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Understanding insurance premiums

Discover some of the factors affecting the price of your premium
Have you ever wondered what’s included in the amount you pay for your insurance? We want to help you understand your insurance premium, what it consists of, and the factors that can influence it.

What is an insurance premium?

Your premium is the amount you pay for your insurance policy. Each premium consists of a base premium and mandatory government charges. 

Your base premium is the starting point for calculating your premium. Insurers work this out by deciding your likelihood of making a claim and its potential cost. It also includes any optional covers you add to your policy, like Portable Contents, and any adjustments or discounts you may qualify for.

Costs and charges included in your premium

Here’s a breakdown of the types of costs that may make up your base premium.

Cost of claims

Insurers use risk factors to consider the likelihood of a claim being made during your period of insurance, as well as the type of insurance you’ve chosen. 

Reinsurance costs

Insurance companies also need to purchase their own insurance, known as reinsurance. Specialist insurance companies provide reinsurance to help insurers pay for claims caused by major disasters such as bushfires.

Commission

If you purchase insurance through your financial institution, they may receive a commission. The commission amount can vary and is usually a percentage of your premium.
Here’s a breakdown of the mandatory government taxes and charges that are added to your base premium.

Emergency services levy (ESL)

Insurers must pay the ESL, also called the fire services levy (FSL), each year for policies issued in NSW. Insurers pay this levy to the NSW Government to help fund the emergency services.

Goods and service tax (GST)

The Australian government applies this federal tax to most goods and services, including insurance.

Stamp duty

Stamp duty is a tax charged by state governments on certain transactions, like buying a house or a car. It’s charged on insurance policies and varies from state to state.

What affects your premium?

Choose your insurance type and find out how insurers work out your premium and why it can change.
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Frequently asked questions

Your premium is the amount you pay for your insurance policy. It’s paid into a shared pool of funds that’s used to pay claims, and expenses to run the insurer’s business. To determine a premium, insurers consider certain factors relating to each policy holders' circumstances and their likelihood of making a claim.
All insurers have a base premium. It’s the starting point that helps them determine the cost of insurance coverage for their policyholders. 

The law requires all insurers to include these charges to fund various government initiatives. Insurers forward these costs to the necessary government organisations. Here are some examples:

  • In NSW, the emergency services levy (ESL) or fire services levy (FSL) supports the essential work of the emergency services.
  • Goods and services tax (GST), a federal tax that’s applied to most goods and services including insurance.
  • Stamp duty, also known as transfer duty, is charged on certain transactions, like buying a car or a house, or on insurance.

Reinsurance is specialist insurance for insurers to help cover the cost of claims for major disasters like bushfires or floods. 

By transferring a portion of their risk to a reinsurer, insurers can manage risk more effectively. It means they can offer more comprehensive coverage knowing they have the financial backing of reinsurers. In fact, insurance regulators require all insurers to maintain a certain level of reinsurance cover. 

Reinsurance works in the same way as your car or home insurance. The number of claims paid by the reinsurer, impacts the premium insurers pay for their policy.

Unfortunately, Australia has experienced a number of natural disasters over the past few years. This has caused reinsurance costs to go up.

There are a number of risk factors that influence your premium. If insurers believe your risk of making a claim is high, your premium is likely to be higher than someone with less risk. As everyone's level of risk is different, each insurance premium can be different. Insurers need to balance the risk involved in providing cover for each policy holder or situation.