Risk Reduction 101: How to Lower Your Insurance Premiums

What is Risk Reduction?

Risk reduction involves proactively identifying, assessing, and addressing risks to minimize losses. Insurance providers incentivize policyholders to take precautions and make improvements to reduce risk, which leads to lower premiums. Conversely, policyholders who take unnecessary risks may be denied coverage or charged higher premiums to match their level of risk.

Goals of Risk Reduction

Lower frequency of losses – Taking preventative measures to reduce chances of damage, injury, or claims

Lower severity of losses – Containing or minimizing damage, injury, or claims when they do occur

Lower premiums – Policyholders with lower risks pay less for coverage

Risk Reduction Techniques

Risk Mitigation

Risk mitigation refers to steps taken to reduce the potential impact of losses by limiting exposures. Examples include installing sprinkler systems to contain fires, placing valuable equipment above ground level to prevent flood damage, and backing up computer data offsite to prevent data loss.

Loss Control and Prevention

Loss control and prevention focuses on avoiding losses before they occur through safety improvements, employee training, maintenance programs, etc. For example, a restaurant may train cooks on safe food handling procedures to prevent foodborne illnesses. An auto service shop might document equipment inspections and part replacements to prevent failures or recalls.

Risk Management

Risk management is the overarching process of identifying, assessing, and addressing risks across an organization. After determining major threats, companies develop and implement coordinated risk reduction plans. This strategic focus on understanding exposures allows organizations to target areas with the highest potential for loss.

Prudent Underwriting

Insurers aim to underwrite risks carefully to attract and retain profitable policyholders. During the underwriting process, insurers assess the quantity and severity of exposures associated with an applicant. Insurers may require risk improvements as a coverage condition or apply experience rating, discounts, or surcharges to match premiums appropriately with risk levels.

By incentivizing lower risks, insurance companies mutually benefit alongside responsible policyholders through fewer claims and lower rates. Risk reduction leads to a sustainable insurance model.