How insurance really works and how to get the best deal

Insurance covers uncertainty, not certainty, and as Australians are discovering, that don't stop the price of premiums from rising. 

On February 18, 2025, NASA announced a one-in-32 chance that an asteroid could strike Earth on December 22, 2032. Nicknamed City Killer, the space rock measures up to 90 metres wide.

Projected to potentially hit Mumbai, a city of 27 million in India, the impact zone stretched from the eastern Pacific across northern South America.

NASA initially projected a 3.1% probability of impact - the same odds as flipping heads five times in a row. That raises an intriguing question: could you insure against an asteroid strike?

Surprisingly, some home insurance policies cover space debris, according to the comparison site Mozo. That said, it's worth checking your policy, as some may only cover falling rocket parts. Suddenly, that insurance advertisement featuring a meteorite crashing through the city doesn't seem so far-fetched.

Insurers can't assess all risks the same way. Some, such as bushfires or cancer, have decades of historical data, making them easier to model. Others, for example, cyber threats, constantly evolve - what was a risk last year might be entirely different today.

Asteroids, however, are a different challenge. They are purely hypothetical events with no past insurance claims to model on.

"Since we don't have any historical claims data to form a view, we consider the probability and the likely cost of the event," says actuarial consultant Danielle Casamento, principal at actuarial and analytics firm Finity.

NASA warns that City Killer could cause "severe damage, potentially collapsing residential structures across a city and shattering windows across larger regions". That kind of data is factored into premium calculations.

Another important distinction: insurance covers uncertainty, not certainty. Once an event is guaranteed to happen, it's no longer a risk - it's inevitable.

That's exactly what happened when the World Health Organisation declared COVID-19 a pandemic, according to Casamento. Travel insurers immediately withdrew coverage because the virus was no longer an unknown risk but an unfolding reality. "It triggered the 'known event' clause, meaning it was no longer covered by the policy," says Casamento.

So, if you're planning to take out an insurance policy as the asteroid enters Earth's atmosphere, it'll likely be too late.

Fortunately, on February 24, NASA downgraded the asteroid's risk to just 0.004% - a one in 25,000 chance, roughly the same odds as flipping heads 15 times in a row.

But how could the impact probability change so dramatically?

"This is the scientific process!" NASA declared.

While the risk of asteroid impact seems minimal, it still exists. And when a risk is shared by many, insurance steps in.

But like an asteroid hurtling towards Earth through space, risk is constantly moving. Predicting its trajectory - whether in astronomy or insurance - is never a perfect science.

Calculating the risks 

At its core, insurance is a trade-off: you pay regular premiums and, in return, your insurer covers specific risks - car accidents, pet emergencies, storm damage. If disaster strikes, it helps foot the bill, sparing you financial ruin.

It works because not everyone claims at once (touch wood).

Take home insurance: you pay $100 monthly but after six months a storm wrecks your roof. You've contributed $600, but your insurer might cover tens of thousands in repairs. Without insurance, you'd need years of saving to afford the fix.

This risk-pooling system keeps insurance viable, but only if enough people pay in. When claims rise, so do premiums. Insurers price policies based on the probability of payouts.

For example, if one in 100 homes is expected to suffer storm damage, premiums are set accordingly. But if five in 100 homes are hit instead, insurers take a loss - and pass that cost onto consumers.

Yet insurers don't operate in isolation. They're just one cog in the machine of risk management, a supply chain designed to measure, distribute and balance risk across multiple players.

Before a policy even reaches a consumer, actuaries and data scientists quantify the potential risk. If the risk is too high for a single insurer to bear, reinsurers step in - essentially providing insurance for the insurers themselves to spread the financial burden.

Once the pricing and risk models are set, underwriters shape the policy, deciding what's covered, what's excluded and how much it costs.

Then comes distribution: insurance brokers and comparison sites help consumers navigate the sea of policies to find one that suits their needs.

In theory, this entire system is designed to balance risk efficiently.

But as Australians are discovering, even the most carefully calculated insurance models don't always stop prices from rising.

Why premiums are rising 

Households are feeling the squeeze - home, contents and car insurance premiums have surged 11% in a year, according to the Australian Bureau of Statistics. But what's behind the hike?

Casamento says three main factors determine premiums: individual risk, broader market forces and competition.

First, insurers assess individual characteristics - age and gender (car insurance), smoking status (health insurance) or home location (home insurance) - to price policies.

Broader economic trends also play a major role. Inflation has pushed up repair, medical and rebuilding costs, making claims more expensive for the insurer. Between December 2019 and December 2024, inflation added 20% to costs, meaning a $1000 expense in 2019 now costs $1200.

"To remain viable, funds have to charge more because inflation is driving up the cost of everything health insurers pay for," says Rachel David, CEO of Private Healthcare Australia, a peak industry body. She notes that health insurance premiums will have risen 3.73% on April 1, 2025.

However, inflation alone isn't to blame. Over the past five years, insurance premiums have jumped 40% - double the inflation rate. A policy that cost $1000 in 2019 now costs $1400.

The Insurance Council of Australia said in an ABC report in October that rising home insurance premiums stem from increasing natural disaster costs and home values (which make repairs pricier), inflation-driven building costs and insurers' rising operational costs.

The last point is particularly pressing. Insurers also pass on costs related to risk management, commissions, taxes and levies.

In NSW, these extra costs made headlines when the State abolished the Emergency Services Levy in 2023. Before that, the levy added up to 18% to home insurance premiums.

Another factor is competition, which in a hardening market (when insurers become more selective about who they insure) tends to keep prices lower. However, Australia's insurance market has softened in recent years, giving insurers less incentive to lower prices.

Fei Huang, associate professor at UNSW's School of Risk and Actuarial Studies, warns that some insurers also set prices based on what customers are willing to pay, rather than just risk - a practice called price optimisation.

The practice is legal in Australia but banned in several US states due to fairness concerns.

Similarly, in 2022 the UK banned 'price walking', where insurers charge existing renewing customers more than new ones with the same risk profile. Australia has yet to follow suit.

When putting all these factors together, it's easy to see why insurance is clouded in complexity and bureaucracy. But, ultimately, insurance is a numbers game - one in which, recently, the odds are driving prices up.

How to get the best deal 

When searching for the 'best deal' on insurance, some people focus on price.

You compare policies, find one that's $30 cheaper per month and lock it in. Bingo, you think - that's your Netflix subscription covered, 4K and all.

But with insurance, cheaper isn't always better.

"The biggest mistake people make is always going for the cheapest option," says Angelo Azar, chief operating officer at Honey Insurance, which sells home and contents insurance.

Azar understands the temptation - when money is tight, cutting costs feels smart. But because insurance is something you pay for but hope never to use, it's easy to overlook its real purpose.

Think of insurance as a tightrope walk. Price is on one side, coverage is on the other. Lean too far toward price and you may fall short when it matters most.

"Sometimes the cheapest policy might be right, but not always," says Azar. "If you're choosing purely on price, you risk ending up with a policy that doesn't actually cover what you need."

That doesn't mean you should overpay. Shopping around is key but so is knowing what you're actually comparing.

Rachel Wastell, personal finance expert at Mozo, says clarity is essential. "First, think about your priorities. Second, get quotes for policies that provide the cover you need - every policy will be slightly different," says Wastell.

Once you have a few options, then you can compare prices based on value, not just cost.

By balancing price with coverage, consumers can find the 'best deal' - one that protects them when it counts without overpaying. Because in insurance, staying steady is about more than just saving money; it's about making sure you don't fall when you need a safety net the most.

5 steps to choose an insurer 

1. Review your policy 

Don't just accept your renewal notice - take a few minutes to reassess your coverage. Insurers adjust policies and pricing annually, so what worked last year might not be the best fit today.

"The biggest thing I'd say to a customer is to review their insurance policy and make sure it still fits their needs," says Honey Insurance's Angelo Azar.

This is especially important if you picked the cheapest option last year.

Your circumstances, market conditions and available deals may have changed, so compare policies to ensure you're still getting the right coverage at the best value.

2. Don't set and forget  

Introductory discounts can make a policy seem like a bargain, but they often vanish after the first year, leading to an unexpected price hike.

As with other forgotten subscriptions that quietly drain your bank account, customers may assume their discount still applies or forget to check, says Wastell. "Switching policies annually won't affect your cover, and insurers price risk differently - just because your premium went up doesn't mean another provider won't offer a better deal."

3. Reduce unnecessary extras  

Many insurance policies include add-ons that may not seem worthwhile, such as motor burnout coverage, which covers damage or loss of electrical appliances from motor burnout. "For home insurance, you might have motor burnout coverage," says Danielle Casamento from Finity, an actuarial firm that helps assess policies.

"For car insurance, there could be an add-on for choice of repairer."

Similarly, landlord insurance may include rental default cover, but if you already hold a bond, you may not need it. "Also, since Covid, airlines and hotels now offer more flexible refund policies, so you may not need as much cancellation cover on your travel insurance," adds Casamento.

The lesson here is to review each policy's extras - if you wouldn't realistically claim on it, removing it could lower your premium.

4. Adjust your excess 

Your excess - the amount you pay out of pocket before your insurer covers a claim - directly affects your premium.

"Choosing a lower excess could increase your premiums, while opting for a higher excess can reduce them," says Wastell. "If you rarely make claims, opting for a higher excess could be a smart way to reduce your ongoing costs."

Check your policy settings - adjusting your excess could help you balance affordability and financial protection.

5. Pay annually instead of monthly  

Many insurers charge extra for monthly payments, adding a hidden premium to your policy. "Some insurers will charge less for your policy if you pay annually rather than monthly, so check before you commit to a payment frequency," says Wastell. If a lump sum payment isn't feasible, Wastell recommends setting up an automated savings plan to make it possible for you to pay annually and unlock the discount.

'Insurtechs' make their mark 

Technology is shaking up the insurance industry, cutting costs and improving efficiency - and hopefully benefitting policy holders. 'Insurtechs' to watch include:

Flip Insurance 

Instant accident cover  

For adrenaline junkies, Flip offers on-demand accident coverage with no waiting periods. Designed for high-risk activities, such as bungee jumping, skateboarding, and extreme sports, Flip lets users activate coverage instantly - whether for a single day or a full year.

This flexible model ensures you only pay for coverage when you need it, making it an affordable alternative for thrill-seekers who want protection without committing to a full-time policy.

Honey Insurance  

Home and contents  

The company uses smart technology to reduce claims and reward proactive homeowners. Customers who opt into Honey's Smart Home Program receive complimentary sensors that detect water leaks, smoke alarms and unexpected door openings. While these sensors don't prevent incidents, they provide real-time alerts, allowing homeowners to respond before small issues become costly claims. Those who opt in receive an 8% discount on premiums, reflecting the insurer's belief that shared risk management should mean shared savings.

Fetch 

Pet insurance  

A newcomer to Australia, Fetch offers a single policy covering dogs and cats from eight weeks old. It has a 24/7 pet emergency line and an app for submitting and tracking claims. It is also the only pet insurer that's a member of Pet Industry Association of Australia (PIAA), reinforcing its commitment to pet welfare.

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