What are insurance premiums based on?

Insurance premiums are primarily determined by the risk associated with the insured property. Insurers assess various risk factors, including the likelihood of a claim being made and the potential severity of that claim. This assessment takes into account specific characteristics of the property, such as its construction type, age, safety features, and overall condition. By evaluating the risk, insurers can set premiums that reflect the anticipated costs of providing coverage.

While the other factors mentioned can influence premiums, they are often considered part of the broader risk assessment rather than primary determinants of the premium itself. The market value of the property can play a role in determining the coverage limit but does not directly dictate the cost of the premium. The history of the policyholder, including previous claims, may affect the premium as it relates to the risk they present, but it is not the foundational reason for the premium amount. The location of the property also impacts risk — for instance, properties in areas prone to natural disasters generally incur higher premiums — yet it is still encapsulated within the overall evaluation of risk rather than being the sole basis for premium calculation.