The basic principles of insurance

Here are some of the principles that govern auto and home insurance and some answers to explain what they're based on.

The insurance policy: a contract between you and an insurer

For a fee (or a "premium"), a contract is signed between you and an insurer of your choice. This contract, or insurance policy, allows you to protect your property from sudden and accidental disasters which can occur and be very costly. When you experience a loss and make a claim, your insurer uses the premiums paid by all of its customers to compensate you.

The premiums paid by all policyholders are used to pay the indemnities of those who will have accidents or suffer claims.

Predict future claims

The insurer uses past events, the number of claims and the amount paid as well as other information to anticipate the number and amount of claims it will have to reimburse the following year.

This data influences the premiums charged to all of its customers, whether they have made claims in the past or not.

The premium as a reflection of the risk

When setting your insurance premium, your insurer also takes into account various factors related to the likelihood of you sustaining a loss and making a claim.

Some examples:

• Being a good driver: the insurer checks how many accidents you have had in recent years;
• If the vehicle you are driving is at risk of being stolen according to statistics;
• The number of kilometers you travel per year;
• Where you live: in an area at risk of theft or sewer backups? In a rural area without a fire department?
• Materials used for the construction of your home, such as wood or brick;
• The heating system you are using.

These are all factors that make you more or less at risk of sustaining a loss, of being involved in an accident or of making the loss costly. There is also the value of the property to be insured and the coverage you choose that enter in the equation.

To learn more about all the factors that influence the amount of premiums:

• Factors that determine the cost of your auto insurance premium
• Factors that determine the cost of your home insurance premium