How is your premium calculated?

Similar principles are used in calculating premiums for all types of insurance.

The amount you pay is made up of :

• A Base Premium – this reflects what the insurer believes is the likelihood of you making a claim. It also includes an insurer’s business costs, and may also reflect the benefits of any discounts or bonuses the insurer may offer to you.

• Added to this are state and territory stamp duties and levies, and the Goods and Services Tax (GST). These taxes can add a significant amount to the sum the insurer requires you to pay for the policy.

• Rivers will also add a Broker Fee, for the work we do to investigate the best insurer for your needs, processing your policy into the insurer’s system, and at Claim time, we are here to help you through the entire process, at no additional cost.

How Insurers calculate the Base Premium

Working out the correct price for insurance premiums is a complex process that must balance the availability of funds, the likelihood of certain claims (the risk), and the ability of the pool of money from all insurance premiums to cover the cost of claims.

Insurers each make their own commercial decisions when deciding how much to charge.  And the factors considered are different for each type of risk.

For example, if you want to insure your car, they will decide how much that particular car is worth (market value) and what risks are worth insuring. The insurer may also allow you to nominate the insured value of the vehicle (agreed value).

Insurers are extremely data-driven when they make these decisions. They will also consider facts like if the car is kept in a suburb with higher rates of car theft, you will be given a higher level of risk (and therefore may pay a higher premium) than someone whose car is kept in a place where car theft rates are low.

Insurers may also look at other issues such as the driver’s age and claims history. This is because some demographics are statistically more likely to make a claim on their policy than others.

Another factor that influences risk is the driver’s personal driving record. Most insurers will take into account whether you have been at fault in other accidents or whether you have been penalised for speeding, drunk or drug driving, or have incurred other traffic offenses.

All of these factors will help insurers work out an appropriate premium.

Remember not all risk is the same, no one can be sure what losses they may suffer – not everyone’s risk will be the same.

An insurer will charge a higher premium when the risk of accident, loss, theft or catastrophe is greater.

Because of this, insurance premiums will vary from person to person because insurers try to make sure that each policyholder pays a premium that reflects their own particular level of risk.

No two insurers offer the same policy with the same terms and conditions, and this can make comparing policies very important. Policies and premiums may also differ if insurers are using different information – for instance, some insurers have enough information to look at and price the risks for an individual address, while others may rely on data for the whole postcode until better information is available,.

Factors that influence premium prices change each year

Premiums will change each time you renew your insurance, even if your circumstances don’t appear to have changed.

Sometimes premium prices will go up across the board, and sometimes your own premium might go up because your level of risk has increased. But if something helps to reduce the risk, this may be taken into account with a lower premium.

There are a few different reasons your premium may change, including:

• Inflation. Insurers will adjust premiums to keep pace with inflation
• Changes in government taxes and any state or territory duties or levies
• A reassessment of your individual risk by your insurer, especially following a claim or a natural disaster, or fresh information from the government or an expert
• Changes you make that reduce your risk, such as installing a home alarm system or new risk management practices in your business
• The number of claims experienced in that sector of the insurance industry
• Large-scale claims due to natural disasters such as floods, cyclones or bushfires
• Investment returns. Insurers invest premiums to help ensure they have sufficient capital to pay future claims. Poor returns may require a lift in premiums
• Regional or global changes that affect the price and availability of reinsurance
• The value or quantity of what you are insuring may have changed
• The insurer’s cost of doing business may have increased

Tips for managing premiums

Consider these tips to manage the cost of insurance:

• Increase your excess
  One way to reduce the amount of the premium you pay is to agree to take on a certain proportion of the risk by increasing your excess. Many insurance policies allow you to specify an excess. In general, a higher excess will mean you pay a lower premium
• Lower your risk
  Many insurers will offer you a cheaper premium if you take steps to lower your risk. You may receive a discount on your home and contents policy if you have security devices in place such as window locks and deadlocked doors. In some circumstances, insurers may not offer you a policy unless you have taken reasonable steps to lower your risk. 
• Talk to us
  Providing additional information to us about your specific risk and letting us know when your circumstances change is vital to make sure you have the right policy for your needs.

There are many competing insurers, Rivers deals with around 150, and the variations available across these policies (such as exclusions, inclusions, excesses, and premiums), give plenty of choice but can also cause a lot of confusion.

Making a decision on price alone may result in you having a policy that does not meet your specific needs and leaves you financially exposed if a claim is to occur.

Reducing your level of coverage can lower your premium, but it increases your risk of being underinsured.

At Rivers, we have specialists that love reading the fine print and understanding the different policies available.  We can cut through the confusion and choice, to give you options, and let you sleep better knowing you are covered properly.