Understanding Insurance Premiums

How premiums are calculated 

Insurers use risk data to calculate the likelihood of the event you are insuring against happening. This information is used to work out the cost of your premium. The more likely the event you are insuring against is to occur, the higher the risk to the insurer and, as a result, the higher the cost of your premium.

An insurer will take two important factors into account when working out the premium they will charge.

  1. How likely is it in general terms that someone will need to make a claim?

  2. Is the person who wants to take out a policy a bigger or smaller risk than the ‘average’ policyholder (for example, a young person with a high-powered car may be charged a higher premium as they are statistically more likely to be involved in an accident than a mature, experienced driver)?

Why premium prices change

Premiums are affected by many factors, therefore, your premium is likely to change each time you renew your insurance, even if your personal circumstances don’t appear to have changed. 

Premium prices may increase across the board due to the current market trends, however, your own premium might go up because your level of risk has increased. Your premium may also reduce based on the market or a lower risk profile.

There are a few different reasons your premium may change, however these vary depending on the type of insurance also.

  • Market Inflation

  • Changes in government taxes

  • Claims history

  • Any change to your individual risk assessment by your insurer including recent claims, change in residential location, change in profession, type of insurance.

  • The insurer’s cost of doing business

When buying insurance it is important to shop around to get the best policy for you, particularly if your own circumstances have changed over the year. It is also worth considering whether there have been any changes in your circumstances which might let your current insurer charge you a lower premium.

For instance, if you have fitted a car alarm to your car, it is worth checking whether your current insurer offers a premium discount.

What may influence your premium?

When your insurer calculates your premium, it is likely to take a range of factors into account. These factors will change from person to person.

Some key factors influencing your premiums may include:

  • Type of cover selected

  • Optional benefits under your policy

  • Eligible discounts eg. No Claims Discount/Multi Policy Discount

  • Claims history

  • Annually or monthly payment options: Most insurers offer a discount to customers who pay their premium on an annual basis due to lower administrative costs. 

  • Government taxes 

  • The level of excess you select

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 however that also means that you will be liable for a portion of the damages if you need to claim on the policy, so you need to be sure you can afford this.

  • 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 your insurer
    Providing additional information to the insurer about your specific risk may also allow your premium to be reviewed. You can also ask your insurer about how you might be able to lower your premium

  • Shop around
    Each insurer will offer products that differ from those offered by other insurers, with variations in the coverage, the terms and conditions, exclusions and costs

  • Ask if you qualify for any discounts
    Some insurers may offer discounts such as a no claims or multi-policy discount if you have two or more policies with one company

  • Pay your premium annually
    If you pay your premium by instalments it generally costs you more than if you choose to pay your premium in one annual lump sum payment

Insurance premiums are based on peoples’ individual circumstances.