So the next time you buy insurance, here are some of the reasons why your insurance premium is priced as such.

An insurance premium is the sum of money the insurance company is charging you for the Insurance Policy you are purchasing


It represents a liability in that your insurer must provide coverage for claims being made against the insurance policy by the time you need it.

The price of an insurance premium for a given policy is not fixed. It can vary depending on different internal and external factors, including the risk associated with the policy. The rule of thumb is the higher the risk, the higher the price. For instance, a claim being made against a driver with a clean driving record may be lower compared to a driver with a lot of driving violations. Insurance companies hire people called “actuaries” to study the risk levels and issue premium prices for a given insurance policy.

So the next time you buy insurance, here are some of the reasons why your insurance premium is priced as such.

1. The type of coverage

Insurance companies offer a wide range of options for their insurance policies. The more coverage, or the more comprehensive coverage you get, the higher your insurance premium may be. An “all risk coverage” home insurance policy, for example, is more expensive than a policy with basic inclusions.

2. The amount of coverage

The higher the amount of coverage, the higher the premium. It can work in two ways. The first one is pretty straightforward: the more dollar value that you want to insure, the higher your premium will be. For instance, insuring a house for $250,000 will be different than insuring it at $500,000.

The second one is a bit complex; you pay less money for the same amount of coverage if you take a policy with a higher deductible. An insurance deductible is the amount of money you’ll pay in an insurance claim before the insurer starts paying you. Basically, it’s your portion of the financial responsibility.

3. Your risk profile

Insurance history, location, and other personal details are used when assessing your application. Insurance companies would like to know how likely you are to file a claim based on the risks associated with your lifestyle.

It goes without saying that the client’s medical condition is a primary factor in getting a health or life insurance. A client discovered to have vices and/or serious medical conditions are considered “high-risk” and they tend to pay higher premiums. For homeowner’s insurance, lacking security and safety features and owning hazardous properties, like swimming pools and trampolines, can result in higher premiums. For car insurance, they look at your driving history, location (to see accident rates), and overall health.

4. Your claims history

Filing a claim can have a major impact on your insurance rates, regardless of who is at fault and how minor or severe the accident was. The greater the number of claims filed, the greater chance of a rate hike since you’re viewed as a high-risk client. Filing too many claims may also disallow you from the renewing your policy.

Next to the number of claims, they look at how damaging your previous claims were and how responsible were you. When the insurance company learns that the policyholder is either fully or partially at fault in that situation, including cases of negligence or failure to conduct maintenance on the insured property, they increase their premiums.

A minor automobile accident, theft, vandalism, and malicious mischief may not cause a rate hike. But claims against dog bites, water damage, mold, and slip-and-fall personal injury claims could have a negative impact both on your rates and your insurer’s willingness to continue compensating.

5. Changes in the general market

Some factors are out of an insured individual’s control. Home insurance policies, for example, see increased premiums in some areas due to severe, frequent weather patterns that increase the risk of flood or storm damage. When these happen, more claims are made by homeowners in those areas, leading to increased financial strain on the part of the insurance companies compensating for these claims. Generally speaking, frequent claims on the same policy can create a push towards higher premiums.

6. Demographics

Does the insurance company target senior citizens or retirees? Do they cater to young adults? Families? Small Businesses? Large Businesses? Insurance companies also define their target market, create programs or discounts to attract the sector, and base their premium prices on them.

7. Insurance company’s loss experience

When business is fast and profitable, an insurance company may not need to increase insurance premiums. Fewer claims and proper premium charges for the risk allow the insurance company to maintain reasonable premium costs for their clients.

However, in less profitable years, should they sustain more claims and losses than expected, they’re likely to review their insurance premium structure and reevaluate the risk factors in what they’re insuring. In situations like this, premiums may go up.

Author Bio: Carmina Natividad is a resident writer for Insurance Advisernet, one of the largest and most credible general insurance businesses in Australia and New Zealand, providing high quality risk management advice for business owners. Being an enthusiast of pursuing financial security herself

she writes and shares self-help articles focused on finance and business.

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