Sebaggala Faisal Lubwama- Market Development Officer at the Insurance Regulatory Authority of Uganda
When buying insurance, often the common question that arises is what determines the cost of premiums. Many assume they are being overcharged and therefore view insurance as expensive, while not appreciating the basis of these premiums.
Insurance premiums are not just arbitrary figures; they are a result of careful calculation based on risk assessment. When you buy a policy, you are essentially transferring your risks like a car accident, medical emergency, or the death of a loved one, to an insurer. In exchange, the insurer charges a premium that reflects both the probability and potential cost of those risks. This is why two individuals purchasing the same type of motor insurance may pay different amounts – the variation lies in the unique risk profile each person presents.
So how exactly are premiums determined? Among other factors, insurers primarily rely on principles of actuarial science: a discipline that uses mathematics, statistics, and financial theory to estimate risk and possible future claims. They consider the probability of these events happening, the likely cost of those events, and the expenses that would be needed to run their operations. They also consider investment income since insurers invest the premiums they collect, and this income helps keep overall costs within a manageable spectrum.
The price you are asked to pay is therefore a reflection of several moving parts, and not a random number. Several factors directly influence how much you pay for insurance.
In life and medical covers, age and health status are key: generally younger, and healthier persons pay less than older persons, or those with pre-existing medical conditions, since their risk of claiming is lower. Take an example: an individual purchasing medical insurance while already managing chronic conditions such as diabetes or hypertension will likely pay a higher premium than someone in good health, because their risk of claiming is significantly higher. Both are seeking protection, but the risks they carry are different, and therefore the cost of covering them differs.
For motor insurance, the type, value, current condition, and purpose of the vehicle can push premiums up or down. Similarly, in agricultural insurance, farm location, input costs, and expected yields matter. In essence, every premium is tailored to reflect each individual’s business or unique risk profile. By pricing premiums according to risk, individuals with higher risks contribute more, and those with lower risks pay less.
However, to prevent destructive price undercutting and ensure insurers remain financially stable to meet policyholders claims, the regulator sets minimum premium rates for which they must not go below.
For consumers, the key is to approach insurance with an open mind, and an understanding of how these prices are derived. Rather than focusing only on “how much it costs?”, it helps to ask “what risks you are transferring, and how valuable is the protection to you or your family?” When understood this way, insurance stops being seen as an expense and becomes an essential tool for financial stability and peace of mind.
As you think about buying your next insurance policy, remember that you do not have to navigate the process alone. There are various licensed insurance players which you can approach to provide objective guidance, answer questions, and help you understand your options before deciding on a particular policy. If in doubt, the Insurance Regulatory Authority of Uganda (IRA) can help clarify.
While insurance may sometimes seem complicated, at its core, it’s one of the most reliable ways of protecting what matters most: your health, your loved ones, your property, and your livelihood. Therefore, understanding how premiums are determined makes it easier to appreciate the fairness and value built into the system.
The writer is a Market Development Officer at the Insurance Regulatory Authority of Uganda.
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