What Determines Insurance Premiums?
In today’s economy, we are all exposed to various types of risks in our day-to-day lives. Whether you are a homeowner who is at risk of losing their largest investment to a fire, or you’re a business owner who’s exposed to an online cyber-attack, we all have some form of risk we may experience.
The good news is that the insurance industry has kept up quite well by offering new products every year to protect this ever-growing list of new exposures. With so many policies, and so many different people and entities purchasing them, how do insurance companies determine premiums?
Well, every company has their own ‘ratings’ they use to come up with your premium, and their ratings reflect the size and vulnerability of the risk in question. In most cases, the rating is a price per thousand and is multiplied by the amount of coverage you are desiring. For example, one insurance company may rate a home at $0.25c per thousand in a certain area, where another might consider it riskier and rate it at $0.30c.
This logic of rating is applied almost universally amongst both underwriters and product lines, so if an insured experiences a rate increase for their small business, this generally means that their insurer has had a poor loss history for the respective industry and is looking to be less competitive in the given area.
In addition, there are some important notes below that can affect your premiums based on the line of business:
HOME – Your homeowner’s policy will be rated based on re-build value (the cost to rebuild it), the endorsements you add (Earthquake and Water have very high ratings), and its location (different postal codes have higher ratings than others).
AUTO – Your auto premiums are derived from the drivers (year experience and loss history), the vehicle (class and value), and the usage (where and how you use it).
BUSINESS – Commercial policies are generally rated based on the specific industry, so where a landscaping company may have lower ratings per thousand of coverage, a technology company may be higher – it all depends on the insurance company’s appetite for the risk. Liability and property coverages will have their own unique ratings.
LIFE – Life insurance premiums are based on the age, sex, and health of the insured. Once the data has been collected, they are placed in a certain category and given a rating per thousand of coverage.
As discussed, there are hundreds of products, and thousands of ratings that determine their premiums, but at the end of the day, everyone follows this same logic.
If you want to hear more about this subject, you should listen to this topic on The Alteri Podcast!