Why is it that some insurance companies offer significantly lower rates than competitors when quoting identical businesses? When profit margins are roughly 2% of the total premium they collect, how can one insurance company be significantly cheaper? It is possible for one insurance company to be cheaper than another, but it’s important to understand why you’re getting that lower price. Sometimes you can run into a great deal on insurance, but other times that good deal turns sour when you dive deeper and see the problems.
Insurance is a complex industry, and business insurance might be the most complex product in the market. That is why we want to help you learn how to compare business insurance quotes, so you can recognize the differences and gain a basic understanding of how insurance companies operate.
To begin, there are some common reasons why pricing might differ on your business insurance quotes. An insurance company might be offering a lower price than others because:
It has clients with fewer claims (better customers and more conservative underwriting).
It has fewer expenses (more efficient or less overhead).
It doesn't pay out as many claims (worse claims service).
It doesn't offer the same coverage as other insurance companies (inferior product).
It isn't offering a sustainable price (temporary pricing).
In this post, we’ll help you determine the difference between a low premium quote offered by a well-run insurance company with an underwriting advantage (1 & 2), versus a quote that is low for reasons that could put you at a disadvantage (3, 4 & 5).
Learning to compare commercial insurance quotes can be challenging, and it can be tempting to just look at the bottom line instead of reading the details of each quote. We’ll help you avoid getting into a race to the bottom when it comes to price (although sometimes the lowest price is the best option!).
Instead of comparing business insurance prices, we recommend looking at insurance from a value-based paradigm. That means: Purchase the insurance policy that transfers the most risk for the lowest price to the most stable insurance company.
Here are our recommendations on how to achieve that paradigm:
1. Determine which quotes use Insurance Services Office (ISO) coverage forms vs. proprietary forms.
In the late 19th century, insurance policies were written on coverage forms that each insurance company drafted themselves. Although customers would seek multiple quotes, the insurance policies were nothing alike and could not be reliably compared to each other.
This was a confusing marketplace for customers and created an environment where insurance companies silently removed coverage in order to lower their premiums. Since the average customer had a difficult time comparing all of these unique policies, they simply chose the cheapest one. There was an incentive to offer insurance with the least amount of coverage and the cheapest price. Quality insurance companies had a difficult time competing in this type of marketplace.
Eventually, insurance regulators saw the need for standardization, not only to provide policyholders with quality insurance, but also to offer some stability for insurance companies. This led to the establishment of the Insurance Services Organization (ISO), which launched its efforts by standardizing the coverage forms that insurance companies use on their policies.
In recent years, we have seen a slight shift away from the templated ISO forms in favor of proprietary forms that insurance companies create themselves. Unlike in the 19th century, these modern proprietary forms are largely based on the ISO template and just modified to fit insurer needs.
When you compare business insurance quotes, look at the coverage forms. You can determine which quotes are truly based on the industry standard by going to the endorsement schedule (usually right below the declarations page) and looking at the form numbers.
If it’s any of the two letters mentioned below that precede the form number, it’s an ISO form. ISO uses these letters to identify that it’s their form and indicate what line of coverage it is writing. For example:
If your quotes involve proprietary coverage forms, don’t necessarily assume they are sub-standard. That may be the case in some instances, but in others, proprietary forms can broaden the ISO templates. For example, CNA has an excellent small business policy, yet they use a modified version of the standard ISO forms.
We recommend you seek the advice of an insurance broker before purchasing a policy with proprietary coverage forms. Similar to the 19th century, it could be a situation where an insurance company is cutting coverages and offering an inferior policy just to lower the price.
2. Review all lines that mention "exclusion," "limitation," or "amendment" on the endorsement schedule.
After determining whether the foundation of the commercial insurance policy is ISO or non-ISO coverage forms, you can then assess what the quote does not cover.
Insurance policies commonly offer a broad agreement, and the rest of the policy is used to limit the scope of that agreement.
For example, if you purchased a policy with an insuring agreement that stated the insurance company will pay for all direct physical damage to insured property, the next 100 pages will be clarifications, conditions, definitions, and exclusions to specify exactly what that original sentence includes.
This is standard practice, but the trick is to figure out what exclusions are on the policy that shouldn't be there. No insurance policy is perfect, and no insurance policy covers everything–there will always be exclusions.
It is your job to identify which exclusions or limitations are abnormal and detrimental to your business.
Start by going to the forms schedule and highlight everything that says exclusion, limitation, or amendment. You can also highlight anything that sounds like it is removing coverage. Here’s an example:
From there, you can read the forms and determine whether you can live with that particular exclusion or limitation.
As a side note, notice how most of the coverage forms begin with "CG", which means this is a ISO-based commercial general liability quote.
3. Know exactly what costs you would be responsible for (deductibles, coinsurance, or policy limitations) in the event of a claim.
When comparing business insurance prices, make sure to take into account each policy's deductible, coinsurance penalties, and building valuations.
This is important because insurance companies can lower the cost of insurance by limiting the amount of coverage they provide on the policy. Coverage is primarily limited in two ways: Increasing your contribution in the loss (deductibles and coinsurance penalties) or lowering the total amount the insurance company is responsible for (building valuation type changes).
If you live in certain geographic areas, some of these penalties might be a necessary evil. For example, if you’re getting an insurance quote for a business located in coastal Florida, wind damage from natural disasters is almost a certainty and penalties relating to that type of damage are unavoidable, thus wind deductibles will be much higher. Regardless of your situation, it is important to know exactly how a claim will get paid out and how much you should be prepared to pay in a claim situation.
When doing these calculations, if you find that you are responsible for paying less and the insurance company is responsible for paying more in a common claim event (e.g. wind damage in a coastal region), then that insurance policy is worth more than others.
Here is how we compare the value of certain deductibles and policy limitations:
Take the cost difference between the lowest price quote and the quote with upgraded coverages.
Determine the extra of money you would be out in certain claims situations due to an ACV valuation, coinsurance penalty, or an increased deductible.
Calculate how many years you would need to go claims free in order for the premium savings to pay for any extra out of pocket costs.
Although tedious, you need to understand how the quotes compare from this perspective since it is exactly how insurance companies are approaching pricing when providing the quote. Sometimes the lowest quote isn’t the best deal.
For more information on deductibles, coinsurance penalties, and different building valuation options, check out our post, "Commercial Property Insurance: The Ultimate Guide"
4. Factor any non-admitted policies into the cost.
Not all insurance companies operate the same way. Some companies operate on an admitted basis, others on non-admitted (often referred to as excess and surplus, or E&S).
For more information on what a non-admitted insurance company is, check out our article, "What is Excess And Surplus Insurance?"
What many business owners don't take into account is the hidden costs of purchasing a non-admitted insurance quote. That’s not to say that non-admitted insurance companies are disreputable; in fact, LandesBlosch works with quite a few E&S insurance carriers.
But there are taxes, broker fees, agent fees, and state fees added on top of the policy premium that may not be visible in the quote. There are other hidden fees as you dive deeper, such as 6-18% finance interest if you want a payment plan, or more expensive additional insured endorsements. Additionally, consider the cost of your time when filling out the additional paperwork and applications usually required in the non-admitted market.
Sometimes choosing a non-admitted insurer makes perfect sense, or it may be your only option. Regardless, be sure to account for all the fees and additional costs when you compare business insurance prices, instead of basing your decision solely on what may be a misleading premium amount.
5. Ask your broker which quote they would choose.
Ultimately, we think the best way to compare insurance quotes for your company is to ask the opinion of an insurance broker whom you trust. Why not? Many people don't think this is a good idea because the insurance person might try to sell you the most expensive product or the one that benefits them the most.
If this is the case, find a new insurance broker. Your financial future depends on the insurance policy your broker puts together. If you feel that you cannot trust them to give you honest advice and offer recommendations based solely on your best interests, you need to find someone who will. Because if a $1,000,000+ claim comes, you are going to be stuck with a policy you chose and a broker you don't trust. And that is a scary place to be.
If you are looking for an insurance broker to help you navigate your options, give us a call. We will listen to what you are looking for and provide advice in your best interest. At the end of the call, you can decide if we are a good fit to work together.