Demystifying Insurance Premiums
As a customer with various insurance products, I know how it feels when a renewal comes along.
With high and sometimes increasing premiums for various products, it can be a real hit to the wallet to protect myself from something that may never happen. It’s a fine balance between giving myself and my family comfort should the worst happen, and carrying the burden of paying the premium. What gets me through is considering the burden of not being covered if the Rule of Murphy were to come along.
This reality check makes things a lot easier in my mind. I’d like to talk a little bit about what goes into a premium from an insurance perspective - an insider’s view, so to speak, that may help you understand more or even take better control over your insurance arrangements. Given that insurance is about covering loss or damage to an asset of some description, the process of setting a premium is all about making a determination on the probability of the loss.
In simple terms, how likely is it that this policy is going to get claimed on for the coverage provided. The less risk posed, the lower the premium will be in comparison to the rest of the portfolio of policies. To focus on RV insurance here, it’s a variant of vehicle insurance, with its own nuances of course, but generally similar. Here’s some points to consider:
Many factors play a part here, including age and driving history. The questions asked here are to predict risk, so insurance claim history for the driver/s will also play a role. As an example, if a portfolio of insurance business has had a large number of losses for 50 to 55-yearold drivers, and you’re 53, then this will be considered in terms of determining the risk.
Year, make and model. These simple details lead to more intricate assessments on origin of manufacture and construction type, both of which will affect repair costs. For example, a unit that is made of composite panels to keep weight down will be more costly and intricate to repair. By the same token, the lower weight means less risk, so all of these things will be considered.
Is it driven daily, irregularly or something in between? Is it being used for full-time travel, for long range travel over an undetermined period of time or for a few weeks a year for whenever the opportunity to take a trip presents itself? Is it being used on or off-road? All of these usage factors affect risk.
Where is the unit kept at night or when not in use? Is it on the street? Locked in a shed with great automated lighting and cameras monitoring? Is there a GPS tracker, wheel clamp or mobile surveillance camera available? The postcode and storage method are critical too. Again, if the insurance provider has seen a high number of claims for that profile of business, there will be a ‘loading’ effect, meaning a higher premium.
This factor is unique as it is the one that you have the most direct control over. Many insurance products allow you to choose your excess level to control your premium. In general, the higher the excess, the lower your premium. This is because you are committing to contribute more to the cost of a claim, if it were to happen.
The above is nowhere near an exhaustive list, but it should help with the key factors. It’s important to note that individual policy premiums feed into a ‘pool’, which then needs to respond to claims generated from any one person who has a policy that is part of that pool. So naturally, if the pool is affected in certain areas, for example with catastrophic weather events, premiums for some or all policies will go up during the next ‘cycle’ to ensure that the pool remains big enough to respond to a claim from any policy in the portfolio.
The pandemic is a good example of environmental factors that may affect an insurance portfolio. Labour shortage and lockdowns affected many insurers’ ability to repair vehicles. The combination of parts shortages and delays, along with a lack of workers to repair the assets, were and continue to be an issue, although this is steadily improving. When supply in parts is low, demand goes up and cost follows, meaning repair costs increase. The same pandemic saw overall demand for RVs increase in multiples, with lead times for delivery stretching out to two years or more in some cases. This shortage in new units has seen a bubble created in the used market, with significant increases in value as people scramble to get their hands on an RV to avoid the long delays. These increased values result in increased costs to replace or pay out total losses, which further impacts claims costs.
If you haven’t already, now is a good time to assess the insured value of your RV. If you cannot replace it, neither can your insurer, and you may be up for the shortfall to keep living the dream. If you do find a shortfall, compare that to a little extra in premium and the cost of an expert valuation; the result may surprise you!