Is An Expensive Policy A Better Policy? (What Goes Into Insurance Pricing)

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If you’ve ever spoken to insurance agents from different companies, you would realize that there is a difference in the pricing even though the policy appears to be similar. Have you ever wondered what is the cause of that discrepancy in the pricing and are you being short-changed or overcharged?

In this article, I will explain to you the components that go into insurance pricing and whether or not it makes sense for you to pay more or less for a given policy.

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Generally, the price of insurance is a combination of the three main factors.

1. Probability of claim

The first factor of insurance pricing deals with the probability of a claim. Naturally, a higher probability of claim will result in a higher price and vice-versa.

That said, depending on the type of insurance coverage, I would argue that most insurers are dealing with similar numbers when it comes to the probability of claim as all of these statistics are affected by the law of large numbers.