What makes up an insurance premium

With some things we purchase everyday little thought goes into the components of price. Why are apples 99 cents a pound when they literally grow on trees? Can I buy those peaches without the can to save money? How much of my purchase at Walmart goes to simply keeping the lights on in there? We get used to a standard price for a good or service, regardless of its justification but I think it's important to sometimes look a little deeper.
 
The price you pay is more than premium but is actually made up of a few things: premium, fees, and taxes.
 
Premium is a rate, usually a simple % of something. The 'something' depends on the type of business you are in or the type of policy. For example, a cleaning company will probably pay a premium based on a % of payroll while a retail store would probably pay a % based on sales. The rate itself is filed by each company with the state Department of Insurance, who has to approve it. This moderates insurance prices and profits statewide to protect the consumer.
 
Inside that premium are several components: expenses, losses, and profit. The goal is to minimize expenses, guess the losses, and thus make a profit. Expenses refer to company expenses such as keeping the lights on, paying the customer service people, postage for all that paper they send you, and so on. Profit is what's *hopefully left over once the losses are realized. The loss number is the real unknown here but insurance companies have it down to a science, called Actuarial Science, which is an actual thing that employs thousands of people.
 
Actuaries and their departments are employed right now trying to predict the claims an average driver will have in any given year. They have gotten so good that they can predict the likelihood of a driver getting in an accident based on age, gender, credit, relationship status, employment, and more with extraordinary statistical accuracy. Your insurance agent asks you all those questions on the application because it actually matters, go figure right?
 
The same logic applies to all lines of business, not just teenagers and car accidents (which is more of an inevitability than a likelihood). The age of a commercial building, the year the roof was put on the house, the size of your dog, and years experience of a contractor are all taken into account. It may feel creepy but it also ensures you don’t pay more than you need to protect from the risks in your life. In that sense, insurance is a very personal product that applies to all people differently.
 
Your insurance agent is the packaging, the safety label, and instruction manual for your insurance products. There are so many agents they  can seem to grow on trees, but I believe they still provide a vital function. Sure it could be cheaper to one day lose the packaging on insurance products and buy directly from the company but consider the risks: there would be little guidance on what is covered and what isn't, no warnings on potential gaps in protection, and no help if something goes wrong.
 
Flood, homeowners, condo, contractors, and business insurance are all unique, shouldn't the service you receive be unique to you? We strive to do more for you and give you the individual attention you deserve while choosing the right insurance product to protect what's important to you.
 
The views expressed here are the opinion of the author and do not attempt to make any recommendation for insurance coverage. Eligibility is determined by the insurance carrier and not all applicants will qualify. Please contact your licensed insurance agent regarding your area's coverage and eligibility.