Hello, friend LigaAssurans.com! We’re delighted to welcome you back to our trusted information channel, which discusses various aspects of risk protection. Many asset owners find property insurance quote sheets confusing. Countless numbers, percentages, and technical terms like…sum insured, deductible, and endorsement Insurance coverage can often feel complicated and confusing. As a result, many focus solely on the final premium figure without understanding how it’s calculated, potentially leading to future financial losses.
Understanding how to fundamentally calculate property insurance premiums will empower you as an asset owner. You’ll be able to identify reasonable premiums, negotiate better terms, and ensure you receive optimal protection without overpaying.
This article is a property insurance guideThe most comprehensive guide, guiding you through every step of premium calculation. We’ll thoroughly explore each component, provide practical examples, and explain why expert help like L&G Insurance Broker is invaluable in simplifying this complex process.
Step 1: Determine the Accurate and Precise Sum Insured
This is the foundation of the entire premium calculation, and mistakes at this stage can be fatal.Sum Insuredis the maximum amount an insurance company will pay in the event of a total loss to your property. Premiums are calculated based on this value, not the property’s market value.
Why is Insurance Value So Important?
The most common misconception is equating the insured value with the market value of your property. Market value includes land price, strategic location, and other external factors irrelevant to the cost of rebuilding. What you need to insure is the physical value of the building, not the land.
Memahami Replacement Cost Value (RCV) vs. Actual Cash Value (ACV)
These two concepts are very important in determining the insurance value:
- Replacement Cost Value (RCV):This is the cost of rebuilding your property from scratch, using the same materials, design, and quality as its current condition, without accounting for depreciation. RCV is the best option because it ensures you can rebuild your property to its original condition after a total loss.
- Actual Cash Value (ACV):This is the replacement cost minus depreciation. Depreciation is calculated based on the age and condition of the property. For example, if your roof is 15 years old, compared to the average age of 25, the insurance company will consider the roof’s value to have depreciated by 60% and only pay the remaining 40% of the replacement cost. Using ACV will lower your premiums, but it will leave you with a significant gap in funds when filing a claim.
Method for Determining Accurate Insurance Value
- Cost Per Square Meter Method (Replacement Cost):This is the most common method. You need to find out the average construction cost per square meter in your area. This cost includes:
○ Basic material costs (concrete, steel, wood).
○ Labor wage costs.
○ Architect and permit fees.
○ Demolition costs if the loss is total.
○ Practical example:If your property is located in Jakarta and has a building area of 300 m² with an average construction cost of IDR 9 million/m², then your insured value is 300 m² x IDR 9 million =Rp. 2.7 billion.
- Professional Appraisal Services (Appraiser):For unique or historically significant properties, using a professional appraiser will provide the most accurate estimate. They will conduct an in-depth survey, considering any unique features and architectural details not found in standard properties.
Dangers of Underinsurance and Overinsurance
- Underinsurance: This is the most common and fatal mistake. It occurs when you insure a property below its actual insured value. The insurance company will apply a pro-rata clause This means you’ll only receive partial compensation for the loss. If your property is worth Rp 2 billion but is only insured for Rp 1.5 billion, the insurance company will only pay 75% of any claim filed.
- Overinsurance: This occurs when you insure your property above the actual insured value. This won’t provide any additional benefits in the event of a claim, as the insurance company will pay out the actual loss, not the insured value. You’ll simply be wasting money by paying excessive premiums.
L&G Insurance Broker have access to the latest development data and can help you calculate the most appropriate Insurance Value, avoiding the risk of detrimental underinsurance and overinsurance.
Step 2: Understanding Premium Rate Structure and Risk Factors
The premium rate is a percentage applied to your Sum Insured to determine the base premium. This rate is a direct reflection of your property’s risk profile.
Key Factors Affecting Premium Rates
- Geographical Location: Location is the biggest risk factor. Insurance companies use highly detailed geographic risk maps to assess the potential for natural disasters such as:
○ Flood: Is your property located in a lowland or near a river?
○ Earthquakes: Is the property in an active seismic zone?
○ Tsunami: Is the property in a coastal area?
○ Crime Rate: Police statistical data is used to assess the risk of theft and riots.
- Construction Type and Material:
○ Fire-Resistant Construction (Class 1): Walls and roofs made of concrete, steel, and non-wood materials. Lowest rates.
○ Non-Fire-Resistant Construction (Class 2): Non-wooden walls, but wooden roofs and floors. The rates are moderate.
○ Wood Construction (Class 3): Wood-dominated buildings. Prices are the highest due to the extreme fire risk.
- Property Use: Premiums for commercial properties, such as factories or warehouses, will be much higher than for residential properties due to operational risks (machinery, chemicals) and the risk of business interruption.
Additional Coverage (Endorsements) that Affect Premiums
Any additional coverage you add to your insurance policy (which usually only covers fire and lightning) will increase the premium.
- Losses Due to Floods: Often a separate endorsement with a special rate.
- Damage Caused by Earthquakes, Volcanic Eruptions, and Tsunamis: Premiums are calculated based on seismic zones.
- Riots, Civil Commotion and Sabotage (SRCC): Important in high risk areas.
- Business Interruption: Premiums are calculated based on the estimated daily income that would be lost if the commercial property were unable to operate.
Step 3: Using the Basic Premium and Additional Cost Calculation Formula
Once you have the relevant Sum Insured and premium rate, you can use this basic formula.
Annual Premium Formula = (Insured Value x Premium Rate) + Administration Fee
Detailed Calculation Simulation Estimation
Let’s use a more in-depth example for a commercial property:
- Properties: Storage warehouse in industrial area, building area 1,000 m².
- Insurance Value (RCV): Redevelopment costs Rp 10 million/m². Total: 1,000 m² x Rp 10 million = Rp. 10,000,000,000.
- Desired Coverage:Fires, Earthquakes, and Business Outages.
- Premium Rates:
○ Basic Fire Rate as determined by OJK (for warehouses): 0.15%
○ Earthquake Additional Tariff as determined by OJK: 0.12% (moderate risk zone)
○ Business Interruption Surcharge: 0.05% (based on estimated revenue)
- Total Premium Rate: 0.15% + 0.12% + 0.05% = 0.32%.
- Additional cost:
○ Stamp Duty: Rp 12.000
○ Policy Cost: Rp 100.000
○ Others: Rp 15.000
- Premium Calculation:
○ Basic Premium = Rp. 10,000,000,000 x 0.32% =Rp. 32,000,000.
- Add Other Costs:
○ Rp. 32,000,000 + Rp. 12,000 + Rp. 100,000 + Rp. 15,000 =Rp. 32,127,000
- Total Annual Premium: Rp 32,127,000
Step 4: Identify Savings Opportunities (Discounts and Deductibles)
Premium calculations don’t stop at the basic formula. Several factors can significantly reduce the final cost. This is the most important step in saving on insurance premiums.
Deductible Tactics
Increasing your deductible is one of the most effective ways to lower your premium. Insurance companies offer premium discounts because you demonstrate a willingness to shoulder some of the risk yourself.
- Standard Deductible: Usually 10% of the claim, minimum IDR 500,000.
- Higher Deductible: If you increase your deductible, for example, to 20% of the claim or a minimum of IDR 2 million, your premium can drop by 15-20%. It’s important to have sufficient emergency funds to cover this higher deductible.
Proactive Maintenance Strategy
Performing regular maintenance on your property also indirectly reduces premiums. A well-maintained property has a lower risk. For example, cleaning gutters to prevent leaks or regularly checking electrical installations to prevent short circuits can reduce your chances of filing a claim.
The Crucial Role of L&G Insurance Brokers in Premium Calculation
While this guide provides a basic understanding, the actual calculation of insurance premiums can be quite complex, especially for commercial and industrial properties. This is where insurance comes in. L&G Insurance Broker become very valuable.
L&G Insurance Brokers are independent partners who represent your interests, not the insurance company. They will:
- Simplifying the Process: They will do all the complicated calculations for you, ensuring the Sum Insured, coverage, and deductible you choose are accurate and optimal.
- Comparing Different Offers: With access to dozens of leading insurance companies, they’ll provide you with transparent comparisons. This ensures you get not only the best price but also the best coverage for your specific needs.
- Negotiating for you: Due to their business volume and good relationships, L&G Insurance Brokers are often able to negotiate for more competitive rates and applicable discounts, which you would find difficult to obtain independently.
- Providing Expert Advice: They will recommend the property insurance policy that best suits your risk profile, helping you understand every detail, complex clauses, and exclusions.
Conclusion
Calculating insurance premiums Property doesn’t have to be intimidating. With a proper understanding of each step and the factors that influence it, you can make smarter decisions and potentially save thousands, even millions of rupiah annually. However, to ensure you get maximum protection at the most efficient premium, consulting with an expert is the best approach.
Don’t let concerns about costs keep you from protecting your valuable assets. Get clarity and certainty with expert help. L&G Insurance Broker We’re ready to be your partner. To find out our premium calculation estimate, please contact us at 08118507773.
