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How does insurance work and where do my premiums go?

August 27, 2014

Insurance has a long history, going back thousands of years. Even so, the foundation upon which it’s built hasn’t changed all that much: Insurance is based on the premise that the premiums of the many, pay for the losses of the few. In today’s world that means, the premiums you pay get pooled at your insurance company, and insurance claims are paid out of that pool of money. (As an aside, if you’re interest in the history of insurance, you might be interested the infographic, “A look at insurance through the ages”.)

For the latter question, “where do my premiums go?”, there are two ways this question can be answered: on a wider industry level as well as on an individual policy level. Let’s look at what happens to your premiums, after you’ve paid them first.

According to the Insurance Bureau of Canada here is how your premiums are spent:

“For every dollar of premiums gathered from policyholders, 53.1¢ go back to policyholders in the form of claims, 15.9¢ go back to communities in the form of various government taxes on insurance, 20.5¢ go to industry operating and regulatory costs and 10.5¢ go to industry profit.

These percentages are based on a 7-year national average from 2004 to 2010.”

Visually, this is how it looks:

It’s easy to see that the majority of your premiums are used to pay insurance claims.

In Ontario, where your insurance premiums go on an individual policy level is detailed in the policy itself and is broken down by coverage. Review your policy and you’ll see the premiums that are charged for mandatory Liability, Direct Compensation (the section that covers your vehicle if you have a not at fault collision) and Accident Benefits, as well as the premium charged for optional coverages like Collision and Comprehensive.

On my policy, for example, the premium breaks down like this: 35 per cent goes towards Liability, 25 per cent pays for Direct Compensation, 26 per cent pays for Accident Benefits, 9 per cent pays for Collision and 5 per cent pays for Comprehensive.

Visually, this is how my insurance premiums break down:

On your policy these percentages may be different as each driver and vehicle is different.

Only claims that are covered under your policy will be paid out. Review your policy with your insurance professional to make sure you have all of the coverage that you need, and if you feel like you’re paying too much, don’t forget to compare car insurance quotes to make sure you’re getting the best deal possible.

Ask the Expert. Anne Marie Answers

At InsuranceHotline.com, we get tons of questions from our customers on a range of insurance issues. Follow our Ask the Expert series featuring resident insurance expert Anne Marie Thomas as she answers your most frequently asked insurance questions. Do you have a question about your policy, coverage, or anything else? Ask Anne Marie by using the hashtag #AskAnneMarie and posting your question to our Facebook or Twitter page. Or email us at contactus@insurancehotline.com. Your question could be answered in our next #AskAnneMarie video.