Download ADVP002 Insurance 101 How Premiums are Calculated_Group.indd

Insurance 101 Understanding insurance premiums
™
Understanding how premiums are calculated.
Calculating home and auto insurance rates.
How do insurance companies set rates? Why do my
premiums sometimes change? Why do different
companies’ quotes differ so much? Why can’t the
whole thing be more straightforward?
Home premiums depend on a number of factors, including:
In most businesses, the cost of producing and selling
a product is known before the price is determined,
but insurance companies have to price their product
before the costs are known. They don’t know ahead
of time how many collisions, thefts, etc. their clients
will be involved in, how much house repairs will cost,
and so on.
>whether the area is prone to flooding or wind damage;
>building material and construction;
>replacement cost;
>neighbourhood crime rate;
>special collections or valuable items in the home;
>proximity to a fire station; and
>applicable discounts and the level of deductible.
Auto insurance rates will reflect:
Premiums reflect risk.
>safety and theft statistics for the area you live in;
Your insurer wants to make sure your premiums
reflect the risk. The greater the risk, the higher the
premium; the lower the risk, the lower the premium.
That’s why someone with a history of careless driving
convictions will pay more than someone with a clean
driving record. But how can your insurance company
determine the level of risk you represent?
>whether you commute to work;
Actuaries evaluate the claims history of groups of
people with similar characteristics and use that
information to determine rates. Setting rates for
all types of insurance – from auto to home to
commercial to life – is based on the same principle:
the higher the risk and the higher the cost of settling
claims, the higher the premium. Someone with a history
of heart disease, for example, will pay more for their life
insurance than someone in perfect health. A factory that
produces ammunition will pay more than a corner store.
>personal or commercial use;
>the year, make and model of your vehicle;
>how many tickets you’ve had, including past
at-fault insurance claims;
>how many years you’ve been driving;
>various discounts;
>and, of course, how much coverage you wish
to purchase and deductibles you choose.
Group Auto* and Home Group Benefits Group Retirement Services
*Auto insurance not available in British Columbia, Manitoba and Saskatchewan.
ADVP002_G (07/09)
Statistics from tens of thousands of drivers are collected
and analysed to determine which factors are reliable
indicators of risk. For example, being involved in a number
of accidents in the past few years doesn’t necessarily
make you a higher risk or affect your premiums. But if it
was determined that you were at fault in most of those
accidents, you will be considered a higher risk and your
premiums will reflect that. For insurance purposes adjusters,
not police, determine fault in accidents using the provincial
government’s rules, which are part of the insurance act.
If you’re wondering whether to submit a claim, or want
to know if it will impact your premiums, you might want
to get advice from a professional. At some companies,
if you decide not to proceed with a claim and no one
has been injured, the information you provide will not
affect your premiums.
Every insurance company must prove to the provincial
government that its auto insurance rates are statistically
justifiable. A great deal of financial information and
statistical analysis must be submitted before the
government will approve proposed rates.
Higher costs lead to higher premiums.
In addition to these specific considerations, there are
many broader factors that affect insurance rates.
Government regulation and taxes are two. The cost of
health care is another – health-related claims paid out
under auto insurance policies have more than doubled
in the past ten years. In fact, in Canada auto insurers pay
more for medical rehabilitation costs than government
health insurance plans or worker’s compensation.
As these costs continue to rise, insurance premiums
reflect the increased costs. Similarly, increased court
awards, towing fees, repair costs, insurance fraud –
and more frequent and severe storms – have all made
insurance more expensive.
Insurance rates may seem like a riddle at times because
there are so many factors at play. By learning the basics
of how premiums are calculated you’ll be better able to
choose the coverage you need at a price you can afford.
This information is brought to you by The Co-operators group auto and home insurance program. Underwritten by COSECO Insurance Company
and administered by HB Group Insurance Management Ltd., member companies of The Co-operators Group Limited. The Co-operators is the leading
Canadian-owned multi-product insurance company. For more information, visit www.cooperatorsgroupinsurance.ca.
Group Auto* and Home Group Benefits Group Retirement Services
*Auto insurance not available in British Columbia, Manitoba and Saskatchewan.
ADVP002_G (07/09)