While it may seem like there is no rhyme or reason to how your property insurance is priced, the answer is more objective than you might think. There are a number of common factors that affect the price you pay for property insurance. When an underwriter reviews your business insurance application, they will often use the C.O.P.E. model to determine property pricing. This acronym stands for Construction, Occupancy, Protection, Exposure, and is used to understand the risk profile of your property.
When an insurance underwriter evaluates your property, the construction type will carry a specific rating factor which will influence the overall price. For example, when considering the peril of fire, insurance for wood frame construction will generally be more expensive than a reinforced concrete building, since it would be more difficult to contain a fire. Additionally for other perils such as a severe windstorm or flood, certain types of construction are more susceptible to severe damage.
Just as important to the construction type of the property, is the tenant who occupies the property. The type of business that occupies the property will significantly influence the price you pay. Let us consider two examples for a warehouse which has the exact same construction type: the first is a paper recycling facility, and the second is an amazon shipping warehouse. When evaluating the property, the underwriter will assign the paper recycler a higher rate than the amazon shipping business. With all other factors being equal, the paper recycler will generally pay more for insurance as a result. This is why it is important for landlords to keep in mind the tenants who will occupy their properties, and consider increased insurance costs when leasing.
This refers to the various protections in place to prevent or mitigate loss. The more protection your property has, the cheaper the underwriter will price your insurance policy based on rating discounts they can apply. For example, a well protected building may have a central fire alarm in place, a sprinkler system, several fire hydrants in proximity to the building, and a paid firehall nearby. A poorly protected structure might be in a rural area, with only a volunteer firehall nearby and no fixtures such as sprinklers in place. Installing protections is always a good idea whenever possible, not only will it discount your insurance pricing, but it will save you a big headache if you ever have a claim!
Underwriters will also examine the geographic area of a property to understand the exposure to potential hazards. This analysis is done to understand risks which are present but not directly tied to the property itself. For example, if your building resides within a flood plain, even with superior construction, a low hazard tenant and great protection, your property may still be subject to high pricing as a result of flood rating. Similarly, if the property is in close proximity to a poorly protected building with a high hazard tenant, underwriters may take this into account when pricing your property insurance.
As a business owner, it is important to understand how your property insurance is being priced. While some insurance coverages are necessary, others might be optional, so the price you pay for insurance will also reflect the amount of coverage you buy. While the C.O.P.E. model is generally used by insurance underwriters to price your property, each insurance company will have proprietary rating guidelines. For example, one insurer might have cheaper rates for properties in a floodplains compared to their competitors. This is why it is important to make sure you are working with an experienced insurance broker, they will understand which insurance company is the best fit for your commercial property.