We know insurance rates are confusing. That’s why we have created a simple guide to understand how it all works!
Your guide to the world of insurance
How does insurance work?
Insurance involves a group of people agreeing to share risks. When you buy an insurance policy, you join others who pay money to an insurance company that share a similar risk profile. The money is “pooled”, and losses and expenses are shared across the group.
When you buy insurance, you get a policy. That policy is a legal contract. It spells out exactly what you are buying; it lists what is covered and what is not. It lets you know how much you must pay (the premium) and how much you will have to pay to use the insurance companies’ services in the event of a claim (the deductible).
The premium is the price you pay annually or monthly. Insurance companies do three things with the money from your policy’s premium. First, they pool the money to pay claims. Second, insurance companies pay for expenses involved in selling and providing insurance protection. Third, insurance companies invest money.
The insurance company uses the money collected to pay claims that are submitted by those who have purchased insurance. By purchasing an insurance policy, you are paying for the peace of mind and financial security if something were to happen to your home, car or business. The insurance company is taking a calculated risk on you, weighing out the likelihood of you having a financial loss that they need to pay for.
How are insurance prices determined?
Determining the price of an insurance product is a complex process. Insurance can’t be priced like most products. This is because the money people pay is intended to help cover the costs of unforeseen events, such as auto accidents or fires. In this industry, premiums (the costs) are paid in advance, so the price must be determined before the actual costs are known.
While there are many factors considered in rate making, rates basically are dependent on two trends: the frequency of claims (how many) and the severity (cost) of each claim.
Unfortunately, insurance rates are not localized. Many insurance companies operate around the world, so major weather or societal events that result in insurance claims can affect all their policy holder’s rates. When insurance companies are profitable – that is, they have a low frequency to severity ratio – they can provide insurance to “riskier” clients, such as those who live in flood plains or who run a high-risk business. But when the frequency and severity of claims increases, insurance companies have tighter margins and are more reserved with their risk appetite.
What role does an Insurance Broker play?
Insurance Brokers sell policies for an insurance company. Brokers act on behalf of their clients and provide advice in the interests of their clients.
Insurance Brokers are trained professionals, who are aware of the terms and conditions, benefits and exclusions and costs of a wide range of competing insurance policies. It is their job to understand you, the client, and help to find the most appropriate coverage for your own circumstances.
Your insurance broker:
- Shops the insurance products for you. They then review all the options and provide you with the best price for the coverage options that you need (we call this, ‘going to market’ for you!)
- Connect with you to explain your coverage options. They will also ensure that all your personal information is correct and the coverage that we’ve found provides you with the protection that you need
- If you need to make a claim on your policy, your broker will assist you through the process and will liaise with the insurer on your behalf
Insurance brokers work with both individual clients and the insurance companies. If you think about the insurance supply chain, brokers are like a retail store. We have a wide range of insurance products available to you, and we have the expertise to understand their offerings and provide the best solution for your unique needs. And when something happens and you need to engage with your “warranty”, you connect with us and we facilitate your claim.
Have insurance questions? Your broker can help!
If you have specific questions about your premiums or insurance coverage - your broker is here to help. Reach out to one of our five offices to be put in touch with your broker or contact them directly. We can ensure that you don't get left in the dark when it comes to your insurance coverage.