The amount of money that a person pays for his/her insurance policy is called the insurance premium. It is basically the amount charged by the insurance company to provide coverage. The insurance premium can be paid on a monthly, quarterly or yearly basis, depending on the insurance plan.

There are a multitude of insurance plans in the market and the premium charged on each of these plans can vary depending on a carefully calculated combination of factors.

## How are insurance premiums calculated?

To a large extent, the premium you pay is based on complex mathematical and statistical analysis. Insurance companies have an underwriting department that compile large amounts of data that could include information on age, income, health, area of residence. This data is then scrutinised to evaluate the probability of an individual filing for a claim. The higher the probability of a claim, the higher is the cost of the premium.

Let us take an example. A 22 year old driver of a sports car is likely to pay a higher premium on his or her auto insurance than a 50 year old driver of a family car – simply because statistics show that young owners of fast cars are more likely to be involved in an accident than a middle aged parent driving a slower car.

Similarly, if you are 22 years old with no history of any serious disease, you will pay a smaller amount as health insurance premium, than a 50 year old with a history of cardiac problems. Here too, statistics show that a 50 year old with a problem medical history has a far higher probability of falling ill and filing an insurance claim than a healthy 22 year old.

## Mortality and sickness tables

Insurance companies study large amounts of data and compile “mortality and sickness’ tables. These tables are based on gender, age and income related information (among other factors) regarding the probability of disease and death. Insurers use these tables to develop models that predict at what age an individual from a particular category could face major illness or die. Based on this data, they predict which customers have a high probability of filing an insurance claim. The premiums are then calculated based on these models.

So for example, a smoker is likely to pay a higher premium than a non-smoker simply because there is a high probability that the former will face serious illness that will require filing for insurance coverage.

## Example of factors influencing home insurance premiums

Let us take the example of home insurance. The premium you pay will be based on various factors that could include: