What Really Goes Into Calculating Your Insurance Premium
When the time comes to renew a client’s insurance policies, insurers are likely to alter monthly premiums based on a range of factors such as changes in the details of the insurance policy, anticipated claims inflation on the assets being insured, and changes in cover sums.
Insurers annually increase premiums according to these factors to ensure that their clients continue to pay a fair premium for the cover that they are provided. Being aware of what insurers take into account when calculating premiums, not only helps one to understand why insurance premiums have changed, but also what the possibilities are for keeping these premiums as low as possible.
The annual changes in premiums of different lines of personal insurance, are affected by the above factors in one way or another. On some policies, such as home contents or building insurance, the client’s cover or their sum insured is automatically increased from year to year. This is common when the insurer expects that the value of the insured items will increase each year.
Claims inflation is noticeable in one’s regular car insurance policies. Generally, the cost of vehicle parts, paint and labour will increase in line with inflation. As a result, insurers increase premiums in line with the claims inflation that they anticipate, to cater for vehicle repairs. Vehicle parts may well increase at a different pace to building materials, for example, so generally speaking claims inflation will differ based on what you are insuring.
Lastly, changes in a policy during the course of the year can also make a significant difference. Changing the factors related to how the monthly premium was initially calculated will also have an effect on the monthly cost of the renewed policy. For example, moving to or from an area with a higher crime rate may change the premiums for home contents or vehicle insurance. Similarly, increasing the security of the asset (by installing alarms, adding fences to a property, etc.) could help to bring premiums down. Also, lodging a claim during the year, changes the policyholder’s claims history – which may have been a factor in calculating the initial premium.
Here is some advice to policyholders who are dissatisfied with the cost of their premiums after their policies are renewed.
• Always keep your policy details up to date by informing your insurer of any changes in your policy. This will ensure that they can provide you with an accurate premium and help you avoid negative surprises at claims stage.
• Understand what factors play a role in the calculation of your premium. Where possible, you should consider implementing measures that could potentially decrease your premiums.
• If you are unhappy with your premium increase, speak to your insurance company to see if they can assist with bringing it down. Alternatively, if you have a broker, see if they can’t negotiate better terms on your behalf.
• Regular claims may affect your premium. Sometimes it is wiser to just pay for smaller valued claims out of your own pocket.
Finally, it is important to know whether one is paying a market related premium for the specific policy. Policyholders who believe that they are paying too much for their cover can always obtain comparative quotes from other insurers or from their broker. However, keep in mind when changing to a cheaper option, that it is essential to research whether one is not compromising on important factors such as cover and service levels.
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