ConsumerInfo – Pricing Your Policy

By Sally Praskey, Editor, Insurance Canada ConsumerInfo

How do insurers decide what to charge for insurance? It's all based on what are called "risk factors." The more risk involved in insuring you, the more you will pay for your insurance. That's where underwriters come in. They decide on what terms to accept a risk, and then price it accordingly. For example, why might you pay more for life insurance than your next-door neighbor does, even though you have purchased the same kind of policy?

There could be several reasons: perhaps you are a smoker and your neighbor is not; maybe your occupation is considered more dangerous than your neighbor's (you're a stunt pilot, for example); maybe you like to indulge in what is considered a risky hobby, like skydiving; or perhaps you are much older than your neighbor, or your health is not as good. All of these are risk factors.

The same principle applies to your property. You may discover you're paying more for your home insurance than your neighbor is, even though you have the same kind of policy from the same company. Again, there's a logical explanation.

Perhaps you rent out the basement of your house, while your neighbor does not; maybe your house is larger in square footage than your neighbor's; or you have some valuable jewellery listed on your policy that your neighbor does not. And so on.

When it comes to home insurance, underwriters price a house according to several risk factors: whether it's occupied by the owner or by tenants; whether it's a single-family dwelling or has multiple tenants; the size and style of your house; and its location (how far it is from a hydrant and fire hall, for example). That's why your country retreat might cost more to insure than your suburban bungalow. Generally, insurance is cheaper on an owner-occupied single-family dwelling, because it is considered a better risk.

In underwriting personal insurance, like property and automobile, the company has already decided what rules it will use to determine if an applicant is eligible for insurance. A risk either fits the company's criteria or it doesn't. If your particular risk doesn't qualify, you will have to modify it to meet the insurer's standards, or shop elsewhere for your insurance, and probably pay a bundle for it.

Life insurance works in a similar way. You will be asked a number of questions on your application to determine your risk status. Risk factors for life insurance include: your age, whether you smoke, your medical history, and your occupation (just how risky is it?). If the company decides you are an acceptable risk, it will agree to insure you. If not, it will refuse the risk, or will charge more to insure you.

There are certain risks that no insurer will agree to cover, because the odds are too great that a loss will occur; for example, a river overflowing and flooding your home, or a volcano erupting and destroying property. Likewise, you may not be able to buy certain types of travel medical or health insurance if you have what is called a "pre-existing condition" – an existing or previous illness that the insurer believes is likely to worsen or recur.