The appellate court upheld the High Court’s decision to bar the regulator from implementing the 2009 in guidelines in which IRA was seeking to set the minimum premium at seven percent of the value of a vehicle.
We look at what goes into determining the level of premiums that insurers charge customers for different classes of insurance such as motor, home and health and life insurance.
What is insurance premium?
An insurance premium is the specified amount that insurance customers, called policyholders, agree to pay in exchange for cover. The payment guarantees them financial compensation for damages or losses they may incur.
Insurers use the premiums they collect to provide financial compensation to policyholders in an event of a claim. Depending on the type of policy, an insurance company may require premiums to be paid monthly, quarterly, semi-annually, or yearly.
How are insurance premiums calculated?
There are several factors that influence the price insurers charge customers as premium. Generally, the cost of insurance policy depends on the customers’ risk, which in turn reflects how likely they are to make a claim. The more risks they pose to the insurer, the higher their premiums will be.
The premium level also depends on the value of what is being insured since items with a higher value will generally cost more to repair or replace. Depending on the type of coverage, insurance companies use different parameters in calculating premiums. They employ actuaries to determine the likelihood of a claim.
Depending on the type of cover being sought, information such as the age of the policyholder, where they live, their employment, medical history and habits such as smoking may be of interest to insurers.
Each insurer makes its own commercial decision when deciding how much to charge each person who wants to cover certain risks. Therefore, the cost varies per insurer.
What factors are considered when calculating insurance premium?
Insurers rely on data to price premium and this therefore varies from person to person even if the risk is similar.
For example, when covering a vehicle, insurers will review ones claims history, the make and model of the car, the value of the car, or even take into account if one has been at fault in other accidents or penalised for other traffic offences.
The insurer will also consider the drivers age and sex. This is because, based on data gathered over time, some demographics point to higher likelihood of claims than others. Many young drivers often pay the highest motor insurance rates.
Other key factors influencing the premium price includes how much cover the customer wants. Comprehensive policies require higher premiums than basic plans but offer broader protection.
For life insurance, such data usually determines the sum assured—the fixed amount that is paid to the nominee of the plan in the event of the policyholder’s death. Generally, younger people with a good medical history and healthy habits will be assigned as higher sum assured.
Why do insurers change the premium prices?
According to the Association of Kenya Insurers AKI, one’s premium is likely to change each time they renew their insurance, even if their personal circumstances do not appear to have changed.
AKI explains that this is because premiums are affected by many factors, including the cost of doing business and changes to the way ones risk has been assessed.
Customers may be rewarded for the changes they make to reduce their risk, such as installing a car alarm or car tracking system, installing smoke detectors or security cameras in their homes.
A higher claims ratio than initially assessed may prompt an insurer to reassess a customer’s risk and increase the premium.
However, other factors beyond the customer may make the prices go up. For example, insurers will often adjust premiums to keep pace with inflation
How can a customer lower their premiums?
Most insurers offer a discount to customers who pay their annual premium upfront, rather than in monthly installments, especially for general insurance, which is annual. This is because one-off payments lower administrative costs and allow them to invest longer for a return.
Customers can also lower their premiums by increasing their excess. This means agreeing to take on a certain proportion of the risk.
Some insurers may offer discounts such as no claims discount or if one has more than one policy with the same company. The premium may also drop if customers take steps to lower their risk profile.
