How is the cost of an E&O insurance policy determined ?
The cost of an Errors & Omissions (E&O) insurance policy is determined by a complex risk assessment process, considering many factors. Insurers seek to establish a premium that accurately reflects the level of risk associated with each professional or company. Here is an in-depth analysis of the main factors influencing the cost of an E&O policy :
- Nature of professional activity: Some professions are considered riskier than others regarding claims' probability and potential severity. For example, lawyers specializing in litigation or doctors practicing high-risk specialties such as surgery may face higher premiums than human resources consultants or graphic designers. The insurer assesses the specific risks associated with each type of professional activity.
- Company turnover: Generally speaking, the higher the turnover, the higher the premium. This reflects that higher revenues often imply more customers and a greater risk of claims. However, some insurers may consider that a high-revenue business will likely have more sophisticated processes, which could mitigate the risk.
- Claim history: Companies or professionals with frequent or costly claims will be considered riskier and face higher premiums. Conversely, a claims-free history can lead to premium reductions. Insurers will examine the number of claims and their nature and severity.
- Selected coverage limits: Higher coverage limits will naturally lead to higher premiums. It's essential to strike a balance between adequate protection and affordability. Insurers will consider both the limit per claim and the annual aggregate limit.
- Professional experience and qualifications: More experienced or better-qualified professionals may be considered lower risk. However, highly skilled professionals may also face higher risks in some cases if they handle more complex cases.
- The geographical scope of operations: Companies operating in multiple jurisdictions or internationally may face higher premiums due to the increased complexity of risks and differences in legal environments.
- Risk management procedures in place: Companies with solid risk management practices, such as quality control processes, regular staff training, and clear complaint management procedures, may benefit from lower premiums.
Other factors may also come into play, such as the deductible chosen (a higher deductible may reduce the premium), the size of the company, the number of employees, and general trends in the insurance market.
It's important to note that the underwriting process can vary from insurer to insurer. Some may use more sophisticated underwriting models considering more detailed data on the company and its industry.
Finally, working with an experienced insurance broker helps you navigate this complex process, understand the factors that influence the cost of your E&O policy, and negotiate better terms with insurers.
