Minimum premiums - What are they and what are they for?
During my underwriting career with multiple insurance companies, I’ve charged minimum premiums countless times. To me it was common place and I did not think twice about. As I reflect back, I think at times they must have been confusing to the insured. In many cases, they must have seemed unfair to the insurance buyer and appeared excessive. In fact, in many situations they were.
There are actually a couple different types of minimum premiums. The first is what I like to call transaction minimum premiums. These are minimum premiums charged to make non-premium bearing endorsements (changes) to a commercial insurance policy. A non-premium bearing endorsement is a change which does not impact the premium rating algorithm for the insurance.
This is frequently the case for many additional insured requests where the insured needs to add another party to their policy to comply with contractual requirements. Most additional insured have no rating provisions in rating rules because they do not significantly alter the likelihood of claims. However, processing the transaction does have a cost to the insurance company and to the insurance agent.
For example, the insurance agent spends time consulting with the insured to take down the information which is required to process the request. They in turn must in turn notify the insurance company underwriter of the request. Even though many of these requests are very routine and usually rubber stamped, the underwriting must review and approve them. The request is usually forwarded to a clerical employee who actual processes the request and changes the policy. All this cost money.
A typical, normal and fair minimum premium for these transactions should range between $100 to $150 per endorsement (change). There are times underwriters and/or insurance companies charge more. Unless there is a specific reason for a higher transactional minimum premium, higher charges are excessive and the insured is being taken advantage of and being gouged. The insured at this point has become a captive for the term of the policy and often has no recourse or option but to pay the charge.
To avoid being nickel and dimed, you should inquire if there are any fees or negotiate the cost of non-ratable endorsements prior to acceptance of the of the policy. For endorsements such as additional insureds or waivers of subrogation, you can always negotiate for blanket wording which will include all current and future requests during the policy period. Just as a warning, some companies and/or underwriters may charge for a blanket additional insured or waiver of subrogation to be included upfront.
Next there are policy or coverage minimum premiums. These are minimum premiums insurance companies charge for a policy or a specific coverage form. For example, an insurance company may not issue coverage for general liability for a premium less than $500 for an annual period. These are usually very small businesses with low levels of claim potential. Similar to transaction minimum premiums explained above, they reflect a certain level of expense incurred by the insurance company to review the policy for acceptability and to cover the cost of issuance. Many home-based businesses are covered in this fashion.
The final minimum premium I want to talk about are what I like to call underwriting minimum premiums. Unlike the policy or coverage minimum premiums, these are designed to cover both loss potential and company expenses. You typically find their use in the “non-standard” or “surplus lines” markets. These markets are generally for harder to place businesses who are not able to find a home within standard insurance companies such as The Hartford and Liberty Mutual. As such, the are not admitted with state insurance departments. While they may still utilize and generally follow ISO rating rules, the insurance industry rating organization, they do not file rating schemes with various state insurance departments. This means they are able to basically charge whatever they what. Some of that is manifested by minimum premium levels. Those minimums are more akin to levels to make it “worth their while.”
For example, when I was an underwriter for a small surplus line carrier, I would frequently see small repair garages who customized off-road vehicles. Based on their size and sales level, they would rate up to between $1,000 and $2,000 using establish rating rules. However, the company had an established minimum premium of $5,000 regardless of their rated premium level. It is almost like the ante in poker.
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