Life Can Be A Risky Business. Why do I need Insurance? Sometimes those risks hit home – a car collision… your kitchen suffering water damage…your business being interrupted by vandalism or theft. At times like these, insurance is there to help us recover, get us back on our feet and provide us with peace of mind. You may even go years without needing to claim for something but trust me you will be grateful you took out insurance when the time comes.
How Does Insurance Work?
When people buy insurance, they put money into a pool with many others. The money they put in is called a premium. Some of that pool of money helps the policyholders who suffer a hardship (e.g., a home fire, a car collision or business interruption) in that year. Payouts for these hardships are called claims.
Because there are usually more people contributing to the pool than there are people making claims at any given time, there is enough to pay the claims. There is, and needs to be, enough money for large single claims (e.g., when someone is permanently disabled as a result of a car collision) or for a large number of smaller claims such as those resulting from a windstorm.
Why Do I Need To Renew My Policy Annually?
Your insurance policy is an annual contract (with some exceptions), so
the pool operates for only one year at a time. Your premiums and the premiums of others are based on a number of factors that all relate to how much risk is involved in the activity being insured. The insurance companies have to predict how much money they will need to pay
the coming year’s claims. It’s important to understand that your premiums do not build up over time.
How Is My Premium Calculated?
Calculating insurance costs is complicated. Insurers don’t know what the claims costs will be in any given year. That is why premiums have to be based on informed predictions about how much money may be needed to pay future claims. To make those predictions, insurers gather information that they know from experience will help them set fair but accurate premium prices.
Here are some things insurers use to determine car insurance premiums:
- Claims history (number of claims in the recent past and their cost)
- Driving record (history that could include collisions, convictions,
tickets, etc.) - Type of car driven
- Repair costs
- Collision and crime rate and where the car is parked in the day and night time
- Driving frequency and distance
- Additional coverage, deductibles and discounts
- Government regulations, taxes (including reimbursing provincial
health plans for treatment of victims of car collisions)
Here are some things insurers use to
determine home insurance premiums:
- Location of dwelling (e.g., crime and fire rates of residence location)
- Replacement cost of building and its contents
- Type of residence (single family home, apartment, etc.)
- Construction material used (brick, concrete, wood frame, etc.)
- Distance from fire hydrant, fire station, etc.
- Claims history (number of claims in the recent past and their cost)
- Additional coverage, deductibles and discounts
- Government regulations, taxes
DID YOU KNOW…?
- Insurance claims for Britains’ who suffer hardship from severe weather (water-damaged basements, sewer backups, etc.) are rising. Such claims cost nearly £8 billion or more each year
in 2009, 2010 and 2011. Learn more
at Directgov - Fraud causes car insurance premiums to rise. In the United Kingdom alone, the cost of such fraud is estimated to exceed £3 billion each year.
Without insurance, starting a business, buying a home or driving a car would present an unaffordable risk, since we would have to pay for any mishaps that took place. The bottom line: Britain’s economy
depends on insurance.