What Determines the Cost of an Insurance Policy

1. What an insurance premium is
2. Cost factors
3. How to compare offers

Insurance premium and rate

Factors affecting the cost of an insurance policy / insurance contract

Insurance is an integral part of a civilised society; moreover, only insurance can protect a person or an organisation from unforeseen expenses arising from an unforeseen event.

Insurance covers precisely those risks that fall into the category of:

• those independent of a person's will;
• probable and unpredictable.

What affects the cost of insurance

• Compulsory insurance;
• Voluntary insurance.

NECESSARY TERMS:

we describe them simply, for easier understanding

insurance rate – the percentage expression of the insurance premium;

insurance premium – the sum of money payable by the Client to the Insurance Company in order for the Insurance Company to bear liability under the concluded insurance contract.

What affects the cost of Compulsory insurance:

• the cost of compulsory insurance is fully regulated by the relevant law, which regulates not only the cost but almost all the terms of insurance for that particular class;
• sometimes the law may provide for:
• rates ranging from and to (FOR EXAMPLE: from 0.1 to 1)
• discount and surcharge coefficients that apply depending on claims statistics for previous insurance periods

That is essentially all there is to the cost of insurance in the compulsory classes. The remaining details and features of these classes of insurance are described at length in other sections of our website.

What affects the cost of Voluntary classes of insurance:

Voluntary classes of insurance are a little more complicated, but only slightly.

First of all, you need to realise and understand what is probably the main thing in insurance: insurance companies are commercial entities, and their aim is to make a profit from what they do.

Once you understand this fundamentally fair and legitimate aim of their commercial activity, everything falls into place.

The next thing is much easier to grasp: how much does an Insurance Company want to earn?

It all comes from the cost of capital. Take a small example:

If you put money on a deposit, it will earn you, depending on the amount deposited, from 9.5 to 15% per year.

• a deposit carries practically no risk;
• the funds are reliably protected and guaranteed by the bank's own capital.

If you invest money in securities (trade on the stock exchange), the income may range from 15% to 200% per year or more, depending on the professionalism of the securities broker.

Given such costs of capital, one can assume (even assert) that the shareholders of an insurance company expect to receive no less than 20% on the funds invested, i.e. that is their return on concluding an insurance contract (and in insurance, an insurance contract is a wager: the Client bets that an insured event will occur, while the insurance company bets that it will not):

Thus, when underwriting, in some classes of insurance the insurance company builds the potential profit in right away:

FOR EXAMPLE: in Voluntary medical insurance, when calculating the insurance premium the insurance company builds in a 20% return, since otherwise, it is fair to say, there would be no point in their working without potential income, because an underwriting calculation is also a probability: one may earn, or one may incur a loss, which often happens.

The voluntary class of insurance contains quite a few types of insurance whose principles of forming the insurance premium, or the cost of cover, are practically identical, with only some differences. Let us consider the most popular types of insurance and rank them by:

• loss ratio;
• frequency of insured events.
• POPULAR TYPES OF VOLUNTARY INSURANCE:
• VOLUNTARY MEDICAL INSURANCE – insured events occur every day, if not every hour or every minute

the cost of voluntary medical insurance depends on:

• the loss ratio under the previously concluded insurance contract – one must always realise that, besides direct losses (funds actually spent on medical services for the person/employees), there are acquisition costs such as the cost of attachment to a medical assistance provider and the expected or anticipated income of the insurance company;
• the content of the medical insurance programme – how many costs are built into the medical insurance, and what limits are set on the most sensitive items;
• the contract amount and the number of insured persons – the cost of insuring 10 people and 500 people will not be the same, since the probability of incurring a loss is lower with a larger number of insured persons;
• VOLUNTARY MOTOR INSURANCE – the second most frequent type of insurance in terms of insured events

the cost of voluntary motor insurance depends on:

• claims statistics – it does not matter whether you had a contract before; if you were involved in a road accident or unforeseen events happened to your vehicle (theft, hijacking, etc.), this will affect the insurance rate and, consequently, the insurance premium;
• the insurance programme – the number of insured events, the amount of the deductible, the territory of cover and the conditions of use of the vehicle;
• the number of vehicles – the size of the contract, provided the above conditions are favourable, can have a positive effect on the cost of insuring a vehicle.
• VOLUNTARY PROPERTY INSURANCE – third in this trio in terms of the probability of insured events

the cost of voluntary property insurance depends on:

• the nature of the insured object – the more complex the insured object, the higher the insurance premium;
• the probability of an insured event – for example, if we insure a private house, the insurance rate will be lower than for insuring an oil storage facility;
• the sum insured – the more expensive the insured object, the lower the insurance rate, although one should realise that this condition cannot continue indefinitely.

Useful tips for reducing the cost of insurance:

• professionalism of those placing the risk – to place voluntary classes of insurance, you should engage professional market participants for whom this is a professional line of business. Such companies know the principles of pricing, and their involvement contributes, among other advantages, to:
• better contract terms;
• resolution of disputed issues when insured events occur;
• obtaining a fair price for the risk

• decide what you want - before starting work on concluding an insurance contract, decide in detail which insurance programme you need. There is nothing worse than showing the market your incompetence and going through underwriting several times while changing your requirements for the risk; this leads to market fatigue and overheating;
• analyse your own statistics – you need to understand how attractive you are (and objectively attractive) to the Insurance Company, and to set your cover requirements accordingly.

If you still have questions, we are always ready to answer them.

Main cost factors

• sum insured and limit of liability;
• list of covered risks;
• term and territory of insurance;
• deductible and how it applies;
• characteristics of the property, vehicle or business activity;
• loss history and safety measures;
• frequency of premium payments.

How to compare offers correctly

1. give all insurers the same initial data;
2. compare identical limits and risks;
3. check the exclusions and the deductible;
4. take into account the notification and payment deadlines;
5. clarify whether the terms can be changed;
6. keep written calculations and offers.

This material is for information purposes. The final cost is calculated by the insurance company after assessing the risk.