What’s in an Insurance Premium?

Posted: by David Bailey

Congratulations on getting this far. I’m guessing there’s a lot of people who see the headline insurance and can’t turn the page quick enough! But read on and you’ll find out more about what affects your premium.

It all started about 4000 years ago when ancient Chinese and Babylonian traders decided there was too much risk in losing a boat load of their precious cargo in rough seas, so to spread the risk they decided no one boat should be loaded with a specific product and instead, each boat had a variety of loads. A couple of thousand years later the Babylonians developed a system which was recorded in the famous Code of Hammurabi, c. 1750 BC, and practiced by early Mediterranean sailing merchants. If a merchant received a loan to fund his shipment, he would pay the lender an additional sum in exchange for the lender’s guarantee to cancel the loan should the shipment be stolen or lost at sea.

“Modern” insurance companies started with issuing a “Fire Mark”. The fire mark would sit above the front door of a house or would be a tile embedded below the front entrance. Insurance companies ran the fire brigades at the time and when the fire bell was rung the brigades would rush to the houses and check the mark as one of their own. If it was they would fight the fire, if it wasn’t…well.

The relationship with Insurance Companies continues today with “Fire Service Levy” tax imposed on insurance premiums. This tax is significant (33% on business policy fire premiums and 18% on home insurance fire premiums). The good news for policy holders is that, effective July 17 the tax has been scrapped and will be replaced with a property based tax. Keep an eye on your premiums next year because, barring any major catastrophes, they should be heading south.

Speaking of catastrophes, why do they impact on our insurance? Premiums are dominated by re-insurance, this is where our Australian insurance companies have to cover themselves and in order to do this they have to go to bigger worldwide companies. These companies charge a percentage to take on the excess risk, which in turn gets passed onto us. So that means that catastrophes such as hurricane Katrina, which cost insurance companies a whopping US$72 billion, will impact our local insurers and therefore our premiums.

So even though we may have a good year without major floods or fires within Australia it doesn’t always mean that your premiums will stay the same. As a global community we are much like the ancient traders who joined together their cargo to spread the risk of losses.
Next edition I’ll have some tips on how to get your policies right

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