The first step in calculating premiums is predicting how large a pool the company will need. Insurance companies employ actuaries to make these calculations. Actuaries analyze mountains of data to figure out how much the insurance company should expect to pay for claims over the course of the next year (or several years).
Based on that information, the insurance company knows how much premium they need to collect in total to ensure that they’ll have enough cash to cover their customers’ losses – also known as the loss ratio.
Of course, not every insurance customer pays the same premiums. Individual premiums are calculated based on the relative risk of insuring a home: customers who are very likely to draw from the claim settlement pool pay higher premiums than customers who are not likely to make any claims.
Basically: more risk for the insurance company equals higher premiums.