7 Variables Impacting Product Liability Insurance Premiums

Some may surprise you.

There are approximately seven variables that can impact your premium. Some you have control over, but others not so much.

Your product. Products cover the full spectrum of risk, so I will not spend a lot of time talking about different products. It is important to note that when products are high risk or imported from overseas, more attention to detail is required. Importers are considered the manufacturer by the insurance carriers and product liability law. Therefore, it is important to have a quality-control inspection plan so that a batch of defective products is not allowed to enter the marketplace. Even if the products do not have a product liability claim, you still face the possibility of the enormous expense involved with a Product Recall.
Amount of your sales. The higher your sales, the more you can expect to pay in premium. However, when looking at premium, it isn’t always best to focus on the cost as much as the rate per $1000 of sales you are paying. There is typically an inverse relationship with sales and rates. For example, if you are doing $500K in gross sales a year, you will have a much higher rate per $1000 of sales than if you were doing $5 million in sales a year. The insurance carriers are usually willing to give you lower rate when your sales are higher because they are collecting more premium.
Liability limits. The higher the liability limits you carry the more expensive the premium. This is common sense, so I will not waste your time with more detail.
Type of policy. I will oversimplify the types of policies so as not to get bogged down with minutia. There are two basic policies available: occurrence and claims-made.Typically, claims-made policies are cheaper because they put more risk on the manufacture/seller of the product and less risk on the insurance carrier. With claims-made policies the incident/occurrence and the claim must take place while the policy is in force.The increased risk for the manufacturer/seller occurs two ways. First is when you have a claim the insurance carrier is now aware that you may have a defective product in the marketplace. Chances are that when your policy comes up for renewal, you are going to either be non-renewed or your premiums are going to skyrocket. Second, if you ever stop selling the products and discontinue the policy, your business is at great risk because any claims after the policy has been cancelled will not be covered. The second type of policy is the occurrence-based policy. It is superior to the claims-made policy because you will always be covered if your policy was in force at the time of occurrence/incident. Even if you cancel your policy and receive a claim later, you will be covered, as long as the incident in the claim occurred while the policy is in force.
The re-insurance market. Re-insurance is basically the catastrophic insurance for your insurance policy. For example, on a $1 million claim, the named insurance carrier on your policy may only be responsible for $200K of it. The other $800K will belong to one or more of the re-insurance carriers. Since the re-insurance carriers are responsible for the largest part of the claim, they are primarily responsible for determining your rates and premium. All insurance carriers use re-insurancemarkets to lessen the impact on severe losses. This is why you can receive four different quotes, which can all have very similar premiums and rates.
Financial markets. All insurance carriers have investments to diversify their portfolio. Geopolitical instability is on the rise around the world and currently represents $103.3 billion in global economic risk. When the financial markets crash, insurance companies will increase their insurance rates and premiums to make up for the losses in their investments.
Climate change. Climate change currently represents $123.3 billion of GDP risk. Weather is growing more severe and causing more and more property damage. This forces re-insurance carriers to raise the rates to the insurance carriers to cover the increase of catastrophic losses.