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When anyone applies for insurance, such as: Life; TPD; Trauma; and Income Protection; the insurance industry has to access the “risk” on the events applied for. This process is known as the underwriting stage. Age; occupation; health status; lifestyle habits; male; female and even any recreational pastimes can all play a role in what premiums cost.
Insurance has, for many years, maintained clear statistics on risk factors that lead to potential claims. Certain occupations have a greater risk of claim than others; therefore premiums are much higher for some than for others. In addition, other factors such as age; whether you smoke and current health status, the outcome on the actual premiums can be very different.
Once a policy has been issued and in place for 12 months, it then becomes known as a “renewal,” whereby the insurance company issues a renewal notice that states among other things, what a premium will cost for the next 12 months. Herein lay the reason as to why premiums increase. Now being 12 months older and given that age is a factor in what insurance costs. Premiums will increase due to this among other reasons.
The insurance industry automatically includes a CPI factor (consumer price index) sometimes also known as an “inflation protector” on all policies issued. This means the actual levels of cover – sum insured, will increase every year by the CPI factor. The insurance industry currently uses a % CPI increase in recent years that factor has been 5%. So age and CPI are just two of the reasons behind increases, along with lifestyle.
Occasionally, the insurance industry can also increase our premiums with a “rate” increase. This increase occurs when the insurance company has a “stocktake.” Insurance providers place all premiums-paid into one “pool of funds.” From this, they invest wisely, hopefully, into the stock market, achieving a good return. This “pool of funds” is where claims are drawn from for settlements. So the “stocktake’ is about taking a look at premiums-paid over a time period of say 10 years against “claim settlements” over the same time. If “settlements” outweigh the “premiums paid” and any investment returns, the insurance company will need to balance the book. This is passed on as a rate increase on renewal of each policy to help balance the books.
In the past three years, at least six insurance companies have undertaken a “stocktake” and indeed levied a rate increase due to increased settlements. From this it is evident that factors sometimes add up to increases greater than 20% on renewal. This is why our members need to have their policies reviewed annually. Our insurance department can advise you on what other options may be available at renewal time.