How Business Insurance Rates are Set

No matter how well you plan, operating a business of any size comes with risks and unpredictability. Business (or commercial) insurance protects you from losses that may pose a significant threat to your operations.

When calculating a business insurance premium, insurers consider many factors such as the type of business you run, the type of products you make or sell and the risk management strategies you have in place. Commercial insurance is complex. Make sure you have an insurance representative who understands your business and its insurance requirements, and can help you choose suitable coverages.

6 factors that determine your rate

1. What kinds of insurance do you need? Depending on whether your business is run from your home or rented premises, you may or may not need building coverage if an insured loss causes damage. Even if you rent your business premises, you have likely made leasehold improvements you should insure. Most businesses – small or large – need stock or equipment coverage to help replace or repair damaged property and contents after an insured loss. The cost to insure your business depends on the kinds of coverage it needs.

2. What are your business’s potential liabilities? If bodily injury or property damage results from a business interaction, you could be held liable. Insurance can provide protection – including the cost of your legal defence – in the event of a lawsuit. Each organization faces unique liabilities and business policies are available to cover specific liabilities. Find out about common types of business coverage.

3. What’s your business property’s replacement cost? If you own a business property, its size, building materials, stock and contents – or the current market cost to rebuild it or replace stock and contents – significantly affect what you pay to insure it.

4. Where’s your business located? Across Canada, insurers track the number, type and cost of claims to understand how likely it is that a future claim may happen in a specific location. If your business is located in an area of heightened severe weather risk, your premiums may be affected.

5. What’s your claims history? Your business claims history may have an impact on your premium. Past claims are often an insurers' best predictor of future claims activity.

6. What are the market conditions? Like any product, the cost of buying business insurance is impacted by the marketplace. Inflation is one of many factors taken into consideration by insurers. Some specific market conditions that contribute to the cost of your business insurance premium include:

   • The cost of repairing damage after a loss event. Insurers factor in the current cost of appraisals, labour, materials, and potential temporary relocation.

   • Changes in the marketplace. When goods, services, and labour are in high demand and supplies are low, prices rise. In addition to repairs, business insurance pays for legal defense costs and damages if you’re found to be liable for a person’s injuries and/or damage to their property. Business insurers adjust rates to ensure they can cover future claims.

How commercial insurance value is determined

To avoid being underinsured, building owners should have an accurate replacement cost (RC) appraisal, based on all the required variables (material and labour costs, debris removal expense, building by-laws, heritage costs and others). An appraiser can look at the building and develop an RC appraisal based on today’s cost to rebuild. This snapshot-in-time appraisal can be used to keep your building insurance values in line with the true cost to rebuild if you experience a loss. You may use the base appraisal for the next three years to approximate each year’s cost to rebuild your building, based on a Statistics Canada Construction Price Index.

How co-insurance works

For example, if a building owner has insured their building for $1 million but the actual replacement cost is $2 million, the limit of insurance is 50%. The building suffers $500,000 in damages. As the owner has only insured the building to 50% of its replacement cost, the insurer will pay 50% of the loss ($500,000 x 50% = $250,000). The building owner is also the co-insurer, meaning they will have to pay the other 50% of the cost to rebuild ($250,000). The co-insurance clause also applies to other property besides the building and is used in business interruption coverage.