restoration and cleaning industry conferences, I like to ask, “What is one thing you dislike about insurance?” I’ve heard a handful of interesting responses over the past 10 years, to say the least, but the most common response is that the cost of insurance is too high.

Contractors are not alone in this sentiment; I’ve never met anyone who has felt that they’re not paying enough for their insurance. However, like taxes, the cost of insurance is simply another one of those necessities in life.

Perhaps getting a better understanding of how insurance companies come up with the premiums they charge can make this pill a little easier to swallow. The determination of risk by the insurance company, also known as rating, is the process of how underwriters decide on the premium to charge for the insurance coverage being offered. The determination criteria vary by the type of insurance coverage offered. For example, an auto policy would have different criteria than a General Liability policy or property insurance; however, there are some similarities.

Four Factors of Insurance Premiums

The four main drivers of insurance premiums are:

  1. Size
  2. Location
  3. Risk Management Effectiveness
  4. Services

Size can be determined by several factors. For auto insurance policies, underwriters look at the number of vehicles and associated equipment. For liability and worker’s compensation policies, they mostly look at payrolls or gross revenues. For property policies, they look at number of locations, buildings, signs, etc. Overall, the larger the quantity, the higher the premium. It’s important to note that the rate of insurance (i.e. the cost per unit of whatever is being measured) should go down. For example, the rate for an auto insurance policy with 10 vehicles should be higher than a similar policy with 50 vehicles.

Location refers to where the risk is geographically. Depending on the type of coverage, underwriters look at different aspects of locations. For example, when it comes to property insurance coverage, they are more concerned with weather conditions and overall climate. If your business is located on the East Coast in an area prone to hurricanes, your premium will most likely be higher than someone whose business is in Wyoming because the chances of a property damage are higher at your location.

In terms of liability policies, insurance companies are more interested in the social and legal environment of your location. For example, New York City is a litigation-happy location, and people often take matters to court to settle disputes. On top of that, the courts are often not favorable to insurance companies; because of this, many insurance carriers will not even write liability insurance for firms located or working in NYC. Those that do charge incredibly high rates due to the increased risk of defense costs and indemnity payouts. For more information check out this website.

Risk management effectiveness refers to the way you manage your business and any past loss history. If you have employee safety programs, routine continuing education, certified technicians, and consistently happy customers, your insurance company will provide you credits or discounts, further reducing your premiums. Your loss history plays an immense role in determining your insurance premiums. It shows how you approach your insurance and your quality of work.

Insurance is to be used for catastrophic losses that threaten the existence of your business. If small claims are filed throughout the insurance policy term for losses that could have been funded without the help of the insurance carrier, it makes it look like you have a long list of upset customers, which depicts you as risky to an insurance carrier. The more perceived risk, the higher the premium. Before filing a claim, I like to ask my clients, “Do you have a true claim for damages, or do you have an upset customer?” If it’s the latter, it may be best to try and remedy the situation without involving your insurance carrier. Of course, it always depends on the situation. However, how you handle these types of situations can impact whether your business is insurable or not. For more information on this, please reach out!

Services you provide are the final factor that insurance carriers look at to determine an appropriate premium. To an insurance carrier, asbestos abatement is a lot riskier than carpet cleaning. If a claim were to occur, the indemnity on an average asbestos claim would be much higher than on an average carpet cleaning claim. The more risk that is perceived by the insurance carrier, the higher the premium charged. In this case, they are worried about the severity of losses and less about frequency as we discussed in the previous paragraph.

Every business is unique in each of the four main drivers of insurance premiums. It would be impossible to give a blanket answer to the question of what drives your specific insurance premiums, but your agent should be sharing with you what is driving the premium charged for your business. If you feel that there is something incorrect in the determination of your premiums (not simply that you want to pay less), I highly encourage you to reach out to your insurance professional and share your concerns.

If you have any questions, feel free to reach out or leave a comment below!

Until next time,

Kari Dybdahl


Kari Dybdahl has a decade of experience in the environmental insurance industry assisting clients from carpet cleaners to municipalities. She has received multiple awards and recognition for her work placing compliant insurance for Crawford Contractor Connection members, ICRA members, and many others. Dybdahl designs custom insurance programs alongside Dave Dybdahl. Please reach out to Kari A. Dybdahl with any questions at 608-824-3341 or kari@armr.net.