How do Insurance Companies Work out their Premiums

When discussing insurance premiums with your friends, neighbors, family, and coworkers, it becomes clear that nearly everyone pays different rates. Because insurance costs not only vary among individuals, but also among insurance providers, it is important to know how these premiums are set so that you can learn what you can do to reduce your own insurance costs.

There are a number of factors insurance companies take into account when they work out their premiums. These factors are all included in a category referred to as ‘risk.’ Risk means the likelihood a policy holder will make a claim which will result in a pay out. The higher an individual is deemed a risk, the more they will have to pay in premiums. Understanding ‘risk’ and how insurance providers determine risk is essential to understanding why one pays a certain premium. 

To understand how premiums are determined, it is necessary to discuss different types of insurance. For instance, when providing car insurance, insurance companies look at statistics that will indicate the likelihood a driver will make a claim. For instance, age, gender, credit history, car make, model, year, risk of theft, accident history of a particular type of car, and the safety rating of the car, are all assessed to determine the premium. Companies will evaluate all of these factors when insuring drivers in order to ensure the premiums are high enough to help offset a claim. With all of the gathered data, they can make good estimates of the cost of loss within a specific population. The companies will then calculate a total amount they will have to pay out if they insure a specific number of people in a specific location. Some companies will divide the total equally so the good drivers are subsidizing the bad drivers, however, most companies will adjust an individual premium amount based on their level of risk allowing policy holders to pay a lower amount if they are categorized as a low risk driver.

Such insurance policies as health and life also use high risks categories to work out their premiums. For instance, age, gender, history of illness, lifestyle such as an avid smoker and drinker, and health of the individual, are all taken into account when setting an individual’s premium. The healthier and younger a person, the lower they will pay for their premiums as they are less likely to make a claim. As well, they will even look at a person’s occupation. A person in an occupation where there is a risk of death or injury will pay higher premiums. For instance, a firefighter will pay more for their premiums than a librarian. 

When it comes to homeowners insurance, insurance companies will look at such factors as crime in the area, if there are home security devices in the home, whether there are smoke detectors, carbon monoxide detectors, and fire extinguishers in the home, if there is a risk of damage from such events as flooding and hurricanes, as well as other factors that contribute to the safety and security in the home. Homeowners that are at great risk of an event happening that causes them to make a claim will pay higher premiums.

All of the research that insurance companies rely on for specific policies comes from a wide variety of local and nationwide research companies. The research allows them to create specific criteria they can refer to when working out an individual’s premium that will be designed to offset claim costs. When searching for a particular insurance policy, in order to get the best possible premium that proves the best coverage, it is important to understand the criteria used to set a policy and learn what you can do to lower your risk which will increase your chances of purchasing affordable policy.