Insurance is a valuable product. Insurance provides peace of mind knowing you are protected against insurable losses that can impact your property. It may seem like an unnecessary cost, but when you experience a loss and you're insured for it, it can be a life saver.
That is why insurance is a way of offsetting potentially crippling financial impacts. There is a cost to insurance, which is commonly called a premium. This is the money you pay in order to be insured and is based on factors such as the cost for the insurer to administer your insurance, reinsurance, commission, and quality of the insurance product you purchase.
That is why getting to know how insurance premiums work is important in making the right choices based on individual needs. The following points will help you to learn how insurance premiums work and how you can save money, while ensuring your insurance provides the necessary cover.
Insurance premiums are the regular payments made by you to an insurance company in exchange for coverage against certain risks. The amount of the premium is determined by various factors, such as the level of coverage, the type of insurance policy, and the likelihood of the insured event occurring.
For example, in car insurance, the premium amount may be determined based on the driver’s age, driving history, the make and model of the car, and the area in which the driver lives. In home insurance factors such as location, the likelihood of natural disasters, and home rebuild costs can influence premiums.
Insurance premiums are typically paid fortnightly, monthly or annually, depending on the policy terms. Failure to pay premiums will result in the cancellation of the policy and the loss of coverage.
Insurance premiums are calculated based on various factors specific to the type of insurance policy, the individual policyholder and what is being insured. The questions that an insurer may ask when a customer is taking out a new insurance policy can help them to understand various risk factors associated with the insurance. Let’s look at how insurers calculate premiums for insurance policies.
Home insurance premiums are calculated based on various factors that assess the risk of insuring a particular property. Some of the main factors that insurance companies consider when calculating home insurance premiums in New Zealand include the following:
Car insurance premiums are calculated based on a range of factors. The main factors that insurance companies consider when calculating premiums include the following:
The following factors greatly impact insurance premiums:
Sum insured - Your sum insured is the overall amount your home is covered for. It is important that your sum insured reflects the cost of rebuilding your home, including costs like demolition, debris removal costs, inflationary pressures, and fees. Setting an accurate sum insured is essential and it should be reviewed each year to check that it’s still accurate. Don’t forget to factor in any renovations, extensions, or other changes to your home as well as increased building costs.
Reinsurance claims - Insurance companies often purchase reinsurance, insurance for insurers, to help manage their risk. However, if there are many reinsurance claims due to natural disasters or other events, this can increase the cost of reinsurance for insurers. These costs will be passed on to you as part of your insurance premiums, resulting in higher insurance costs.
EQC Levy - The Earthquake Commission (EQC) is a government agency that provides natural disaster insurance to New Zealanders up to a specific amount (insurance companies then top up to your sum insured). They provide some cover for:
a) natural disasters including; earthquake, natural landslip, volcanic eruption, hydrothermal activity, or tsunami; or
b) fire caused by a natural disaster; or
c) in the case only of residential land, a storm or flood.
The EQC levy, collected through insurance premiums, funds the EQC’s operations and claim payments.
FENZ Levy - Fire and Emergency New Zealand (FENZ) is a government agency that provides fire and emergency services to New Zealanders. FENZ is funded through a levy that is collected through insurance premiums.
Risk-Based Pricing - The goal of risk-based pricing is to help insurance companies accurately assess the likelihood of claims and set premiums that are appropriate for each individual customer. This means if the building or car are considered a higher risk, then you will pay a higher premium for your insurance.
Tax - The Goods and Services Tax (GST) is a value-added tax of 15% that is applied to many goods and services in New Zealand, including insurance premiums.
Natural disasters can increase insurance premiums due to the higher likelihood of claims and increased costs for insurers. However, the extent to which premiums are affected will depend on various factors, including the likelihood and potential significance of damage caused during a natural disaster.
The 2023 January floods in Auckland and Cyclone Gabrielle in February clearly show how insurance plays a key role in protecting families and businesses during natural disasters. There have been tens of thousands of claims lodged and both insurers and reinsurers will be paying towards the costs of repairs to the many impacted homes, businesses, farms and vehicles.
While insurance helps families and businesses recover, how do these events affect insurance premiums? There are three main ways in which natural disasters can affect insurance premiums.
The recent flooding and cyclone underscore the importance of having effective financial reserves and reinsurance protection that can cover these wide area disaster claims.
When insurers collect premiums, they use the money to cover the cost of claims, pay administrative and distribution expenses, and pay for reinsurance. Insurers often use premiums they collect in the following ways:
You should review your insurance policies periodically and adjust as necessary to ensure you get the best coverage at the best price. The following strategies can help reduce insurance premiums:
The information in this blog is of a general nature and does not constitute financial or other professional advice. Policy limits and exclusions apply - refer to the policy wording for full terms and conditions.