Everyone knows that insurance premiums are calculated by certain rates, but what if the calculated premium is extremely small? Why is Minimum Premium mandated? What causes the Minimum Premium to be set at a certain level?
For many small businesses and start-ups, insurance coverage costs a disproportionate amount of money. The generally accepted benchmark for insurance costs is that your premium is about 5% of your gross revenue. However, many small businesses find that their coverage is more than 5%, even though they have a small amount of risk. This is typically caused by Minimum Premium. Minimum Premium is the lowest amount of premium that a carrier will issue a policy for. This means that no matter how small the risk is, they will have to pay at least the Minimum Premium amount to get the coverage.
So why is there a Minimum Premium?
Cost of Operations: There’s a lot of paperwork and manpower put into writing a policy. The underwriters have to spend time looking over the risk, creating the policy, and filing everything correctly. These activities require well trained staff, and well trained staff costs money. There’s also the cost of infrastructure and overhead, along with printing and postage costs. On top of this, the agent’s commissions still need to be paid. After all of those items are paid, the carrier has to have some premium for claims reserves, and at least a little bit of profit to keep it in business.
Actuarial Data: Beyond the cost of operations, a carrier also has to consider the data. Minimum Premium limits are often highly influenced by the company’s actuaries. The amount required is to properly fund the account for future losses, based on what the business is doing. So even though the initial rating for a business has a very small premium, the final premium paid will be increased to meet the Minimum Premium. This is because operating a business, no matter how small, carries a bottom-line risk level. To say this in a different way, simply running any business opens up all sorts of claim possibilities.
Carrier Appetite: Some carriers specialize in different areas, such as accounts larger than $100K in sales or in policies larger than $20,000 in premium. These carriers have decided that they are going to specialize in larger accounts and/or in riskier accounts. Additionally, they know that they can’t compete with smaller accounts, or they can’t profitably write smaller accounts. Many variations of this exist, and what it comes down to is a niche market Minimum Premium amount.
Minimum Premiums are a necessary thing for efficient, profitable carriers. They are similar to Deductibles, as they are influenced by both the actuarial side of insurance and the standard operations side of business. Having Minimum Premium amounts allow insurance carriers to provide their products at cheaper rates and lets them provide better response times for their customers.