Why insurance premium increases every year
You must have wondered why your insurance premium increases every year. To understand the reason behind this, it is important to know how insurance works.
How insurance works
Insurance is based on the concept of risk, so it is necessary to assess this risk using mathematical, but above all, statistical techniques.
Indeed, it is important to remember that insurance is a risk-sharing system such that the gains compensate for the losses that could be generated. This is the principle of risk pooling. Pooling risks allows the higher costs of people with a lot of health issues to be offset by the lower costs of healthy people, in a plan or premium rating category.
However, insurers must put in place rules so that pooling is not endangered. Too many risks could become unmanageable for an insurance company. Hence, the risks must be:
- Homogeneous: the risks must be of the same nature, in large quantities, have the same chance of occurring and finally have the same order of magnitude.
- Scattered: we must avoid grouping the risks that are likely to occur at the same time and in the same place. In such a case, compensation cannot take place. If all farmers in the same area are insured for hail, the slightest hailstorm can wipe out the crops of all policyholders and have catastrophic consequences for the insurer.
- Divided: A single claim must not threaten mutuality.
The use of statistics and the calculation of the contribution
Statistics are essential in the world of insurance to determine the likelihood of the risk occurring. It is also possible to determine the average cost of a claim.
From these elements, the insurer can then calculate the amount of the amortization payment, the average amount necessary to compensate the risks between them.
So why is my premium increasing?
The determination of the insurance premium depends on several factors. For instance, there is inflation in the insurance market every year. Also, there is the compensation which continues to increase because of the consideration of several criteria. However, these reasons are general. There are reasons related to the underwriter and reasons regarding the insurer.
Reasons relating to the insurer
Sometimes the insurer decides to increase insurance premiums for all its policyholders, or sometimes only for some of its policyholders, for example in a defined geographic area. This decision often comes after a political and commercial decision by the insurer. For instance, if there is an increase in medical costs in certain developing countries, but also climate change which leads to an increase in medical claims.
Reasons relating to the insured
First, the profile of the insured and his background are considered in the assessment of the premium. Then the main reason for this increase is age – the older you get the more likely you are to get sick. These risks are therefore included in the risk calculation of your premium each year.
There are therefore as many criteria that make it possible to determine insurance prices both on the side of the insured and the insurer.
A good insurance company will always make sure that you get good value for money. You will need to research and compare insurance companies to note their premium increase over time, see if they provide flexible options and check other important considerations.