Risk and the role it plays in determining premiums

(Bertus Visser, Chief Executive: Distribution, PSG Insure)

The cost of living is increasing almost daily and most people have probably considered cutting their insurance premiums to save money.

The question is however: Does a cheaper premium offer value for money?

The value of an insurance policy only becomes apparent when one has a claim against it. This is when fast service, quick decisions and fair settlements make for satisfied clients, especially if they were properly informed of exactly what their policy offers.

Currently the insurance market is very competitive and excessive premium discounts are freely available. One may, however, not find the names of leading insurers under those that offer this type of discounts. These companies have been in the business of insurance for the past hundred or more years, and it is often the new players in the market that offer lower premiums in order to increase market share.

It is, however, wise to know how premiums are determined and not to rush into any decision to accept the cheapest quotation.

So how are premiums calculated?

When an insurer quotes a premium, it is the result of statistics gathered over many years. Let’s use a single storey standard construction residential home as an example. Over and above the building, the location, safety measures, unoccupied periods, renting thereof, and sum insured are considered when a premium is calculated.

Statistics are also employed to identify trends in advance. If claims and operational costs increase dramatically compared to the numbers provided, a premium increase may be considered. At the same token, premiums will be lowered when claims and operational costs decrease. The seasoned insurer keeps his finger on the pulse of his business, and premium increases and decreases are usually followed by the market. This trend is known as an insurance cycle.

Chance, probability and risk

These are the three elements are considered when determining a premium. In terms of short-term insurance, risk plays a decisive role in all premiums quoted.

Effective risk management is therefore extremely important. Insurers have a wealth of knowledge when it comes to the origin and prevention of risks. Furthermore, risks may be accepted, reduced or distributed. The insured decides if he wants to insure his vehicle, but not his house contents. Thus he decides whether to accept responsibility for his house contents or not.

Risks are reduced by applying risk management and elimination, for example by installing enhanced security equipment and adjusting procedures to remove unnecessary risk elements.

In the light of this, it is difficult to imagine that someone will cut a premium by 30% or more that has been calculated scientifically and without taking anything else into consideration.

Even though there are a huge number of insurance products on the market, the consumer should be very careful in obtaining the right product that suits his or her needs. Unless you have sufficient knowledge about insurance and the time to arrange it, we recommend that you use the services of a broker to compile an affordable and suitable insurance portfolio.

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