Have you ever wondered how your insurance premiums are set each year? It can be a useful thing to know, as the better you understand the many factors that influence your premiums, the more you can do to keep them under control where possible.
The basics
Every insurer has its own processes. But, generally speaking, they all use mathematical calculations, statistics and a variety of policy-specific variables to determine the premiums they charge their clients. Unsurprisingly, in most instances the higher the risk – or, more accurately, the higher they deem the likelihood of a claim – the higher the premium will be.
Beyond this, insurers also take into account a long list of other factors. This includes things like the type of insurance you’re purchasing, the value of what you’re insuring, as well as their own business costs and margins, which can vary significantly from insurer to insurer, and year to year. The final amount you pay will also include state and territory stamp duties and levies, together with GST.
Rising claims, rising premiums.
Some of the things that influence your premiums have very little to do with you or your business. For example, as part of providing ongoing security for their clients, insurance companies often have to adjust their premiums in response to the increasing cost of claims payouts across their portfolio. There can be many reasons for this. One of the biggest in recent years is the rise in both the number and cost of extreme weather events. If your insurer experiences a large-scale number of claims – following a major storm or flooding event, for example – they may need to raise their premiums to restore the necessary balance between their pool of available funds to pay claims, and the risks. Like we said at the start, it’s all about the maths.
Inflationary creep.
The other major external factor influencing insurance premiums in Australia (and the world) right now is inflation. As prices for materials and labour continue to rise across many industries, the costs of claims are rising with it. This can be something of a double whammy for business owners, as not only can inflation drive up your premiums, it can also lead to you being unknowingly underinsured if rising repair and replacement costs exceed the sum you have insured in your policy. Together will reduce your coverage in an attempt to save money (something we strongly advise against!) it can leave a potentially dangerous gap and is something to watch very closely in the months ahead.
What can you do to keep premiums down?
As discussed, there are many things you can’t influence. But one of the best things you can do (beyond simply being aware of changes to your premiums), is take proactive steps to reduce your business risks, especially in areas where your premiums are highest, or likely to rise fastest. From your people and property, to equipment and assets, effective risk mitigation strategies can often lead to very real savings.
Some of the factors that can influence your premium:
- Type and level of cover selected
- Optional benefits provided under your policy
- Receiving (or losing) insurer discounts for loyalty/bundling
- Previous claims and incident history
- Inflation (locally and globally)
- Large-scale claims events
- Whether you pay your premiums annually, monthly or by instalments
- Government taxes, duties and levies
- Your excess.