GUELPH, ON, June 21 – According to a recent study conducted for The Co-operators, 66 per cent of Canadians find insurance “difficult to understand,” and 63 per cent are “unsure how premiums are calculated.” Yet understanding insurance basics is very important, as virtually every Canadian family has insurance of some sort.
“The findings are troubling, because insurance is an important financial planning tool and part of most household budgets,” said Kathy Bardswick, president and CEO of The Co-operators. “That’s why we are making a special effort to help Canadians learn more about the industry. We call it “Insurance 101.”
Insurance 101: how rates are set
The idea behind setting insurance rates is to make sure that premiums reflect the risk being insured. Basically, the claims histories of groups of people with similar characteristics are analyzed, and that information is used to determine rates. Setting rates for all types of insurance — from auto to home to commercial to life — is based on the same principle: the higher the risk and the higher the cost of settling claims, the higher the premium.
“Someone with a history of heart disease, for example, will pay more for their life insurance than someone in perfect health,” explained Bardswick. “And a factory that produces ammunition will pay more than a corner store.”
Home premiums depend on a number of factors, including:
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building material and construction;
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replacement cost;
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whether the area is prone to flooding or wind damage;
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neighbourhood crime rate;
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valuable items in the home;
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proximity to a fire station; and
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applicable discounts and the level of deductible.
Auto insurance rates will reflect:
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safety and theft statistics for the area;
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whether the client commutes to work;
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the year, make, and model of the vehicle;
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how many tickets and past at-fault insurance claims the driver has had;
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years of driving experience;
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available discounts;
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and, of course, how much coverage is purchased and the level of deductible chosen.
Statistics from hundreds of thousands of drivers are collected and analyzed to determine which factors are reliable indicators of risk. For example, explains Bardswick, “being involved in a number of accidents in the past few years doesn’t necessarily make you a higher risk or affect your premiums. But if it was determined that you were at fault in most of those accidents, you will be considered a higher risk and your premiums will reflect that.”
For insurance purposes, insurers, not police, determine fault in accidents. In some provinces, this is done based on legal precedent; elsewhere it is based on the government’s guidelines, known as “fault determination rules.”
Anyone wondering whether to submit a claim for a minor incident, or whether it will impact their premiums, should contact their agent or broker for advice. At The Co-operators, if you decide not to proceed with a claim and there are no injuries or convictions, your premiums will not be affected.
Every insurance company must prove to the provincial government that its auto insurance rates are statistically justifiable. A great deal of financial information and statistical analysis must be submitted before the government will approve proposed rates.
In addition to these specific considerations, there are many broader factors that affect insurance rates. Government regulation and taxes are two. The cost of health care is another — health-related claims paid out under auto insurance policies have more than doubled in the past 10 years. In fact, according to the Insurance Bureau of Canada, auto insurers pay more for medical rehabilitation costs than government health insurance plans or worker’s compensation. As these costs continue to rise, insurance premiums reflect the increased costs. Similarly, increased court awards, towing fees, repair costs, insurance fraud — and more frequent and severe storms — all make insurance more expensive.
About The Co-operators:
The Co-operators is a group of Canadian companies focussing on insurance, as well as investment products and property development. Owned by 33 Canadian co-operative organizations, The Co-operators provides insurance protection to more than a million Canadians. http://cooperators.ca/ .
