Ever wondered what makes your insurance prices rise and fall? Quite simply, there are two forces at work in determining insurance prices – 1) risk and 2) supply and demand. Let’s touch on how these two factors influence the insurance market and in turn the individual insurance policies that affect you.
Risk and Insurance
Risk is probably the easiest market factor to understand. In essence, the more likely you are to need a payout, the higher your insurance policy will be. This risk is determined by the insurance provider. Typically, employees called actuaries study millions and millions of factors and past behavior to make assumptions about the risk profiles of their customers.
For example, if you buying health insurance your age is a primary factor in the cost of your insurance. That’s because as you get older, you typically require more medical care. This is a pretty obvious factor, but insurance companies don’t stop with just a few factors. In most cases, they analyze hundreds of factors. Things like your zip code, whether you rent or own, your sex, education level, employment and often other lifestyle choices that you make.
Sometimes insurance quotes from two different providers can be very different. That’s typically because the two providers are measuring your risk differently. For example, if you are applying for car insurance, one provider may place more weight on where you live (the risk of the area) rather than your age or past driving experience. Every insurance company uses slightly different factors to assess your risk. Finding a company that views your risk profile appropriately can often reduce your insurance rates.
Supply and Demand
Behind most insurance companies is a larger market that also affects insurance prices. This is the supply and demand of insurance in general. For example, if a specific market is found to be profitable and has laws established that make it profitable for insurance companies to write policies, then these areas will have many insurers competing for business and hence the prices will go down. The supply of insurance will increase and the demand will remain the same or go up slightly – that is economics 101 for a decrease in prices.
The opposite can happen in markets that become troubled with crime or other negatives like increased regulation or consumer-focused laws. In these areas, the insurers will often back away from underwriting and cause insurance prices to rise.
Furthermore, behind these insurance companies there is another market that helps insurers stay liquid and make the market more efficient. In fact, there are insurance markets similar to the stock market, where insurers and investors come together to buy, sell, write and trade insurance policies. Sometimes this is done by re-insurers and sometimes in a secondary insurance marketplace. If you are interested in reading more about how this part of the insurance market works you can visit an insurance news website, which can give you more insight into this type of market.
Overall, the insurance market is a very complicated market. Using simple concepts like this to describe the whole market is a good place to start, but if you want to really learn more, you may need to study statistics and economics.