How consumers can impact the cost of their insurance premiums

Understanding how premiums are calculated is key to saving. Picture: Independent Newspapers.

Understanding how premiums are calculated is key to saving. Picture: Independent Newspapers.

Published Mar 19, 2024


By: Siyakhe Masiye

Consumers often query the cost of their insurance premiums, questioning why an asset belonging to one individual may cost more to insure, in comparison to another individual who owns the same asset type.

The answer lies in the fact that premiums are determined according to an intricate and complex process of underwriting, which involves assessing each person’s unique risk profile. As such, understanding which factors influence a risk profile can help savings-conscious consumers make more informed decisions when purchasing assets and choosing insurance coverage.

An individual’s risk profile is an analysis of that person’s potential exposure to various risks and the likelihood of future insurance claims. Typically, the higher someone’s risk profile is, the more chances there are that they will need to pay higher premiums for insurance.

Unfortunately, there’s nothing that can be done to change demographics like age, which can affect the cost of a premium. However, there are many variables you can change, including certain lifestyle habits, how and where your asset is stored or secured, and how often you claim, as examples. Having insurance provides an all-important safety net when disaster strikes, but by taking extra precautions, you can significantly lower your risk exposure and save money in the long run.

Property insurance risk factors

In the case of property, which is an immovable asset, a person’s risk exposure would be determined primarily by their geographical location. Some of the aspects that contribute to this calculation include the level of crime in the area – properties in high-risk areas may often cost more to insure, as they represent a higher risk to insurers.

Another factor that would be considered is the property’s proximity to natural features such as rivers, lakes, mountains, and forested areas. This would in turn determine how susceptible that property would be to damage, or destruction caused by natural disasters like fires, storms, and earthquakes. Even areas that have high foot traffic such as bars or taverns, are also considered as high risks.

Examples like the extreme flooding that took place in parts of KwaZulu-Natal in 2022, for example, were eye-openers for clients and insurers alike. The floods resulted in large-scale soil erosion, threatening homes on hillsides and riverbanks. In one of the most extreme examples, part of an apartment block situated close to the sea collapsed into a heap of rubble.

With the effects of climate change due to become even more apparent as the years progress, these kinds of examples are likely to increase, making it even more important for people to consider the location of the properties in which they invest.

Apart from these considerations, certain lifestyle factors may also influence the cost of a premium. For example, someone who is a professional or hobbyist gamer may pay a higher home contents premium based on the significant cost of replacing specialised gaming equipment.

Decoding car insurance

Another practical way of understanding which factors could influence the cost of a premium is to look at car insurance. Here, a different set of circumstances are considered to determine someone’s risk profile.

Firstly, the make and model of the car will be considered, as certain models of cars are more prone to theft and other forms of road crime than others. Secondly, the car's age will also be considered, with newer cars costing more to insure given that they are more expensive to replace in the event of a complete write-off.

As in the case of property, the geographical location of a vehicle will also influence how much it costs to insure. Underwriters will look at where the car is being parked when not in use and the area(s) to which it travels regularly. They will also consider the conditions in which it is stored, such as behind an access-control gate, in a secure parking bay, or behind a wall with an electric fence, for instance.

Insurers will also often ask whether the car owner has installed security measures such as an alarm, anti-theft devices, and a location tracker. In some cases, having these kinds of security features installed in a car could reduce the cost of the insurance premium, given that these features decrease the probability of it being stolen.

History of the claims record

South Africans need to bear in mind that their personal claims history will also be considered by insurers when determining a premium. If you have a history of frequent claims or involvement in accidents, insurers may view you as a higher risk and adjust your premium accordingly.

This is because individuals with a higher likelihood of making future claims are more costly for insurance companies to cover. On the other hand, if you have a clean claims history with no reported incidents, you are typically considered a lower-risk client, and insurers may offer you lower premiums as a result.

It's important to note that even if you switch insurance providers, your claims history may still impact the premium you receive, as insurers often request this information when providing quotes. Therefore, maintaining a clean claims history by driving safely and avoiding accidents can help you secure more affordable insurance rates in the long run.

* Masiye is a spokesperson at MiWay Insurance.