How insurance is priced

how insurance is priced
Setting a price for donuts? Simple. You know in advance what you’ll pay for ingredients and your bakery lease. The price you charge will cover these costs and allow for some profit. Setting a price for insurance? Not simple. Here, we break it down.

Setting a price before knowing the cost

When you—and hundreds of thousands of others—buy policies, the insurance company does not know in advance if you will file claims. Or how much they will pay out for those claims. It’s basically the only business in the world where the sellers set prices before knowing the costs. What they do know is… Money comes in from:

  • Customers paying premiums
  • Investments earning a profit

Money goes out to:

  • Pay customers who file claims
  • Pay employee salaries and other business expenses

And staying in business means that money coming in must exceed money going out. Now, this is quite the math problem. Multiple variables. Unpredictability. Hundreds of thousands of people. Millions of dollars. Who can take all these moving parts and make the premium pricing—and the insurance company—stable? Who can figure out a price that is high enough to cover the costs of paying claims, but low enough that people can afford it? Not too high. Not too low. But just right. Sounds like a job for Goldilocks. Nope. Sounds like a job for an actuary.

Did you just say “actuary”?

Yes. They’re the ones who slayed AP trig in high school. Today they work at insurance companies and slay stats and calc.They look at years and years of data from their own company and from sources like the Insurance Services Office (ISO), which collects information on losses from hundreds of insurers. They look at past trends in hurricanes, fires, crime rates, cost of living, and changes in population. They look at life expectancy in Maine vs. New Mexico.

They know what burglars steal in January vs. June. They know how often people have losses and how much these losses cost. They crunch the numbers and make their predictions. Then—and only then—they decide what pricing makes sense for the customer and the company.

Who double-checks their math? The state Department of Insurance.

When it comes to pricing insurance, the actuary may be the smartest one in the room. But even their work has to make the grade. Every state has laws and regulations to guide insurance companies, as well as a Department of Insurance to make sure they follow those laws. Insurers have to submit everything about their policies and their overall business to this department.

That includes customer forms, pricing calculations, and investment portfolio reporting. Every time the insurance company changes anything to a policy, they have to run it past the Department of Insurance in every single state where they sell insurance.

State laws require insurance premiums to be…

  • Adequate—large enough to let the company pay claims and expenses, compete with other insurers, stockpile enough money for the future (especially important for life insurance plans), and make a profit.
  • Not excessive—low enough that policyholders are not paying more than the actual value of the policy.
  • Not unfairly discriminatory—If you and your twin are vegan telecommuting librarians who live in the same small town, you should pay similar rates for insurance. If one of you starts a BASE-jumping business, expect a call from the insurance company.

Price matters. Terms and conditions matter more.

We all want a good deal. But when comparing insurance plans and trying to answer the question, “How much is renters insurance?” make sure you are comparing apples to apples—and not doughnuts. This is especially true with property & casualty insurance. The ads list several competing plans as if they offer equal protection.

But do they?

The plan with the cheapest premium might not cover you as fully as the others. If a gas explosion blows your 10-year-old sofa up into smithereens, will your policy reimburse you for the full amount you paid at purchase or make deductions based on depreciation? Or say your apartment becomes uninhabitable for two weeks due to a flood upstairs. Are you covered for business use of your home office? Don’t treat insurance like a commodity. Treat it like a promise. Read the terms and conditions of that promise (or ask us for help) before you buy.

What about Jetty Renters Insurance—how is that priced?

Jetty’s plans vary in price based on a variety of factors, including where you live, the types of coverage you have, the amount you’re covered for, and your deductible. Let’s break it down…

Where you live

This is one of those things that is, unfortunately, out of your control. Premiums vary in different parts of the country based on things like crime rate, historical claim activity, catastrophic exposure and your location’s fire protection rating (how well prepared your local department is to fight a fire).

If you live in a rural area far from a fire department or hydrant, then chances are you’ll have a higher premium than someone with a paid fire department around the corner and a public hydrant across the street.

Types of coverage

In a typical renters insurance plan, there are different types of coverage. Three common ones are:

  • Contents (your things)
  • Liability (when you’re personally responsible for damage to others’ property)
  • Loss of Use (if your home becomes uninhabitable because of a covered incident).

But it doesn’t stop there. In many cases, you can add even more protection. For example, with Jetty, you can add our Portable Electronics Power-Up, which protects you from things like shattering your phone screen.

Or, you could add our Bedbugs Coverage Power-Up, which helps to cover the cost of bedbug cleanup. Another option? Our Valuables Protection Power-Up, which covers extra expensive valuables, like an engagement ring. When you add these extra types of coverage, your premium and protection typically go up. When you remove them, your premium and protection typically goes down.

Amount of coverage

Each of these types of coverage has a different amount of coverage associated with it. So, for example, you could have $40,000 in Contents coverage, $200,000 in Liability coverage, and $10,000 in Loss of Use coverage. As those amounts of coverage change, so may your monthly premium. Want a higher amount of coverage? Your premium may go up. Want a lower amount of coverage? Your premium may go down.

Your deductible

A deductible is the amount of money you pay out-of-pocket before Jetty kicks in. For example, if you have a deductible of $500 and your couch was damaged because of a covered incident, you’d be required to put $500 toward your new couch, and then Jetty would cover the rest. The way your deductible affects your monthly premium is simple: As your deductible goes up, your monthly premium goes down—in most cases. This would not be the case if you’re already at the lowest-possible monthly premium based on all of the other factors above.

Why should I use Jetty?

With so many options out there, it can be hard to pick the right renters insurance provider for you. Here’s where Jetty stands apart:

Fast, easy experience through better technology.

Making the Member experience fast and easy to use is extremely important to us. We’re constantly working to design our platform so that you can sign up and get covered in under 60 seconds. We also make it easy to see exactly where you’re covered, so you can decide for yourself where you want to add extra coverage.

Affordable, customizable plans based on your needs.

We’ve made it easy for you to add and subtract coverage so you’re not paying for what you don’t need. Want extra protection for your portable electronics, like your phone and laptop? No problem—just add our Power-Up. Don’t want it? No need to add it. Plans start at just $5/month.

Modern coverage for modern renters.

When renters insurance plans were created long, long ago, people didn’t have smartphones and laptops. It wasn’t common to do things like drop and crack your phone screen, so the plans didn’t need to cover those incidents. Jetty is different—we take modern problems and build plans that aim to solve them.

So, Jetty is the one of the only insurance providers that has plan options to cover your cracked phone screen (something AppleCare and other insurance providers don’t cover), damaged laptops, and even bedbug invasions.

Get a quick quote from Jetty today.

Better, more affordable coverage from just $5/month.