Insurance is the transmission of potential risk from one person to the other in an exchange of a coverage payment. Insurance companies are the ones providing products, which they sell to individuals who wish to be insured.

A premium is the amount to be paid by the individual who wishes to be insured. The procedure basically includes an agreement between the insured person and the insurance company where the individual pays a certain amount of money with an assurance and guarantee that the latter will cover whatever expenses may be incurred in case of any damages or loss of the insured.

With insurance companies, different kinds of insurance products and packages are available. Along with them are different insurance rates that vary according to the coverage, terms, and agreements between the insured and the insurance company. The question then is how are these insurance rates identified? It is actually quite a complicated process. Complicated, in terms of insurance products are not the same as with the other buy and sells products that depend on the demand and supply, but rather the rates depend on the cost of the claims and losses, as well as the person and their demographics acquiring the policy.

The claims and losses are known as loss experience, which is understood to be the losses over the premiums, accumulated. Insurance companies together with the economic environment use the loss experience as a reference to the cost that they are expected to comply for claims in the future without sacrificing the costs of the business. Once the estimated cost has been identified, the rates are then computed in correspondence with different factors.

To further give a clearer picture on how rates are considered, let's dive into an example. Consider the interest rates of auto insurance. The vehicle drivers are grouped and classified to high or low risk based form the previous historical data on loss experience. Such as the driver is young or a teenager, is identified based from previous cases that most accidents are caused by motor vehicular accidents driven by teenagers. With this, teenage auto insurance plans have higher rates compared to that with the adult drivers, due to their likelihood to be in an accident.

As with auto insurance policies, interest rates can be controlled or reduced considering a lot of factors aside from the age.  This includes whether your car is brand new or not. Brand new cars have higher interest rates compared to older models. So if you are still a new driver, it would be very wise to buy a second-hand car rather than a new one to save some money with your insurance costs. You need also to consider proper driving behaviors like observing proper speeds while driving. . At the same time, avoid driving while under the influence of alcohol or drugs. The less trouble you can avoid with the law while driving, the better off you will be and the cheaper insurance rates you will have to pay.

There are lots of factors to consider when buying an insurance plan or policy. This applies not only to auto insurance plansm but also to other insurance policies as well. That’s why it is very important to discuss with your insurance agent, the coverage and the computation of the interest rates so will have a clearer understanding about what kind of policy you are receiving.