Any new business is considered to be high risk by your insurance company, and the appropriate premiums will be charged. After all, you have not had the opportunity to prove otherwise. As your business becomes more established, though, other factors come into play and help determine your business insurance premiums. Your loss ratio is one such factor that insurance companies take into consideration.
Loss Ratio Explained
The loss ratio can most easily be explained as the ratio between the premiums that the insurance company receives from you compared to the amount of money they pay out as the result of claims to your business. A simplified example that helps you understand how insurance companies look at loss ratio is this:
- If you pay your insurance company $200 a month, that is $2,400 per year in premiums they receive.
- Suppose your business is paid $1,200 in covered claims by your insurance company that year.
- This results in a loss ratio of 50 percent for your insurance company.
- Your insurance company had a profit from your business of $1,200 since they paid out half ($1,200) of the yearly premium you paid them ($2,400) because of the claims they paid to you ($1,200).
Loss Ratio and Your Insurance Premiums
If your loss ratio is higher than comparable businesses in your industry, you will likely pay higher premiums for your insurance coverage. The same is true if you have one year that is marked by a high loss ratio even if you have shown a low loss ratio during the years prior to that particular year. Your insurance company can help you find the policy that best applies to your own unique business situation.