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How FP&A Professionals Need To Think of Premium Allocations

March 7, 2022 Vena Solutions  
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Whether you’re considering a new benefits program for your employees or looking to switch insurance providers, it's vital to understand how insurance companies calculate premium allocation. Certain factors impact how your insurance premiums are calculated—including the types of coverage in your policy, the location of your business and even any associated service fees. With this knowledge in hand, you'll be better equipped for how these costs will affect your organization’s bottom line.

In this article, we’re going to take a look at how insurance companies calculate premium allocation and how these costs may influence your organizational decisions when selecting coverage, policy limits as well as any deductibles you wish to include.

Let’s begin.

How To Best Think About Premium Allocation

We all know how insurance policies work. You pay into a premium “pool” alongside other policyholders and should a claim be made—such as in the event of commercial property damage for example—you are entitled to withdraw funds for repairs and any other potential losses incurred by the damage.

When it comes to how much you contribute to this pool, insurance companies pay close attention to premium allocation. If you are determined to be less likely to file a claim, you’ll pay a lower premium than those more likely to make a claim.

A couple meeting with an insurance broker

Insurance Premium Allocation: Policy Type Matters

Every insurance company has a system for calculating and allocating premiums. They consider a variety of factors when doing so. Here’s a list from Risk and Insurance that illustrates the main considerations that affect premium allocation balancing on a macro level:

  • Tax considerations
  • Data accuracy
  • Thoughtful premiums
  • Critical timing

With this in mind, let’s look at how insurance companies calculate premium allocation based on three of the most common types of business insurance policies:

General Liability Insurance

Insurance companies consider the following when calculating a general liability insurance policy premium:

  • The number of employees: Whether you have 50 employees or 500, the number of people who are employed at your company will impact your premium allocation. The more staff you have means there are more chances for something to go wrong.
  • Years of business experience: The longevity, financial stability and business expertise of a company come into play when calculating insurance premium allocations. 
  • Type of business or industry you operate within: Different industries and business operations come with different types of risks. For example, on the spectrum of risk tolerance, a factory that manufactures cars would be classified as having higher risk in comparison to a bank or credit union.
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With these factors in mind, it’s easier to understand how premiums are calculated for your general liability insurance policy.

Commercial Property Insurance

Insurance companies consider the following when calculating a general liability insurance policy premium:

  • Size and physical condition of your property: General liability protects your business against potential business premises liability claims, which means it needs to take into account the size and safety of your business premises. The higher the risk due to older buildings or more space, the higher your premium.
  • Type of occupancy: How your company uses a commercial space will impact the property insurance premium. Certain establishments such as a medical practice will have more liabilities, meaning it’ll simply cost more to insure.
  • Location: The physical location of your business can potentially affect your premium cost, depending on your risk exposure. The level of criminal activity, vulnerability to natural disasters as well as neighboring businesses could all influence how much you pay.

Insurers analyze every aspect of your situation—in comparison to others with the same or similar circumstances—to calculate premium allocation.

Business Interruption Insurance

Also known as commercial insurance, insurers consider these factors when calculating and allocating premiums:

  • The industry you operate within: If your business is at risk of losing income due to the tumultuous nature of its industry, you may have a higher premium.
  • Risk management strategies: Even in a high-risk industry, there are strategies for minimizing the potential for trouble.
  • Past claims: Common examples include if a company is consistently targeted by cybercriminals or fraudsters.

Where Do Premiums Go?

The secret to a satisfactory premium allocation is all about balance. Proper allocation structuring is required in order to obtain established financial objectives. Doing so in an accurate and timely manner will enable finance teams to operate much more efficiently. Failing to do so by under- or over-compensating your resources can result in costly consequences. 

Ultimately, optimal financial structures as a result of precise premium allocation allow for satisfactory coverage of all business operations and their associated risks.

A man signing papers for his insurance premium

Final Thoughts

At Vena, we understand how challenging financial planning can be. And that’s why we created a pre-configured Insurance solution that leverages the flexibility of an Excel interface within the Vena Growth Engine.

When it comes to premium planning, Vena for Insurance makes it easy to plan new and renew gross written premiums by line of business/product and allocate across regions, channels or other dimensions.

In other words, our Complete Planning platform built for Insurance was built with premium allocation in mind. Click here to request a demo and learn more.

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