What is an insurance premium and how is it calculated?
An insurance premium is the amount of money you must periodically pay to your insurer for coverage and its calculation is based on risk evaluation.
In order to determine the premium charged for a specific policy, insurance underwriters will employ statistical analysis and consider all the criteria that could increase a claim probability (e.g. young people are high risk) as well as the claim size (e.g. an expensive car). In this sense, the most commonly used criteria used by auto insurance companies to set policy costs are:
- Driver's age and occupation
- Type of the vehicle being insured (make, model, age, value, power)
- Location (where you drive and park your car)
- Driving activity (what do you use your car for, how often and how far you drive)
- Driving history
The range of considered criteria as well as their respective weights differ from an insurer to another. That's the reason why two companies might charge different premiums for the same type of policy.