What Factors Determine Your E&O Insurance Premium?
Have you ever asked yourself, “What goes into rating my premium?” All insurance policies are rated using various details about the insured, which help evaluate potential risk and Errors and Omissions Insurance policies are no different in that aspect. While there are many factors that go into the premium and the weight of each factor varies by a carrier’s underwriting guidelines, there are 5 major factors that are helpful to keep in mind.
1.) State of Domicile. The state in which your business is domiciled and performs business activities plays a significant role in the rating process. According to actuarial data, some states have a higher claims volume than others. It’s similar to the idea of how certain states have more vehicle accidents and therefore the automobile insurance rates for those states are higher than other states whose vehicle accidents are fewer. So, a real estate brokerage firm in Montana could potentially pay less for their E&O Insurance than a similar brokerage firm in California – where the number of E&O claims is higher.
2.) Gross Commission Income. Your firm’s total gross commission income helps a carrier determine your firm’s volume of business. The more transactions a firm performs, the greater possibility of a claim. That’s just simple statistics.
3.) Breakdown of Business Activities. Certain activities have a greater risk of a claim and the potential to be a larger claim than others. Therefore, a firm that performs only residential 1-4 family transactions could have a much lower premium than a firm with the same gross commission income, in terms of dollars, but from performing business brokerage instead. The more income derived from higher risk activities, the higher the premium.
4.) Number of Professionals. This is similar to the idea that the higher number of transactions, the greater possibility of a claim. Also, while the number and types of transactions are important factors, they alone do not result in claims. It’s the activities performed by professionals within your business that result in claims. Whether an agent is truly at fault or not, a claim alleges a wrongful act based on the performance of an agent.
5.) Claims, Incidents, and Disciplinary Actions. If a firm already has history of claims, incidents, or disciplinary actions, it will result in higher premiums. Not only will your firm not qualify for a “no claims credit” offered by the carrier, the total loss ratio will also be considered. Loss ratio is determined by using the premiums the firm has paid in the last 5 (sometimes 6) policies years and any loss amounts in the last 5 (sometimes 6) policies years. Loss amounts include damages paid to a claimant and attorney’s fees paid for defense. In addition, loss amounts also factor in any amounts “reserved” by the carrier for an open claim – even though those amounts aren’t actually “lost” yet. (More Info: How To Report a Claim)