What Makes Up Your Premium?
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What is insurance?
Insurance plays a vital role in the wellbeing of New Zealanders by ensuring protection against unexpected events and uncertainty. By safeguarding people from the financial impact when things go wrong, insurance acts as a safety net by effectively managing and reducing risks.
When you buy insurance, you transfer this risk to your insurer, who charge you a premium for providing cover for that risk. If an unexpected event occurs and is covered by your policy, insurance companies fulfill their commitments by paying claims and enabling New Zealanders to recover or replace their valuable assets.
Insurance offers people a sense of security against the uncertainty of future events and provides peace of mind to plan ahead without constant worry.
Risk reduction
Insurance protects against unforeseen events, mitigating the financial impact of occurrences such as vehicle accidents, natural disasters, and theft.
Financial stability
Insurance functions as a safety net, providing policyholders with funds to cover significant expenses in times of need, thereby ensuring a seamless recovery without financial strain.
Business continuity
Insurance compensates businesses for property damage, liability claims, and unforeseen events. This allows them to continue to operate and maintain stability.
Lessen stress
Knowing that one is protected by insurance reduces anxiety regarding financial losses and the unpredictability of future events.
Asset protection
Insurance protects valuable assets such as homes, vehicles, and personal property against potential damage and losses.
What is a premium?
A premium is the dollar amount that you pay for an insurance policy each year to protect yourself from unexpected events, like a car accident or a house fire. If that happens, your insurer helps cover the costs so you don’t have to pay for everything yourself.
What makes up my premium?
There are many factors that can have an impact on the amount of premium that insurers charge, such as what you’re insuring, your claims history and the cost of those claims, reinsurance rates and levies and taxes set by the government.
The diagram below provides a broad break down of how your home premium is made up:
The portion of your premium that your insurance provider will have calculated to fairly reflect the cover provided and ensure they remain sustainable, so they are there for customers when the unexpected happens. This accounts for roughly 46% of your premium.
Your premium also includes the costs of reinsurance, which is a global market that provides insurance for insurance companies. It accounts for about 20% of your premium.
The Fire and Emergency NZ (FENZ) levy is collected by all insurance companies on behalf of the Government and funds FENZ to deliver fire and emergency services to all New Zealanders. The FENZ levy makes up around 5% of your premium.
The Natural Hazards Insurance (NHI) levy is collected by all insurance companies on behalf of the Government and helps fund earthquake and other natural hazard insurance cover provided by the Natural Hazards Commission (NHC). The NHI levy makes up about 24% of your premium.
The Goods and Service Tax (GST) is a charge that is applied to insurance premiums and paid to the Government. GST makes up around 13% of your premium.
Insurance premium
The portion of your premium that your insurance provider will have calculated to fairly reflect the cover provided and the expenses that keep the company running and ensure they are profitable and sustainable and can support customers when the unexpected happens. This accounts for roughly 46% of your premium.
There are several factors which come into play when determining risks and rating factors:
- For vehicle insurance, rates factor in the motorist’s age, previous claims and make and model of your car among others
- Home insurance may be influenced by the materials used to build your home, the area you live in and weather and climate related events.
In recent times, premiums across the insurance industry have also been affected by inflation and rising costs for labour, materials and new technology.
Reinsurance
Your premium also includes the costs of reinsurance, which is a global market that provides insurance for insurance companies. It accounts for around 12% of your premium.
Insurers take out their own set of insurance policies to protect itself against the financial impact of one-off major events, like flooding, cyclones or earthquakes. Events like these can affect large numbers of customers and cost an insurance company billions of dollars in claims. Globally there has been more frequent and severe weather events causing an increase in claims and reinsurance costs.
Government levies and GST
Levies and taxes roughly account for around 43% of your premium. The main contributions come from:
The Natural Hazards Insurance (NHI) levy is collected by all insurance companies on behalf of the Government and helps fund earthquake and other natural hazard insurance cover provided by the Natural Hazards Commission (NHC). Insurance companies include them in the premium you pay and ensure they’re passed on to the Government. The NHI levy makes up about 24% of your premium.
The Fire and Emergency New Zealand (FENZ) levy is collected by all insurance companies on behalf of the Government and funds FENZ to deliver fire and emergency services to all New Zealanders. Insurance companies include them in the premium you pay and ensure they’re passed on to the Government. The FENZ levy makes up around 5% of your premium.
GST is a charge that is applied to insurance premiums and paid to the Government. GST is charged at 15% of the total amount owing so any increase to your insurance premium, including any levies charged, means you’ll also be paying more GST. GST makes up about 13% of your premium.
Some ways to manage your premiums
Increase your excess
One way to reduce the amount of the premium you pay is to agree to take on a certain proportion of the risk by increasing your excess. Many insurance policies allow you to specify an excess. In general, a higher excess will mean you pay a lower premium
Lower your risk
Many insurance providers will offer you a cheaper premium if you take steps to lower your risk. You may receive a discount on your home and contents policy if you have security devices in place such as window locks and deadlocked doors. In some circumstances, insurers may not offer you a policy unless you have taken reasonable steps to lower your risk.
Talk to your insurer
Providing additional information to the insurance provider about your specific risk may also allow your premium to be reviewed. You can also ask your insurer about how you might be able to lower your premium
Shop around
Each insurance provider will offer products that differ from those offered by other insurers, with variations in the coverage, the terms and conditions, exclusions and costs
Pay your premium annually
If you pay your premium by instalments, In some cases it may cost you more. If in doubt, talk to the insurance provider about your options.
