How Insurers Calculate Premiums

Understanding key insurance terms is like learning the language of your policy—it helps you make smarter, more confident coverage choices. Your policies are full of important details, and as your trusted insurance advisors, we want to explain some essential factors that can help you avoid surprises at renewal time.

An insurance premium is the amount a policyholder must pay in exchange for coverage. Depending on the type of policy, an insurance premium must be paid monthly, twice a year, or annually.
 
Underwriting is the method insurance providers use to evaluate risk and set premiums.
 
The cost of premiums is based on the insurer’s underwriting criteria, the type of insurance, and the policyholder, which means rates can vary significantly from person to person. The following are some of the most common factors that influence premiums:

Auto Insurance

• Age: Younger drivers typically experience higher rates due to their increased statistical likelihood of getting into an accident.
• Driving Record and Credit History: Safe drivers with favorable credit tend to have lower auto insurance premiums. While any accidents or infractions in your driving history will cause an increase to your premium, the effects of past incidents will gradually decrease over time.
• Location: Insurers may consider where your car is garaged and how much you drive as potential risk factors. For example, driving in more metropolitan areas may increase your premium since these locations tend to have greater instances of accidents, theft, and vandalism.
• Vehicle Type: Vehicle characteristics, such as safety features, make, model, and cost of repair, can impact premiums.

Homeowners Insurance 

• Location: Homes in areas at a higher risk for severe weather or other types of losses typically have higher premiums.
• Rebuilding Costs: The more expensive it is estimated to be to rebuild or repair your home, the more expensive coverage typically will be.
• Claims History: Your insurance company will assess any claims you’ve made within a specific period, including those made at a previous residence. The types and frequency of these claims may impact premiums.
• Home’s Age and Features: Older homes typically cost more to insure because they may have features that are harder and more expensive to replace.
• Credit History: As with auto insurance, providers review your payment history and how much debt you currently have. Typically, the better your credit-based insurance score, the lower your insurance premium.
• Renovations and Updates: Improvements made to your home may increase your premiums if they increase its value. Additionally, repairs or updates made to your roof, electrical, or plumbing systems that increase safety or efficiency may qualify you for discounts. Always alert your agent about new home renovations and updates to ensure they can be replaced if damaged or destroyed.

Why Premiums Change Over Time Even Without Submitting Claims 

Premiums aren’t solely based on your personal risk. They are also influenced by broader economic and environmental factors. A season of severe storms can lead to a surge in claims, which puts pressure on insurers. To remain viable in the market, they may raise rates. Inflation plays a part as well. As the cost of repairs and materials rise, premiums often rise to match.

How to Lower Insurance Premiums 

Although many factors can cause your premium to increase over time, these strategies may help manage costs: 

• Bundling policies
• Maintaining a clean driving record
• Paying your entire annual or six-month premium at once
• Receiving electronic documents (i.e., paperless)
• Mitigating risks (installing security systems, updating your roof, performing regular maintenance, taking proper precautions before storms) 

We’re Here to Help 

We’re here to help you become fluent in your policy's language. We’ll help you explore what factors may be impacting your premium and advise you on how to make the best choices for your coverage.