How are insurance premiums calcul...

Insurance premiums are often ranked high up as one of the determining factors of whether a customer takes up a product or service with a service provider, however is this enough to make an informed financial decision?

The reality is that we have some level of affection towards our assets and most prized possessions, and as such, we always try and ensure their safety against everyday perils which people encounter, specifically natural disasters, theft, fire, and accidental damage. When with life itself, just having that little bit of assurance that you would still have the ability to take care of your family long after you are gone- all of the abovementioned is motivation enough to consider taking up insurance products.

The purpose of this blog is to outline some of the essentials which an insurer has to consider when calculating premiums to provide better understanding to the insured of how premiums are calculated, and the risk factors considered in premium calculation. We should also have better context on what underinsurance is and the negatives it has to the insured.

Below are the different insurance premium calculations guide based on the different product categories:

Car insurance calculator for your premium

Did you know that how much you pay for car insurance is influenced by a few key things? First off, insurance companies consider factors like how long you''ve had your driver''s license, your history with previous insurance, your age, and even your credit score.

In the world of car insurance, insurers also look at costs from the people they work with, like panel beaters, parts suppliers, and storage facilities. These costs tend to go up a bit each year due to inflation, and insurers have to take that into account when figuring out how much your premium will be. After all, insurance companies base their prices on how risky they think it is to insure you.

The main goal of an insurer is to make sure that if something happens to your car, they can help you get back to where you were financially before the accident. So, if the costs for the services they use go up, they might need to adjust their prices a bit too.

It''s all about making sure you''re protected while keeping things fair for everyone.

Some of the other factors that insurers consider are the risk ratio attached to the different areas in which the insured keeps the insured items when deciding on premiums. For example, prior to making a car insurance claim, insurers require an incident report from SAPS.

This might seem like a hassle, but it''s actually really important. The information from these reports helps insurers understand the risks in different places. They look at things like how many incidents happen and how often they occur. This helps them figure out the likelihood of something happening to your stuff.

Another important factor to consider is the outsourced Emergency Assist benefits which insurers use. Their main aim is to act as support function to insurers in cases where a customer may experience issues like running out of fuel, getting a flat tire or losing your keys where you require towing. In order for the service to be executed, there is a heavy reliance to petrol costs and the effects it has in rendering these services, and as such the fluctuating costs of petrol price can have a direct impact on how they price their services, which ultimately translates in it being a factor to consider when an insurer prices its product.

Factors influencing car insurance premiums include:

• Personal details
• Supplier costs
• Location
• Fuel costs

Home Insurance premium calculation

The home insurance category is made up of property/structural cover and home contents cover which provides cover for the shell and barricades of your property and your furniture pieces as well as home appliances kept in the home. For this blog, we will refer to these product categories as a collective “Home Insurance”.

Specifically on property insurance cover, insurers give a guaranteed premium over a 12-month rolling period, provided that there are no material changes (significant alterations or updates in the insured person''s circumstances, property, or risk profile that could affect the terms, conditions, or pricing of their insurance policy which may impact premium during this period).

Property valuation appreciates instead of depreciating, as such insurers need to apply a percentage increase on the cover amount which may differ from insurer to insurer, and this is mainly done to accommodate the appreciation value of the asset, which again will translate into an increased premium payment.

Insurers can also consider factors such as the materials used to construct the structure of your property. E.g, A house that is built from brick has better safety compared to that built from wood which would be more prone to fires, especially considering the perils which an insurer has to cover.

When it comes to home contents cover and the underwriting criteria used to calculate premiums, because the general cover includes clothing items, furniture pieces and home appliances, the insurer applies a percentage increase on the cover value to include any other items that may been acquired in the last year. The purpose of doing this is to avoid having customers being underinsured, where the general rule of underinsurance would suggest that an average is applied should a customer claim. Over and above all this, a house that has better safety measures like burglar bars, an alarm system, electric fencing and a motorised gate may reap the benefits of paying a cheaper premium because of all the security measures that have been put in place, thus reducing the risk of claiming.

Life Insurance premium calculation

Life Insurance can be defined as a contract(financial) between a policyholder and an insurer. The insurer will provide a lump sum payment in the event of death or disability. The insured will enjoy this cover by paying monthly premiums to the insurer so their designated beneficiaries receive the death benefit upon the death of the insured person.

In terms of underwriting criteria that is considered when calculating premiums, some of the biggest factors include age and for some even health conditions where screenings may even be required. According to the world bank, the life expectancy in South Africa currently sits at 62.34 years (https://datacommons.org/place/country/ZAF). These numbers are very important to an insurer in helping them package their products whilst also applying exclusions to try and mitigate risk and to also have the correct pricing based of the criteria used. In layman’s terms, the older you are when acquiring a life insurance product, the bigger your likelihood of paying a higher insurance premium compared to being a younger adult who is perceived to still have their whole life ahead of them.

In essence, premium calculations are a little more complex than just naming a price. Insurers need to consider a fair increase for their clients whilst also ensuring profitability.

Get the right insurance for you and your needs.