How insurance premiums are calculated

Have you ever wondered just how your landlord insurance policy is calculated? You are not alone. And unfortunately, the answer is not all that simple – but we hope this article will help.

First up, to understand how insurance premiums are calculated, you need to understand what insurance is. In brief, it is a risk transfer. You relieve yourself of risk (and worry) and pass it over to an insurer, for a cost. If something unexpected happens – and it is covered under the Terms & Conditions of your insurance contract – the insurance company pays you for the loss or damage. If you are a landlord, and your investment property is severely damaged by a fire, without insurance, you would be left to cover the rebuilding or replacement costs yourself. With insurance, you have a financial safety net.

So, when determining how much to charge for an insurance policy, insurers consider many factors (which we’ll list below) and use statistics and probabilities to determine the risk of insuring a particular property and owner. The likelihood of claiming is considered and a premium for the insurer to take on the risk is determined.

Generally, when the risk of accident, loss, theft or catastrophe is higher, so too are the premiums. And when the risks are lower, the premiums are too.

Whether it’s your own home or your investment property, an insurer looks at the specifics of the property – and the person taking out the policy.

Here are some property-specific factors insurers may commonly consider when calculating a premium:

• The address
• Local crime rate
• Natural disaster risk (e.g. cyclone, floods, bushfire)
• Type of insurance (building, contents or both)
• Sums insured
• Type of building (and property size)
• Replacement costs (building and contents)
• Age and condition of the structure
• Construction material and other characteristics and features of the property
• Risk mitigation measures in place such as security

When an insurer is considering the above factors, they are ultimately analysing the risk associated with each one. Take natural disasters as an example – when an insurer sees an increase in natural disasters, it means there is greater risk to investment properties. Increased risk means increased claims and increased costs (premiums).

For landlord cover, they may also consider:

• Policy type (how the property will be used)
• Price of rent
• Number of rental properties owned and covered
• Location of property

Aside from the characteristics of the property itself, insurers may also factor in:

• Level of cover chosen – including any optional extras
• Excesses payable
• Discounts for which the policyholder may qualify
• Claims history for the area
• Claims history of the person who is taking out the policy

Please note, the above is a very general list. All insurers are different and may consider some, all or none of the above.

The premium will also include government taxes (like GST), any state or territory duties (like stamp duty) or levies (like the ESL), and administration fees that come with offering insurance.

Breaking it down

When we break down a premium, it looks something like this:

Base rate + Government charges + Admin fees = Total premium (what you pay)

Base rate – the base rate cost is the underlying amount required to insure a property and is the cost the insurer believes is sufficient to cover the risk of insuring the property. 

Government charges – these are costs that are required by the government, including GST, stamp duty, and Emergency Services Levy, and ranges from state to state. NOTE: These are not determined by the insurer and are a requirement of the government.

Admin fee – this is a fee charged by and paid to the insurer for arranging insurance. At EBM RentCover, it helps to support the overheads of running the business and all the processes associated with our products and services including settling claims. The fee amount varies depending on the product and is noted on a client’s invoice.

There are other factors outside of those specific to the property being insured that are considered too. This includes inflation – but we look at that more in depth in a future article.

At the end of the day, we aim to make insurance attainable for everyone and we try to make it as cost effective as possible, keeping everything above in mind. If you have any questions about your premium, chat to our Expert Care team by calling 1800 661 661. 

*While we have taken care to ensure the information above is true and correct at the time of publication, changes in circumstances and legislation after the displayed date may impact the accuracy of this article. If you need us we are there, contact 1800 661 662 if you have any questions.