Insurance is a form of risk management. When you take out an insurance policy, you are essentially transferring the risk of a financial loss in the event of an accident, injury or illness to an insurance company. The amount you pay for the insurance is referred to as your premium.
The parameter of how an insurance company calculates your rate depends on various aspects of the insured (such as age, location, credit score and coverage limits), but at its core, the premium that you pay is based on the potential risk and likelihood of making a claim.
Insurance companies calculate your rate using data from a pool of applicants. That information, called “actuarial data,” is used to determine the probability that you or your property will be involved in a claim. As a result, the company factors in the number of claims the average person in a pool of applicants makes over his or her lifetime.
The insurance company also considers the potential severity of the claim. The larger the claim is likely to be, the more expensive the premium.
Insurance companies regularly review their actuarial data to adjust their rates accordingly. Your rate may change over time if the assumptions used to calculate it prove to be inaccurate.
In addition to actuarial data, an insurance company may consider other factors when determining your rate, such as your driving record, the type of car you drive, any past claims you’ve made, and the type of coverage you select.
Ultimately, the rate you pay for your insurance is determined by the insurance company’s assessment of your risk.
