Understanding insurance premiums

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How do insurance companies set rates? Why do my premiums sometimes change? Why do different companies’ quotes differ so much? Why can’t the whole thing be more straightforward?


Premiums are calculated based on risk

As discussed in Back to Basics:  What is insurance?, those that represent a higher risk will pay a higher premium and those that represent a lower risk will pay a lower premium. It is your insurer’s job to make sure your premiums reflect the risk.


For example, someone with a history of heart disease will pay more for their life insurance than someone in perfect health. And someone that lives in an area prone to sewer backup will pay more for their home insurance than a person living in an area thatis not prone to sewer backup.


Within reasonable limits, some of which are prescribed by law, your premium is calculated to reflect the probability that you will make a claim; that is, that you will draw funds from the insurance pool.


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Insurers take many factors into consideration to determine the likelihood that you will make a claim. A common misconception is that a policyholder who has never made a claim should pay less, little, or nothing for insurance. While it is true that past claims history is important, a more reliable indicator of how likely a person or business is to make a claim is the statistical group to which he/she/it belongs.

–  Insurance Bureau of Canada


Premiums depend on a number of risk factors

Factors that influence insurance rates


  • Building material and construction
  • Replacement cost
  • Whether the area is prone to water losses or wind damage
  • Neighborhood crime rate
  • Special collections or valuable items in the home
  • Proximity to a fire station
  • Applicable discounts and the level of the deductible



  • Statistics for the area you live in
  • Whether you commute to work
  • Personal or commercial use
  • The year, make, and model of your vehicle
  • How many tickets you’ve had
  • past at-fault insurance claims
  • How many years you’ve been driving
  • Various discounts
  • How much coverage you wish to purchase and deductibles you choose


Higher costs lead to higher premiums

Our economy influences insurance premiums in addition to individual rating factors. Increased court awards, towing fees, repair costs, insurance fraud, the frequency and severity of storms, etcetera influence insurance ratings and thus the calculation of premiums.


There are so many factors at play when determining insurance rates. By understanding the basics of how premiums are calculated you’ll be able to choose the coverage you need at a price you can afford.



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