Is the Premium Fair? Why math matters.

A lot of insureds do not understand how their premium is calculated. If the ratable base in terms of exposure level, or which credits or debits are being used to arrive at the final premium figure, are not explained to the agent and insured, the lack of knowledge makes some insureds feel as if they are in the dark regarding whether or not their premium is fair and reasonable.

One of the most important jobs I have as a broker is understanding the math to get a handle on whether a quoted premium makes sense.  Some policies are rated on the last 12 months of receipts, while some used a weighted average of the receipts over the past several years.  Factors like a claim, a material increase in the ratable base, a new set of services, an acquisition, or even an additional coverage not on last year’s policy can all lead to a higher premium. The details matter.

Every time I present a quote, I first run the numbers myself.   After I figure out the base rate and how the insurance company calculated the premium, my next step is putting myself in the “underwriter’s shoes” to determine whether I would have done the same thing if I were the underwriter on the account.

If the numbers do not add up, I will often ask my underwriter to confirm the ratable base to make sure we are on the same page in terms of the exposure level. If the ratable base is correct, I often double-check the methodology behind how the underwriter calculated their final premium.

If the numbers do line up, I then shift to making sure the agent and insured are aware of how and why the rating changed, whether it be positively or negatively.  Being the insured’s advocate starts with understanding the math and being able to get a handle on whether a quoted premium is competitively priced for the insured.  If the agent and insured have an understanding of the numbers, the insured can move forward with making an educated buying decision on behalf of their company.

Andrew J. Kelly
Executive Vice President

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Andrew Kelly