How do insurance companies price premiums?
Insurance companies use various types of information to calculate premiums for different types of insurance policies. The goal is to assess the risk associated with insuring a particular individual, property, or entity. Here are some of the key factors considered in determining insurance premiums.
1. Personal Information:
This includes age, gender, marital status, occupation, and lifestyle habits. For health insurance, factors such as pre-existing conditions and medical history are crucial. For home insurance, the majority of this information is found through public record, like how old the home is, prior climate history, and how many times the property has been bought or sold.
2. Location:
Geographical location plays a significant role in insurance pricing. For instance, in property insurance, areas prone to natural disasters like hurricanes, floods, earthquakes, or high crime rates may have higher premiums. Climate risk is calculated in a number of different ways, with advanced mapping that takes into account topography, humidity, temperature, and wind speed among others.
3. Type and Amount of Coverage:
The level of coverage and the type of insurance policy (e.g., comprehensive vs. basic coverage) directly impact the premium. Higher coverage limits or additional coverage options often result in higher premiums. The majority of homeowners don’t actually know how much coverage their average policy gives them, so we urge you to check with your broker, agent, or carrier to assess whether you’re fully prepared for whatever climate throws at you!
4. More Specific Risk Factors:
Insurance companies assess various risk factors specific to the insured item or individual. For instance, in auto insurance, the make and model of the vehicle, driving history, usage patterns, and likelihood of accidents or theft are considered. In health insurance, smoking habits, BMI (Body Mass Index), and other health-related factors are evaluated. A lot of these factors are variable and change with the premium. For example, with trackers and apps that sync up to your insurance account, the way you drive can reduce your average premium by calculating mileage, stopping and starting, speed in relation to speed limit, etc.
5. Claims History:
A person's or entity's previous claims history is taken into account. Individuals who have made frequent claims in the past may be deemed higher risk and could face higher premiums. This goes along with the same kinds of records detailing moves from property to property, credit score, and market conditions. In some jurisdictions, credit scores are used as a major factor in setting insurance premiums. A higher credit score is often correlated with a lower risk profile, leading to potentially lower premiums.
The insurance market's overall conditions and competition among insurers can also impact premium pricing. Insurers may adjust their rates based on market trends and their competitive positioning. Along with that, underwriters use historical data, actuarial tables, and statistical models to predict future risks. They analyze patterns and trends in claims to determine potential future liabilities. All of this factors into history and how a premium gets calculated.
However, in some cases, taking certain precautions or implementing safety measures can sometimes lead to discounts on premiums. For example, installing security systems in a home or having a good driving record might result in lower insurance costs. And as climate change becomes a more significant factor, insurers may incorporate data related to environmental risks, such as flood zones or wildfire-prone areas, into their pricing models for property insurance. These points of reference offer more underwriters the possibility of lowering premiums and offering a better customer experience to their residents and other clients.
Learn more about how to reduce your risk here.
