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How are car insurance premium increases determined?
Friday, 13 August 2010 14:53
Car_Insurance_Premium_IncreaseCar insurance premiums increase each year as your insurer responds to market conditions. They keep track of all the claims that they pay out and the amount they pay, among other things, to determine how much they should charge by way of insurance premiums. They use the Incidence Rate and the Loss Severity to calculate this.

The incidence rate refers to the number of incidences and the type of incidences that occurred, such as theft, carjacking, accident, fire, and total write-offs. They will then determine how much money was paid out for each category (this is the Loss Severity). For example, if 3,000 cars were stolen in the year and claimed for, the incidence rate is 3,000. The loss severity would be the total amount paid out for these vehicles is R3,183,000.

With this information, the insurance company can determine if the premiums they’re charging for theft, cover this amount with profit. If not, they will increase their premium for theft. This is how insureds often end up paying for other insureds claims.

While other factors determine your risk, such as your age, gender, use of the car etc, it’s the incidence rate and loss of severity that determine premium increase. The insurer can also use a comparison of incidence rates of the current year to the last year to determine whether a specific incidence is increasing, thus making it more of a risk.

If you want to cut down your insurance premiums, you can reduce your cover eliminating your risk, for example fire. Without this risk, you won’t be paying for other insureds higher risk for such an incidence.
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