When insurers set premiums for your policy, we look at a range of different things that can affect the premium you pay.
As well as ensuring that we're collecting enough in premiums to remain a sustainable business, we also try to set prices as fairly as possible for our customers.
That means we need to strike a balance between pricing policies for risk, or pooling the risk and spreading the cost to make insurance affordable for as many customers as possible.
Many of the questions we ask our customers when they take out a new policy are designed to help us understand what we call 'risk factors' - the various elements of insurance risk.
We use two main sources of information to help us analyse how claims costs may vary based on risk factors: the claims we pay and risk models.
The claims we pay can help us estimate likely causes and impact of risk, like trends in the number of car crashes or burglaries our customers might experience and how much those claims might cost.
But other things are harder to estimate, and we use risk models to help us estimate the impact from these "known unknowns".
In New Zealand, a good example is earthquakes. If we based all our decisions solely on experience, then earthquake cover in Canterbury and Kaikoura would be very expensive but elsewhere it might be cheap or even free.
But we all know that an earthquake could potentially hit most places in the country, so we use external data (rather than just claims data) and sophisticated modelling techniques to give us a more balanced understanding of earthquake risk - one that is more aligned to the actual risk of a future quake.
Setting premiums based on either of these sources of information is what is generally referred to as risk based pricing.
So why do prices differ between insurers?
Insurers are likely to have different claims experiences that may mean they price differently.
Some claims have no underlying cause, so they are effectively "random". That means that although they can be priced for generally, they can't be allocated to certain types of customers. Instead, the cost of those claims is pooled and everyone has to pay for them.
Vero works with independent experts to model earthquake risk, but other insurers will use different independent suppliers when it comes to earthquakes or other risk modelling.
So while one insurer might think the biggest risk for earthquakes is Canterbury, another might say Wellington or Napier.
The way insurers underwrite – meaning the type and number of questions they ask and the information they gather on customers.
There are also differences in the way insurers define common risk factors. For example, your address might be in different 'risk areas' for different insurers depending on the claims experience they have had and the risk data or models they use.
Although all insurers think about level of risk when underwriting policies, insurers can have different approaches when it comes to how much the risk influences their price.
Some will set premiums based almost exclusively on risk, while others will smooth out premiums more to pool both risk and price.
At Vero, we've used risk based pricing for our insurance products for some time. But insurance affordability for our customers is also an important part of our pricing, and we use a variety of strategies to try and smooth out price changes for our customers and keep our products as affordable as possible.
We regularly sense check our pricing against things like our claims costs, and when large events such as earthquakes occur.
We want to be here for our customers in the long term, so we need to continually check that pricing across all our products is sustainable. But we're also here to help protect New Zealanders, and we want to ensure that insurance cover remains affordable for as many New Zealanders as possible.
If you have queries about your cover, or want to talk to someone about ways you could reduce your premiums, we suggest you talk to your broker. If you don't have one, you can look for a broker or adviser here.