Why do insurance premiums increase?

• The cost of insurance can increase, and there are many reasons why
• There are a few things you can do to keep your costs down
• It’s important to consider whether you have the right cover, as things might have changed over the years

When you get an insurance renewal email or letter, you may notice an increase in the cost of your insurance.

And if your car insurance has gone up despite not making a claim or changing your car, or your home insurance has increased while everything’s stayed the same, you’re probably wondering why.

So, here are some factors that could affect the price you pay for insurance – and what you can do about it.

How are premiums calculated?

The total premium you pay for your insurance is made up of several components. Some are set by the insurer, and some are set by the government, such as the NSW Emergency Services Levy, the Cyclone Reinsurance Pool, GST and stamp duty.

What you pay will be based on your circumstances, the type of cover selected, your sum insured and any optional benefits you’ve included. Previous claims and the excess you choose will also affect your premium.

Think of it like a pool of funds

Put simply, insurance works as a pool of funds that people pay into. If you need to make a claim, chances are the amount taken from the pool will be more than what you’ve put into it.

Insurers need to make sure there’s enough money in that pool to pay out the claims they estimate they’ll get. That estimate is based on claims histories, statistics, and probability calculations, as well as natural disasters like floods and storms.

To be prepared for these unexpected events, it’s important to have adequate cover to protect your biggest assets – your home and your car.

What else affects the cost of insurance?

Inflation can also affect your premiums. Just as the cost of living increases, so does the cost of providing a service and the cost of a claim. This may be reflected in your insurance premium.

The cost of repairing cars has increased, along with the cost of builders and trades, meaning home and car repairs are more expensive than they used to be.

Changes in government taxes, which are a part of the cost, large-scale claims such as the East Coast floods, and investment returns will also have an impact. Premiums are typically invested to get better returns and ensure there’s enough money in the premium pool.

Car insurance factors

Car insurance premiums can be affected by things like changes in repair costs, availability and costs of parts, inflation, your car’s sum insured, and your claims history.

Another factor is market value. With the increase in second-hand car prices and parts over the past few years, the market value of your car may have gone up. If that’s the case, your premium may have increased to reflect this.

Changing your cover type (for example, switching from Third Party Property Damage cover) to comprehensive cover and/or adding optional benefits, such as hire car, can also change your premium.

Home insurance factors

Home insurance premiums can be affected by things like increases in the cost of replacement or repair, including materials and labour, inflation, and severe weather events.

Changes to your sum insured, type of cover, adding optional extras, or your claims history can also have an impact.

How can I reduce my insurance premium?

Look at your excess

If you want to keep your premiums down, you could consider increasing your excess. That is the amount you’ll need to contribute towards the cost of a claim in most cases.

For example, if your car was involved in a crash and you had an excess of $1,000, you’d pay $1,000 towards the cost of the repairs.

If you increase your excess to reduce your premium, it’s important to consider whether you’ll be able to pay the excess in the event of a claim.

Get the right level of cover for you

While the cost of almost everything is going up, you’ll want to have the right level of cover for the things you want to insure. It’s worth checking your current policy to make sure you’re not paying for benefits you no longer need.

To work out whether you have the right level of insurance, you may need to assess the value of your vehicle, or determine how much the cost of replacing, or demolishing and rebuilding your home will be.

This handy home insurance calculator can be used to give you an indication of what the estimated value may be. But these calculators are indicative only – you might want to consider a professional assessment, so you know what the actual cost may be.

Review cover regularly

To make sure you always have the right level of insurance for you, it’s a good idea to review your cover from time to time.

Circumstances change, so it’s important you’re not underinsured, and face significant financial risk in the event of a claim. You also don’t want to be paying more than you need to.

Pay annually

Another way of keeping your premium down may be to consider paying annually, as some insurers offer lower premiums for upfront payments.

In summary

With the cost of living increasing, we’re all looking at ways to cut back. And while it might be tempting to strip back your insurance cover, it may be worth considering whether you have adequate protection, should the unexpected happen.

If you need help understanding your insurance needs, or how to get the most value from your car or home insurance policy, talk to us and get a quote today.

Learn more about QBE home insurance or QBE car insurance.

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