How Insurers Set Your Premiums

Published with permission from Vero Insurance New Zealand.

When insurers set premiums for your insurance policy, they look at a range of different things that can affect the premium you pay.

As well as making sure they collect enough in premiums to remain a sustainable business, insurers also try to set prices as fairly as possible for their customers.

This means striking a balance between pricing policies for risk, or pooling the risk and spreading the cost to make insurance affordable for as many customers as possible.

How risk affects your premiums

Many of the questions asked when taking out a new policy are designed to help insurers understand what they call ‘risk factors’ – the various elements of insurance risk.

There are two main sources of information to help analyse how claims costs may vary based on risk factors: the claims payed and risk models.

The claims paid can help insurers estimate likely causes and impact of risk, like trends in the number of car crashes or burglaries their customers might experience and how much those claims might cost.

But other things are harder to estimate, and insurers will use risk models to help estimate the impact from these “known unknowns”.

In New Zealand, a good example is earthquakes. If all decisions are based solely on experience, then earthquake cover in Canterbury and Kaikoura would be very expensive but elsewhere it might be cheap or even free.

But we all know that an earthquake could potentially hit most places in the country, so external data is used (rather than just claims data) and sophisticated modelling techniques give insurers a more balanced understanding of earthquake risk – one that is more aligned to the actual risk of a future quake.

Setting premiums based on either of these sources of information is what is generally referred to as risk based pricing.

So why do prices differ between insurers? They’ve got different claims data

Insurers are likely to have different claims experiences that may mean they price differently. Some claims have no underlying cause, so they are effectively “random”. That means, although they can be priced for generally, they can’t be allocated to certain types of customers. Instead, the cost of those claims is pooled and everyone has to pay for them.

They have different risk models

Different insurers use different independent suppliers when it comes to earthquakes or other risk modelling. While one insurer might think the biggest risk for earthquakes is Canterbury, another might say Wellington or Napier.

They ask different questions

The way insurers underwrite – meaning the type and number of questions they ask and the information they gather on customers.

There are also differences in the way insurers define common risk factors. For example, your address might be in different ‘risk areas’ for different insurers depending on the claims experience they have had and the risk data or models they use.

They have their own approach to risk based pricing

Although all insurers think about level of risk when underwriting policies, insurers can have different approaches when it comes to how much the risk influences their price.

Some will set premiums based almost exclusively on risk, while others will smooth out premiums more to pool both risk and price.

Overfifty Insurance has the expertise, support of insurance and underwriting agencies to compare policies to find the most appropriate level of cover.

Having access to a wide panel of insurers means they can compare policies and ensure you’re getting a better deal. If you want to find out more about how they can help, visit https://overfifty.co.nz/