What determines the cost of an insurance policy?

Written on the 4 September 2018 by Arrow

What determines the cost of an insurance policy?


There are a number of factors that determine the cost of an insurance policy. A cheap life insurance or income protection insurance policy doesn't necessarily mean it's an inferior one, and by the same token, the most expensive policy may not be the best to suit your needs.

The price of an insurance policy is generally a reflection of how the underwriter views the risk of you claiming on that policy. As each insurer will attribute their own measure of risk to each element of your lifestyle, personal habits and work situation, your overall risk profile can fluctuate between one insurer and another.

Assessing risk
One insurer can decide you are a greater risk than others, which directly impacts the cost of your policy.

The underwriter determines your overall risk by examining a number of factors, such as your age, gender, medical history, current health status, whether you are a smoker or non-smoker, your occupation, and your recreational activities.

Once you understand how many elements are involved in assessing an individual's risk, it's easy to see how insurers can arrive at a different figure when determining your overall risk profile.

Internal factors can influence the cost of your policy
From the insurer's side, there are also a few internal factors that can affect the cost of your policy. Larger insurers may be able to offer a more competitive rate because of their economies of scale.

If you already have another policy with the same insurer, they may offer you a better rate on any additional policies you decide to take out with them.

Also, if a company specialises in a certain type of insurance, the volume of business they do in that specific area may mean they can offer a lower premium to their customers than insurers with a broader portfolio of products.

Risky activities can add to the cost
Recreational activities can also result in variations in insurance quotes from one provider to another, as each insurer will attribute their own level of risk to each particular pastime.

Risky activities such as scuba diving, skiing, skydiving, bungee jumping, and mountain climbing, may add to the cost of an insurance premium.

Just how much each activity will add to the overall cost of a policy will differ from provider to provider, so shopping around to find out who provides the most appropriate cover for your particular interests could help you find the most comprehensive cover for you.

Insurers tend to categorise risky activities into three areas:

  • Speeds - i.e. skiing, motorsport
  • Heights - i.e. skydiving, bungee jumping
  • Depths - i.e. scuba diving

There are some insurers who do not offer plans for those deemed to be high risk, whilst there are others who offer plans specifically for those who take part in those types of activities. If you take part in a potentially high-risk activity, check if the insurer considers it to be risky and if it's something they will cover when you're looking to take out a policy.

It's important to ensure that any policy you take out meets your individual needs. If you're unsure of how much Income Protection Insurance or Life Insurance cover you need, talk to us today and get on your way to being covered.

First published: 30 October 2017


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