What are 5 factors that are used to determine the cost of insurance premiums?

The amount you'll pay for car insurance is impacted by a number of very different factors—from the type of coverage you have to your driving record to where you park your car. While not all companies use the same parameters, here's a list of what commonly determines the bottom line on your auto policy.

• Your driving record – The better your record, the lower your premium. If you've had accidents or serious traffic violations, it's likely you'll pay more than if you have a clean driving record. You may also pay more if you're a new driver without an insurance track record.
• How much you use your car – The more miles you drive, the more chance for accidents so you'll pay more if you drive your car for work, or use it to commute long distances. If you drive only occasionally—what some companies call “pleasure use"—you'll pay less.
• Location, location, location – Due to higher rates of vandalism, theft and accidents, urban drivers pay a higher auto insurance price than those in small towns or rural areas. Where you park your car (on the street or in a secure garage) and anti-theft features may impact the bottom line as well.

Other factors that affect premium price that can vary from one area or state to another are: cost and frequency of litigation; medical care and car repair costs; prevalence of auto insurance fraud; and weather trends.

• Your age – In general, mature drivers have fewer accidents than less experienced drivers, particularly teenagers. Insurers generally charge more if teenagers or young people below age 25 drive your car.
• Your gender – Statistically, women tend to get into fewer accidents, have fewer driver-under-the-influence accidents (DUIs) and—most importantly—have less serious accidents than men. So all other things being equal, women often pay less for auto insurance than their male counterparts.
• The car you drive – The cost of your car is a major factor in the cost to insure it. Other variables include the likelihood of theft, the cost of repairs, its engine size and the overall safety record of the car. Automobiles with high quality safety equipment might qualify for premium discounts.

Insurers not only look at how safe a particular vehicle is to drive and how well it protects occupants, but also how much potential damage it can inflict on another car. If a specific vehicle model has a higher chance of inflicting damage when in an accident, an insurer may charge more for liability insurance.

Most people understand that insurance premiums rise and fall, the questions is why do your premiums change? What factors cause the amount of money you pay to your insurance company to increase or decrease?

If you have to pay higher premiums, does that automatically mean that you have better coverage? If not, what about lower premiums, should you opt for the lowest you can find?

These are just some of the questions that Australians ask about their insurance cover, so let’s dive straight in and look at five of the main factors that can affect the cost of your premiums: risk, coverage, replacement value, fraud and the market in general.

1. What’s the risk? One of the first factors that an insurer considers when asked for insurance cover is what’s the risk of paying a claim? For example, for comprehensive car insurance, the insurer will ask whether the car is kept in a garage, carport or on the road, and will also consider the type of car, driver’s age and driving history, as well as the owner’s residential location. All of these factors can increase or decrease the risk to an insurer of paying a claim.
2. What’s the coverage? The amount of risk the insurer takes by issuing an insurance policy will affect the coverage that is offered. If the risk is too high, they may refuse to issue a policy or set the premiums and excess payments high enough to offset this risk. In general, the higher the coverage, the higher the premiums, but this doesn’t always apply, so it pays to talk to an experienced adviser about your coverage options.
3. What’s the replacement value? Insurers use a base value for the replacement costs, which might be completely different to your idea of how much it will cost to replace your car, motorbike or home. Often you can insure your property for either a predetermined value or for its market value; each option generally has a different premium, depending on the risk to the insurer.
4. Fraudulent claims: Some people believe that making a claim against their insurance policy will increase their premiums. This may be true if you make frequent claims on the same policy or the insurer believes that you were partially at fault or negligent in some way. Unfortunately, fraud is a huge problem to the insurance industry and to cover their costs, insurers tend to increase everyone’s premiums by a certain percentage, every now and again. 
5. Market factors: Severe storm damage in Darwin will increase premiums for both residential and commercial property owners in this location, flooding will raise premiums in Brisbane and rising construction costs will raise premiums for everyone. Inflation is another big factor in the cost of premiums, as are increased government taxes, the number of claims made within an industry, natural disasters, and regional or global market changes in the insurance industry.

The reason that premiums increase is that the insurer needs to have the money to pay the claims that are submitted throughout the year. If their costs of doing business increase (for whatever reason), they will increase everyone’s premiums to make up the shortfall. Of course, your premiums may rise or fall because of changes to your personal circumstances, which is why it’s important to keep your insurer updated of any changes that might affect your premiums and your claims.

General Advice Warning

The information provided is to be regarded as general advice. Whilst we may have collected risk information, your personal objectives, needs or financial situations were not taken into account when preparing this information. We recommend that you consider the suitability of this general advice, in respect of your objectives, financial situation and needs before acting on it. You should obtain and consider the relevant product disclosure statement before making any decision to purchase this financial product.

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