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, data 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.
Other factors:
- 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.
What can you do to keep premiums down?
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.
Working with an experienced insurance adviser who understands your business can also play a crucial role in managing your insurance premiums. Your adviser can negotiate with insurers and provide valuable advice on risk management strategies that you can implement to reduce your risk and potential costs involved.
Get in touch with the team if you’d like to discuss the key factors influencing your premiums, or are interested in exploring risk management strategies.
General Advice Warning
This communication including any weblinks or attachments is for information purposes only. It is not a recommendation or opinion, your personal or individual objectives, financial situation or needs have not been taken into account. This communication is not intended to be a constitute personal advice. We strongly recommend that you consider the suitability of this information, in respect of your own personal objectives, financial situation and needs before acting on it. This document is also not a Product Disclosure Statement (PDS) or a policy wording, nor is it a summary of a particular product’s features or terms of any insurance product. If you are interested in discussing this information or acquiring an insurance product, you should contact your insurance adviser to obtain and carefully consider any relevant PDS or policy wording before deciding whether to purchase any insurance product.”
