One of the questions that we are often asked in the insurance industry is “why are my insurance premiums so high?”. There are many factors that impact insurance premiums, and there are also steps that you can take to help reduce the premiums you pay.
In this post we will explain the concept of how insurance works and share some information with you about what factors have an impact on the premiums you pay.
How Insurance Works
Insurance involves pooling the premiums of many to pay for the losses of a few. Since there are more people contributing to the pool than there are making claims, there are enough premiums available to pay the claims that occur, large or small.
Insurance companies employ actuaries, professionals who deal with the assessment and management of risk, to calculate the premiums and reserves for various insurance policies.
As mentioned above, there are many factors that impact the insurance premiums you pay. Some of these factors have an impact on the industry as a whole, whereas other factors can impact your premiums on an individual basis.
Industry Factors
Loss Ratios
A loss ratio is the amount of claims paid by an insurer divided by the amount of premiums they have earned, usually for a one-year period. If the loss ratios of a particular insurance company are high in a particular area (ie. automobile insurance), then they may issue an increase in their automobile rates. This rate increase would then impact all of their automobile insurance policyholders.
Catastrophic (Cat) Losses
A catastrophic loss, otherwise known as a cat loss, is an index used to quantify the magnitude of insurance claims expected from a major disaster. The Alberta Floods of 2013 and the Fort McMurray fires of 2016 are examples of catastrophic losses that had a huge financial impact on the insurance industry.
Insurance Fraud
Insurance fraud occurs when a policyholder commits an act with the intent to obtain a benefit or advantage to which they are not otherwise entitled. For more information on insurance fraud and insurance crime and how you can help, please visit the Insurance Bureau of Canada’s (IBAC) website.
Personal factors
Claims History
The number, frequency and type of claims you have had (whether it be for automobile, property, or commercial) can have a direct impact on the amount of insurance premiums that you pay. In some cases, your claims history may impact which insurance companies are able to provide you with coverage. Those individuals who are claims free may also qualify for a claims free discount on their policy.
Licence History and Experience
In addition to claims history, the number and type of convictions you have on your driver’s abstract will impact your insurance premiums and determine which insurance companies are able to provide you with coverage. The number of years you have been driving will also have an impact on the premiums you pay.
Type of Vehicle
If you carry physical damage coverage (Collision, Comprehensive, and/or Specified Perils) on your vehicle, the type of vehicle you drive will have a direct impact on your insurance premiums. Each vehicle make and model is assigned a set of rate groups based on the claims history and cost to repair/replace parts for that particular type of vehicle. For example, the Comprehensive rate groups for SUV’s are commonly higher than other types of vehicles because there have been a larger amount of vehicle theft claims for SUV’s.
Age of Drivers
In addition to your claims and licence history, your age will also have an impact on the premiums you pay. Younger drivers typically have less experience and are often rated higher, whereas more mature drivers may have more experience and could also qualify for a mature driver discount.
Property Details
With respect to property insurance, the specific details of your home, apartment or condo will have an impact on your insurance premiums. The insurance company will take into account the age of the property, the type of heating, the square footage, construction material and other factors to determine the appropriate premium for the risk.
Use of your Vehicle or Property
How your vehicle or property is being used will also have a direct impact on the insurance premiums you pay. For example, if your vehicle is used for pleasure use only, it is considered less risk than someone that uses their vehicle commercially. As well, if you reside in your home, there is less risk of a claim than a property that is sitting vacant.
For the purpose of this post we have listed some of the most common factors that have an impact on your insurance premiums. If you would like to discuss your own personal insurance policy in more detail, please do not hesitate to contact our Office and one of our Brokers would be happy to assist you.
Please stay tuned for Part 2: How to Reduce your Insurance Premiums next week!
Thank you,
The Costen Insurance Team