🧾 Understanding What Shapes Insurance Premiums

🔍 1. Nature & Level of Risk

The core idea in insurance pricing is simple:

Higher the risk, higher the premium.

If the chance of loss or the severity of loss is higher, the premium will be higher.

Example:
A firecracker factory pays a higher premium than a garment shop, because the fire risk is greater.

🎂 2. Age of the Insured

Age is a major indicator of risk, especially in life and health insurance.

• Younger people usually pay lower premiums

• Older ages attract higher premiums due to greater health and mortality risks

Age = Risk indicator = Pricing factor

🩺 3. Health Condition & Lifestyle

Medical history, current health condition, and family history influence premium.
Lifestyle habits matter too — such as:

• Smoking

• Alcohol consumption

• Adventure sports

• Obesity or sedentary lifestyle

Healthy life = lower premium
Risky habits = higher premium (loadings)

🧑‍🏭 4. Occupation

Some jobs carry more danger or stress than others.
Insurers classify occupations as low-risk or high-risk.

• Desk job → Lower premium

• Driver, pilot, construction worker → Higher premium

Riskier profession = More premium.

💼 5. Sum Assured / Coverage Amount

Simply put — the higher the coverage, the higher the premium.
However, large policies often benefit from per-unit cost reduction due to pooling.

Think of it like bulk pricing — more coverage, but priced efficiently.

🏠 6. Type & Value of Property (Non-Life Insurance)

In motor and property insurance, the build quality, usage, and value impact premium.

Luxury car vs. small car
High-rise office vs. small rural shop

Different assets carry different risks and repair costs → Different premiums.

📍 7. Location & Exposure

Where the insured lives or operates matters.

• Flood-prone areas

• High-crime zones

• Industrial fire-risk belts

Higher exposure = Higher premium

Location is often a silent but powerful pricing factor.

🛟 8. Safety & Risk Control Measures

Insurers reward safety-conscious customers.
When a person or business takes precautions, risk reduces — and premium can reduce too.

Examples:

• CCTV and alarms

• Fire extinguishers and sprinklers

• Healthy lifestyle commitments

• Anti-theft devices in vehicles

Prevention = better pricing.

📄 9. Policy Features & Terms

Premium varies depending on:

• Policy period

• Riders & add-ons

• Deductibles / excess

• Waiting periods

• Cash value features (in life insurance)

More benefits = Higher premium
Higher deductible = Lower premium

🧾 10. Past Claims Experience

A history of frequent claims increases premium.

Example:
A motor policyholder who files claims every year may lose discounts and face higher pricing.

Good claim behaviour = Discounts like NCB (No Claim Bonus)

📊 11. Actuarial Assumptions

Insurers use mortality tables, morbidity data, and loss ratios to estimate future risk.
These scientific calculations form the backbone of premium pricing.

Insurance is mathematics, discipline, and fairness.

⚖️ 12. Regulatory Guidelines

The IRDAI may guide or control pricing in specific products like motor third-party and certain health policies.

Rules ensure fairness, solvency, and consumer protection.

✅ Summary

Premiums depend on:

• Risk characteristics

• Age, health & lifestyle

• Occupation

• Safety behaviour

• Location & asset value

• Past claims

• Coverage structure

• Actuarial and regulatory factors

Better risk profile = Better premium

Insurance pricing is a balance between fairness to the customer and sustainability for the insurer.

🎓 Final Message for Advisors

When clients ask “Why is my premium like this?”, explain:

“Premium reflects risk. Healthy habits, safety measures, and fewer claims help reduce cost.”

Educate customers — it builds trust and credibility.