Each insurance premium is determined using a countless number of variables: age, medical history, job status, and hobbies are only some of the factors that determine premiums. Despite the fact that carriers abide by the same principles, each insurer has their own method of calculating premiums.
Properly priced plans require large volumes of accurate information, collected over a number of years. What follows is a quick look at some of the factors insurers consider to calculate insurance premiums.
Below are some of the factors that insurers rely on when calculating insurance premiums:
- Age: A candidate’s age is the most important factor in health and life insurance.
- Scope: Comprehensive policies are more expensive. A basic car insurance policy that only covers liability is cheaper than a policy that contains collision and uninsured motorist coverage.
- Personal History: An insurance provider may consider factors including an applicant’s claims history, driving record, health, and lifestyle choices.
These are the most common variables used, however, insurers go into more detail to get the most accurate results.
Home Insurance Premiums Calculation
Insurers analyze previous non-natural losses in the policyholder’s neighborhood, such as break-ins or vandalism.
The quality of an insured property along with the systems inside plays a role in the premium calculation since some types of homes are more vulnerable to damage.
Data from flood maps and other similar sources are invaluable in helping to understand a property’s risk from various calamities.
Whether a house is permanently occupied determines premiums. For example, empty houses are more expensive to secure because there’s nobody to deal with possible issues that can turn into serious problems, such as leaks or break-ins.
How Carriers Calculate Premiums
Insurers employ actuaries who use complex calculations and statistics to underwrite risk and create insurance premiums. They often rely on ready-made software solutions that have pre-built functions. While these software tools are useful when a company is in the early stages of growth, after more information on various risks is collected, insurers quickly realize that there are other powerful ways to calculate premiums that aren’t available in these software solutions.
In other words, insurance companies inevitably outgrow their insurance software.
Therefore, in order to compete and capture market share, insurers must modify their premium calculations. Relying on these kinds of software solutions to do becomes increasingly difficult, if not outright impossible.
Business Rules Engines Drive Innovation
Insurers rely on business rules engines to experiment and come up with new ways of calculating premiums. A business rules engine is a powerful software tool that enables non-technical users to make complicated changes to their premium calculations without waiting for support from the IT team.
Rules engines run powerful conditional “if-then” statements that are used to model and manage complex premium calculations. Many rules engines can be added to existing insurance software in order to streamline their tariff modeling. As a result, insurers can make instant changes to their tariffs and get a leg over their competitors.