Commercial Lines Pricing
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When it comes to property and casualty insurance, the market is usually divided into two segments: personal lines and commercial lines. Sitting between the two are sole proprietors who sometimes request quotes as individuals, and sometimes as businesses. For insurers, this can be a challenge – some savvy customers might even request quotes both ways to find the most favourable offer.
Today, I want to focus on commercial lines - what makes pricing in this segment different and what challenges are commonly encountered.
The Nature of Commercial Insurance
Companies buy insurance to protect their business operations, property, liability, and other risks tied to running a business. The insurance coverage of a corporate client is therefore largely determined by their company, and particularly the nature of their business operations. Naturally, commercial insurance products are far more diverse and less consistent than those for individual customers. A frequent practice in this segment is to segment clients into three groups: sole proprietors, SMEs, and large enterprises — and this separation makes sense, as they insure different things and behave differently.
Types of Commercial Property Insurance
Commercial property insurance covers businesses and commercial entities, helping protect them against various risks to their buildings, assets, and operations. It is typically divided into several key products:
- Business Property: Covers buildings, equipment, inventory, and other physical assets from perils such as fire, theft, or vandalism.
- General Liability: While not strictly "property" insurance, it is often bundled with commercial property coverage. It protects businesses from claims of injury or property damage caused to others.
- Business Interruption: Covers loss of income due to unexpected interruptions like natural disasters or other events that shut down business operations.
- Commercial Auto: Provides coverage for vehicles used in business operations, whether for transporting goods or employees.
- Equipment Breakdown: Covers costs related to machinery and equipment malfunctions that disrupt business operations.
- Tenant's Insurance (for businesses leasing property): Offers coverage for tenant improvements and business property located inside leased spaces.
- Cyber Liability: As businesses grow digitally, protection against cyber-attacks, data breaches, and similar risks is becoming increasingly important, though it’s not traditionally considered part of property insurance, it often complements commercial coverage.
Why Pricing is More Complex for Corporate Clients
Corporate client insurance largely depends on the client’s company and, in particular, the nature of its business activity. This makes corporate insurance much more diverse – and as a result, less standardized – than insurance for individuals.
While one of the key parameters in personal lines pricing is the speed at which a quote can be delivered to the client, in corporate insurance this factor is far less critical. What matters far more is how precisely the insurance coverage can be tailored to the specific needs of the client.
As a result of these needs – combined with the high diversity of insured entities – corporate insurance pricing includes a vast number of clauses that allow insurers to customize their offering.
Clauses in insurance are specific, non-standard conditions that are added to a standard policy in order to adapt coverage to the individual needs of a client. They can extend or limit the scope of coverage, or introduce additional exclusions.
Here are a few examples of insurance clause often used in commercial insurance:
Business Interruption Clause (BI)
Provides coverage for loss of profit resulting from an interruption of business operations caused by a covered property damage event.
Automatic Acquisition Clause
Ensures automatic coverage for newly acquired fixed assets (within a predefined limit), without the need for immediate policy endorsement.
Debris Removal Clause
Covers the costs of debris removal and site clearance following a covered loss, such as fire, flood, or explosion.
Approaches to Pricing in Commercial Lines
Rating Structures & Underwriting
Most insurers today use rating structures and underwriting to price commercial policies. Rating structures are a traditional form of policy pricing. These rating structures often rely on expert judgment, with base prices adjusted by risk factors. For the most important variables used in the risk pricing process, risk-differentiating factors are provided. The insured items are divided into distinct categories, each assigned a specific base rate or price.
This method of pricing has a major advantage: it is 100% interpretable. The final premium consists of a base rate that corresponds to a given segment, multiplied by a set of factors from the rating structure, each reflecting individual policy characteristics.
As a result, the tariff is highly predictable, often relatively simple, and fully explainable and understandable. Transparency in pricing is especially important for corporate clients. If a client approaches us with two quotes that, in their view, are identical but have different premiums, it’s very easy to compare them.
In my experience, there are always differences between such quotes – sometimes it's due to annual mileage, sometimes due to differences in claims or policy history. A rating structure simplifies these kinds of situations, supporting broad understanding, intuitiveness, and even tariff monitoring.
Moreover, regulatory bodies tend to view this form of pricing favourably due to its transparency and consistency.
Ultimately, underwriters play a major role in final pricing decisions. Even if a dynamic pricing engine calculates a starting price, underwriters can adjust it — sometimes by up to 80–90% — based on their expertise and judgment.
The Shift to Risk Modelling
We are currently observing a growing trend of shifting corporate client pricing from traditional rating structures toward risk modelling. Most often, this involves skilfully separating claims into perils (types of losses), which differ conceptually and have different types of claim distributions.
Once divided in this way, the perils are modelled individually to better understand the relationship between specific policy features and both the frequency and severity of claims.
A notable characteristic of these insurance products is the presence of heavy-tailed distributions—both in terms of sums insured and actual claim amounts.
A common solution to this challenge is to move away from modelling the average claim amount and instead focus on modelling the claim size as a percentage of the sum insured or even abandon the separate modelling of frequency and severity entirely, shifting towards modelling premium risk, or premium risk relative to the sum insured.
Demand Modelling & Price Optimisation
The next significant step in the pricing sophistication journey is the use of demand models and price optimization. However, implementing this is far from easy, primarily due to the central role that underwriting still plays in pricing within commercial lines.
Take, for example, the data preparation needed for a demand model. If underwriters have the ability to adjust the original premium by as much as 80% (either to increase the likelihood of purchase or to account for perceived risk) your price test is useless. In this situation you can’t reliably trust the output of your demand models.
As a result, to effectively implement demand-based pricing and optimization, the influence of underwriting on pricing needs to be reduced.
It is said, the most advanced insurers are already moving in this direction.
Data – Your Competitive Edge
Pricing sophistication is not the only focus for insurance companies offering policies for businesses. One of the biggest advantages in this market is data. The more quality data you have, the better pricing you can achieve. There are two main resources here:
- Using internal data - try to build a holistic view of the customer.
Use historical data from all the products the client has ever had. The more you know, the better the risk calculation will be. This is a general statement that also applies to personal lines. For example, if a client reports a claim in an assistance product, it implies that they are familiar with the General Terms and Conditions (GTC) of insurance and will likely use this knowledge in the future.
- Using external data - Using external data sources can significantly enhance risk assessment in corporate insurance. Public and commercial databases provide valuable insights into a company’s operations, such as business locations, number of employees, and declared revenue. Access to details like industry type, years of operation, history of business suspensions, or recent ownership changes helps underwriters better understand the stability and risk profile of a potential client. Moreover, external data can validate and enrich internal data by providing objective, third-party information — particularly useful when dealing with large or geographically distributed clients. Incorporating these datasets into the underwriting process improves pricing accuracy, supports fraud detection, and enables more tailored insurance solutions. This information enriches internal data, helps detect fraud, and supports precise, fair pricing - especially for geographically distributed clients.
- Internet of Things - With the rise of connected devices in commercial properties and equipment, IoT data can offer real-time insights into risk exposure and claims prevention. This allows insurers to move beyond historical data and toward more proactive, behaviour-based pricing models. Integrating IoT into pricing strategies could significantly improve risk segmentation and loss prevention.
The differences between personal and commercial lines
In commercial lines, we often deal with a much larger number of insured items. For example, a company may own an entire fleet of cars or insure over a hundred buildings. In the case of larger companies, their pricing cannot be approached with the same assumptions typical for personal lines, such as owning one car, one house, etc. Specifically, the number of claims per client in commercial lines over the past year will mean something different when a client owns 1 car versus 50. Therefore, a common pricing solution to these types of challenges is the skilful and conscious creation of a so-called bonus-malus system, or when a client owns a larger fleet of cars (or, more broadly, a larger number of insured items), the focus shifts to analysing the frequency of incidents per client rather than the number of claims and insured items.
Multi-Item Pricing Challenges
Corporate client insurance may require recalculating premiums for multiple items simultaneously. The challenge here is that these premiums may be interdependent. Good examples are fleet insurance policies, where premiums are often calculated at the vehicle type level (e.g., passenger cars, vans, semi-trailer trucks, etc.), and then the prices are aggregated to present the client with a proposal for each type of vehicle. It works in such a way that the same price is offered for every passenger car, regardless of the specific model, and similarly for other types of vehicles. In many cases, the offer is valid for the entire year, and new items can be insured according to this offer.
Final Thoughts
Corporate insurance pricing is a unique and complex field, where success depends not just on actuarial precision, but on deep understanding of business risk, smart segmentation, flexible systems, and increasingly — data integration. The companies that master all these areas will gain a significant competitive edge, not only by optimizing risk assessment but also by providing clients with fairer, faster, and more tailored insurance solutions.
