Commercial Insurance Definition
- Commercial Insurance is a contract between an insurer and a business owner whose purpose is to minimize the owner’s risks against losses, whether from weather, theft, vandalization, lawsuits, accidents or any other reason. There is a cost for this “hedge,” which is referred to as a premium, so in essence, the potential for a greater (possibly devastating) loss is reduced to a smaller loss (the cost of the premium).
- Who Benefits from Commercial Insurance?
- Any business owner benefits from commercial Insurance since it reduces the risk he may encounter . He can insure his company’s assets, real estate and the health of all of his employees (by offering group health insurance). If the business owner is an attorney, property appraiser or other professional who gives advice and writes and administers contracts or other binding written business, he will benefit from having Errors and Omissions Insurance. If he is a physician, he can insure his ability to diagnose and treat diseases and/or successfully perform surgeries by having Malpractice Insurance, which covers losses due to patient lawsuits.
- Insurance company products are classified into two groups. The first is life insurance, which handles life insurance, annuities and pension products. This group is characterized by its long-term investments.
The other group is known as non-life insurance, and it covers all other types of insurance, such as a commercial fleet policy for a company’s trucks and other vehicles and the company building hazard policy, which covers fire, theft, vandals and weather-related hazards. This would also include the business’s professional liability policy.
Insurance can further be broken down into two more categories: standard lines and excess lines.
In the United States, standard lines cover all mainstream insurance policies, such as auto (and property as well as Errors and Omissions, workers compensation, and so forth. Excess lines offer protections that standard will not cover, such as the special insurance needs of gun and hunting clubs and shooting ranges, restaurants, taverns and bars, vacant commercial buildings, non-in-home daycare centers and homeowners associations. Excess lines also offer specialty commercial coverage for such businesses as event planning, ambulance malpractice, liquor liability, and inland and ocean marine.
These excess lines are not required to be licensed in the states they issue policies and are referred to as non-admitted insurers. This gives them more flexibility and means that they can perform faster because they do not file forms or publish rates as the standard groups do.
Since Insurance companies are a business, who then insures the insurance companies? That would be another category of commercial insurance called reinsurance.
- An insurance underwriter has the job of evaluating the information and history of the applicant to determine the level of risk. He looks at the age and type of the business, the owner’s insurance history, credit rating and so on to determine whether to offer a policy and assign a premium. In theory, the higher the risk, the higher the cost of the insurance, a ratio which allows insurance companies to remain solvent.
- Insurance companies use actuarial science to determine the risk they are willing to assume. This is the study of statistics and history based on geographical area as well as who and what is being insured. Based on this information, they can predict the likelihood of future claims. This is true for any insurance, but since commercial insurance usually deals in larger properties, the risks are even greater. Since insurance companies invest all of the premium monies they collect, they make income from the premiums as well as the investment profits. At the end of a policy period, they add up all that was collected in premium money, add to that the profit from the investment made, and subtract out any claim amounts to determine if the policy was profitable. In the event they find that they have paid more than they have gained, they have lost. Needless to say, actuarial science is used to create more winners to offset the losers so they can be profitable.
- Insurance companies are rated based on financial strength, assets and ability to settle claims. It would benefit anyone seeking commercial or any type of insurance to find out what the rating is for the companies being considered. The best known rating companies are A.M. Best, Standard and Poor’s, Weiss Research, Duff and Phelps, and Moody’s Investor Service.