Insurance · Explainer
How your insurance premium is actually calculated
A premium is an expected claims cost plus expenses, capital charge and margin. Everything else is how insurers estimate the first part.
The short answer
- Rating factors are statistical proxies for claim frequency and severity.
- Excess choices and no-claims history shift the premium more than loyalty.
- A cheap policy is only cheap if the cover and exclusions match your risk.
Insurers pool risks and price each policy against the expected cost it brings to the pool. That expected cost has two parts: how often a claim is likely (frequency) and how large it is likely to be (severity). Every rating factor exists to estimate one of them.
The build-up of a premium
- Expected claims cost for your risk profile.
- Expenses: distribution, administration, claims handling.
- Cost of capital held against unexpectedly bad years.
- Profit margin, plus insurance taxes or levies.
What you can influence
Voluntary excess directly transfers small claims back to you and reduces both frequency and administration cost, which is why it moves the price. Security measures, mileage, and accurate occupation descriptions matter. Loyalty generally does not — and in several markets, pricing rules now prohibit charging renewing customers more than new ones for the same risk.
Read the exclusions first
Two policies at very different prices often differ in what is excluded rather than in service quality: escape of water, accidental damage, business use, unoccupied periods. The exclusions define the product.
Sources
- Insurance consumer information — National Association of Insurance Commissioners
- General insurance pricing practices — Financial Conduct Authority
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