What Determines Your Insurance Costs? A CFO's Guide to Rating Factors

When it's time to renew your business insurance, you may wonder why your premium increased—or sometimes decreased. The answer lies in a complex system of rating factors that insurers use to calculate your costs. Understanding these factors can help you make informed decisions about coverage, potentially reduce expenses, and better manage your organization's risk profile.

This guide introduces the framework insurers use to determine premiums and previews the specific rating factors that apply to four major policy types your business likely carries.

Why Insurance Pricing Matters to Your Bottom Line

For most businesses, insurance is a significant operational expense—often ranking among the top five controllable costs. Yet many CFOs and business owners don't fully understand what drives these expenses.

Unlike utility bills or vendor fees with transparent pricing, insurance premiums can seem arbitrary. A competitor in the same industry might pay substantially different rates for similar coverage. This inconsistency often confuses business leaders and makes budgeting challenging.

The reality is that insurance pricing follows a logical, systematic approach based on actuarial science and decades of claims data. Insurers aren't pricing arbitrarily—they're pricing based on risk assessment.

The Insurance Rating System: How It Works

Insurance companies use a multi-step process to calculate your premiums:

Step 1: Classification

Every business is assigned to a classification or class code based on its industry and operations. These codes are standardized (often through industry bodies like ISO or NCCI) and create a baseline premium for your industry category.

Step 2: Base Rate Application

The classification code determines a "manual rate"—a base rate per unit (per $100 of payroll, per $1,000 of revenue, per square foot of building, etc.). This rate reflects the average expected losses for your industry.

Step 3: Factor Application

Your specific business characteristics are then applied as modifying factors:

• Positive factors (lower risk) reduce your premium
• Negative factors (higher risk) increase your premium

Step 4: Final Premium

The final premium = Manual Rate × Business-Specific Modifying Factors × Coverage Limits × Deductibles

Common Rating Factor Categories

While specific factors vary by policy type, insurers consistently evaluate:

Operational Factors

• Industry classification and hazards
• Business size and revenue
• Number of employees
• Years in operation

Risk Management Factors

• Claims history and loss experience
• Safety programs and risk controls
• Maintenance and compliance records
• Employee training programs

Structural Factors

• Building characteristics (for property coverage)
• Equipment and loss prevention devices
• Geographic location and natural hazards
• Regulatory environment

How This Series Helps Your Organization

Over the next five articles, we'll dive deep into the specific rating factors for four essential policy types:

1. General Liability Insurance - Understanding how revenue, industry operations, and loss history drive your exposure

2. Commercial Property Insurance - Learning the COPE framework (Construction, Occupancy, Protection, Exposure) that property insurers use

3. Workers Compensation - Discovering how class codes, payroll, and your experience modification rate impact your rates

4. Professional Liability - Exploring the unique factors that affect service-based and professional businesses

Each article includes practical strategies for managing these factors and potentially reducing your premiums.

What You'll Learn

By the end of this series, you'll understand:

• Which rating factors you can control - and which ones you can't
• How to document risk management efforts - to support lower premiums
• What underwriters are looking for - when they evaluate your business
• Strategic questions to ask your broker - to optimize your coverage and costs
• Benchmark questions for renewal negotiations - based on your specific risk profile

Key Takeaway: You Have More Control Than You Think

Many business leaders assume their insurance premiums are fixed based on their industry. In reality, your specific business characteristics, loss history, and risk management practices significantly impact what you pay.

By understanding rating factors, you can:

• Implement cost-effective risk controls that lower premiums
• Document safety and compliance efforts that support better rates
• Ask more informed questions during renewal conversations
• Budget more accurately for insurance expenses
• Make strategic decisions about coverage that align with your risk tolerance

Ready to Dive Deeper?

Start with the policy type most important to your business:

• For retail and service businesses: Read our guide on General Liability Rating Factors
• For property-owning businesses: Explore the Commercial Property Insurance COPE Framework
• For businesses with employees: Understand Workers Compensation Rating Factors
• For professional service firms: Discover Professional Liability Rating Factors

Each article includes specific rating factors, practical examples, and actionable strategies to optimize your insurance costs.

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About This Series

This "Understanding Insurance Rating Factors" series is designed for business leaders who want to take a more strategic approach to insurance management. Whether you're preparing for a renewal conversation with your broker, evaluating your coverage needs, or simply trying to understand your insurance statement, this series provides the practical knowledge you need.

Insurance doesn't have to feel like a black box. With the right information, you can make confident decisions that protect your business and your bottom line.

Have questions about your specific rating factors? Contact the Volare Risk Management team for a personalized insurance review.