How to price SME package insurance: rating factors and a worked example
How a small business package policy combines property and liability across several locations, with a worked quote for a two-site retailer priced by a real rating model.
An SME package policy, called a business owner's policy (BOP) in the US, puts property and liability cover for a small business into one policy. Pricing it means rating each location for the property it holds and the business it does, then adjusting the total for the type of business and how it is run.
This article covers the main rating factors, the underwriting rules and a worked quote for a two-site retailer priced by a real rating model: the business owner's policy example, one of the default models in Ptally. The rates are illustrative and are not taken from any insurer.
Rating each location
Every location is rated with the same child model, so a business with one site and a business with six use the same rules.
Property
Property premium is the insured value of the building and contents, in thousands, times a state property rate. The example uses rates per $1,000 of $2.40 in Texas, $2.80 in Illinois, $3.20 in California, $3.60 in New York and $4.50 in Florida.
General liability
Liability premium is annual sales, in thousands, times a state liability rate: $0.60 per $1,000 in Texas, $0.70 in Illinois, $0.80 in California, $0.85 in Florida and $0.95 in New York. Sales stand in for exposure: more customers and more transactions mean more chances of a claim.
The location premium is property plus liability, each rounded to the cent.
Rating the policy
The policy model adds up the locations and applies factors for the business as a whole:
- Business class. Offices take 0.90, retail 1.10, light manufacturing 1.30 and restaurants 1.55, mainly for liability and fire.
- Years in business. Established businesses get 1% off for each year over five, up to 15% at 20 years.
- Claims history. Neutral with no claims in three years, then 1.15, 1.30 and 1.50 as claims increase.
- Security. No security takes 1.10, standard security 1.00 and a monitored alarm 0.92.
- Flood exposure. The highest flood band across the locations: 1.00 low, 1.10 medium, 1.30 high.
A $100 policy fee is added at the end.
Underwriting rules
The example model declines policies with no locations, or more than 10, as outside standard package scope. It refers restaurants, businesses trading for less than two years and policies with four or more locations to an underwriter.
A worked example
Take a retailer that has traded for seven years with no claims, a monitored alarm and low flood exposure. It has two shops:
| Location | Property | Liability | = Location premium |
|---|---|---|---|
| Texas: $400k building, $120k contents, $900k sales | 520 × $2.40 = $1,248.00 | 900 × $0.60 = $540.00 | $1,788.00 |
| Illinois: $300k building, $90k contents, $600k sales | 390 × $2.80 = $1,092.00 | 600 × $0.70 = $420.00 | $1,512.00 |
| Locations total | $3,300.00 |
Then the policy:
| Step | Value | Reason |
|---|---|---|
| Locations total | $3,300.00 | Two shops |
| × Business class | 1.10 | Retail |
| × Experience credit | 0.98 | Seven years trading |
| × Claims history | 1.00 | No claims in three years |
| × Security | 0.92 | Monitored alarm |
| × Flood exposure | 1.00 | Low |
| + Policy fee | $100.00 | |
| = Policy premium | $3,372.81 |
The calculation is 3,300 × 1.10 × 0.98 × 1.00 × 0.92 × 1.00 = 3,272.81, plus the $100 fee.
The same two sites run as a restaurant come to $4,711.68, and the quote is referred to an underwriter because restaurants carry a higher liability and fire risk.
Things to watch in a package model
Locations change. Businesses open and close sites. Rating each location with a child model means adding a shop is one more run of the same model, and the policy factors apply as before.
Package discounts and minimums. Many products give a discount for buying property and liability together, or set a minimum premium per location. Each is one more step, and both should be covered by tests.
Sections and wordings. A package policy often has optional sections, such as business interruption, money or employers' liability. The rules that decide which sections apply can sit in the same model as the price. See building policy documents from the quote response.
Building the model
The full model, with every rate table, rule and test, is on the business owner's policy example page, along with a trace of a quote through every step. Price a quote over the API and add ?debug=true to see each location's premium and each policy factor.
Getting started
Ptally is free to build on, with no implementation fee. Send us your package rating guide or spreadsheet and we will help you turn it into a tested model, or start from the default BOP model and change the rates yourself. Talk to our team.