Credit insurance premiums are calculated based on a complex mix of factors that reflect the overall level of risk the insurer is assuming. Here’s a breakdown of the key elements:
- Insured Sales Volume:
- The primary driver: Premiums are generally calculated as a percentage of your total insured sales (or a portion thereof). Higher sales volume translates to greater potential exposure, hence higher premiums.
- Risk Profile:
- Your Industry: Industries with historically higher default rates or cyclical downturns will have higher premium rates.
- Customer Base: The creditworthiness of your customers is crucial. Riskier customers with poor credit profiles increase the premium rate.
- Geographic Scope: International sales, particularly to countries with political or economic instability, increase risk, and thus, premiums.
- Coverage Scope:
- Policy Type: Whole portfolio policies tend to be more expensive than selective coverage. International coverage adds costs compared to domestic-only policies.
- Deductibles: Higher deductibles generally lead to lower premiums as you share more of the risk.
- Coinsurance: The percentage of loss you share with the insurer influences premium calculations.
- Coverage Limits: Higher policy limits or buyer limits will increase your premiums.
- Insurer-Specific Factors:
- Underwriting Standards: Insurers have varying risk appetites and might price policies differently based on their risk assessment models.
- Claims History: Your business’s past claims history can influence your premiums.
- Market Conditions: Overall economic conditions and the insurance market itself can impact premium rates.
Calculation Process:
While the exact formulas are insurer-specific, here’s a simplified example of how a premium might be calculated:
- Annual Insured Sales: $10,000,000
- Premium Rate (reflecting risk factors): 0.5%
- Annual Premium: $10,000,000 x 0.005 = $50,000
Important Notes:
- Premiums are not fixed costs: They can be adjusted annually based on changes in your sales volume, customer mix, or other risk factors.
- Negotiation: There can sometimes be some room for negotiation on premiums, especially if you have a favorable risk profile.