Insurance premiums can sometimes seem like a mystery, fluctuating based on criteria that aren’t always clear and sometimes even seem strange. However, understanding the factors that influence your insurance premium can help you make informed decisions and potentially lower your costs. These inferences about premiums have been honed over years of data collected and analysed by actuaries.
Different types of insurance have their own specific factors that influence premiums. Each section will have different criteria and weightings of the influence the following factors might have on your insurance premium:
- 1. Personal demographics
Your personal details play a significant role in determining insurance premiums.
Age: Generally, younger people are less risk averse and do not have as much driving experience and hence their premiums are higher.
Gender: Statistically, men might pay more for motor insurance even though they make less accidents, because they make big accidents (higher severity) whereas woman make more accidents but are generally small accidents (low severity).
Marital Status: Married individuals often receive lower risk due to perceived stability.
- Credit history
For many types of insurance, especially personal insurance, your credit score can impact your premium. Insurers use credit-based insurance scores to predict the likelihood of a claim but more importantly, your ability to pay your premium in the long run and stability at one insurer. A higher credit score can lead to lower premiums, while a lower score might increase your costs.
- Location
Where you live affects your insurance premiums significantly.
Motor insurance: Urban areas with higher traffic and theft rates typically have higher premiums compared to rural areas. Hijacking hotspots that you might travel through might also have an impact on your premium.
Home insurance: Areas prone to natural disasters often face higher premiums due to increased risk. Crime statistics are also factored into the rating of home insurance for the area that you reside in.
- Claims history
Your history of filing claims can influence future premiums. Frequent claims might label you as a high-risk policyholder, leading to higher premiums. Conversely, a clean claims history can result in discounts and lower rates.
- Coverage and excesses
The amount and type of coverage you choose directly affects your premium.
Coverage amount: Higher coverage limits typically mean higher premiums even though the rate might be lower. Extensions might also increase your premiums, so ensure to check all the “add-ons”.
Excess: Choosing a higher excess can lower your premium since you’re agreeing to pay more out-of-pocket before insurance kicks in. This indicates to the insurer that you agree to self-insure and take responsibility for a part of the insurance.
- 7. Vehicle and property characteristics
For vehicle and home insurance, the characteristics of what you’re insuring matter.
Motor insurance: The make, model, age, and safety features of your car influence your premium. Newer, safer cars may have lower premiums, while luxury or sports cars might cost more to insure. Even the color of your car plays a role in your premium, one because certain paints are more expensive to repair, but also because generally people with red or black cars have more accidents.
Home insurance: The age, condition, and features of your home (e.g., security systems, fire prevention) can affect premiums.
- Discounts and multi-peril policies
Taking advantage of available discounts can lower your premium. Many insurers offer discounts for:
- Multi-peril policies – by combining home and motor insurance, you generally get it cheaper.
- Safe driving records
- Installing safety devices (e.g., security systems, anti-theft devices)
- Paying premiums annually instead of monthly
- No claim bonusses for being claim free for a number of years.
Understanding the myriad factors that influence your insurance premium empowers you to make informed choices. By assessing your needs, comparing policies, and leveraging discounts, you can manage your insurance costs more effectively. Always review your policy details and consult with your insurance provider to ensure you’re getting the best coverage at a reasonable price.