One of the most common questions any insurance professional receives is "how much". In this post we are going to explore insurance pricing to get a better understanding of why insurance costs as much as it does.
Insurance pricing has three objective:
1. Pricing should be high enough to prevent the insurer from going bankrupt.
2. Pricing shouldn't be excessive so that consumers are not paying too much for coverage.
3. Pricing should be based on underwriting principles that are fair and non discriminatory.
How is pricing determined?
Actuaries analyze past data in order to categories risks into similar categories. This information is used to determine a "rate" which is directly correlated with insurance pricing. In property insurance a rate is calculated for every $100 in coverage purchased.
For example: If a house or building is worth $1,000,000 and there is a .10 cent rate, we would calculate the insurance premium as follows:
$1,000,000 / $100 = $10,000
$10,000 X .10 (rate) = $1,000
This house or building would cost $1,000/ year to insure the property. Keep in mind this pricing would not include other coverages such as general liability or contents located in the building. The final pricing for an insurance policy is a combination of rates allocated from different coverages that have been purchased.
What do you think?
The Base Team
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