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Why do premiums change?
Insurance insights

Why do premiums change?

06 Apr 2022 4 mins read

Insurance is not immune from cost pressures, so sometimes premiums need to change. Premium adjustments respond to several different factors. Read on to find out what these are.

Landlord insurance. You know it’s necessary. But how often do you stop and consider how it works and what determines its cost?

Let’s start at the beginning – what is insurance?

Insurance is ultimately a risk transfer – you relieve yourself of risk (and worry) and pass it over to an insurer, for a cost. This cost is known as a premium.  A premium is made up of a base rate (this is the actual amount it costs to insure the property) and additional fees, such as government charges and administration fees.

How are premiums calculated?

Determining landlord insurance premiums is highly complex. It considers many factors and uses statistics and probabilities to determine the risk, along with the likelihood of claiming. These factors are analysed, and a premium is determined for the insurer to assume those risks.

Basically it’s all about risk. And an insurer will set the premium to reflect the risks posed. When the risk of accident, loss, theft or catastrophe is higher, often so too are the premiums.

Why do premiums increase and decrease?

Premiums are often influenced by what’s happening in the community at large (e.g. the level of claims, especially following a natural disasters). In recent years, re-building costs (materials and labour) has been a contributing factor to premium increases, along with increasing rents (the cost of renting a property in most states is more than it was a few years ago). The cost to replace a property that is damaged or destroyed today, will be greater than it would have cost to replace five or even just one year ago (this means sum insureds are higher). For these reasons, claims will cost the insurer more, so the premium will be higher.

Premium prices need to factor in the costs insurers incur (e.g. costs of running a business) or may incur (e.g. to pay out claims), in providing coverage and service. It is important to understand that insurers are businesses, and they need to set premiums so that their businesses are sustainable.

What factors affect your premium?

There are several factors that influence your landlord insurance premium. Factors specific to your property include:

  • Property address
  • Type of building, age, condition, construction materials and property size
  • Risk mitigation measures in place such as security
  • Type of insurance (building, contents or both) and type of policy (based on how the property is let)
  • Sums insured
  • Level of cover, including any optional extras
  • Price of rent
  • Property occupancy (rentals that are vacant for long periods may attract higher premiums)
  • Natural disaster risk (e.g. cyclone, floods, bushfire)
  • Personal and individual property claim history (previous claims and incident history)

Premiums are also impacted by other factors including:

  • Large-scale claims due to natural disasters such as floods, storms, bushfires and cyclones – in Australia, this is a leading factor in premiums increasing, as insurers may need to offset losses incurred by increasing premiums the next year to restore the balance between the pool of funds available to pay claims and the risk
  • Cost of claims the insurer (and underwriter) have paid to other customers and claims they expect to pay in the future
  • Repair and replacement costs (e.g. the cost and availability of materials and labour)
  • Inflation and changes in government taxes, duties or levies
  • Rent prices (with higher rents charged, payouts for loss of rent claims are also higher)
  • Insurer’s cost of doing business including regulatory requirements
  • Other commercial considerations such as investment returns or combating insurance fraud
To summarise…

At the end of the day, insurance is about protection against the unforeseen. If you value peace-of-mind, reliability and financial security, then the cost of transferring risk is likely to be very appealing. To determine the value offered by insurance, consider what would happen if your investment property was severely damaged or destroyed 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.

There’s no doubt determining landlord insurance premiums is a complex exercise, but at EBM RentCover we make sure our premiums are affordable and work hard to deliver reliable insurance solutions so that landlords and property managers feel confident the property is well protected and we can continue to offer the service and support our clients have come to expect from us. 

*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. 

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