What key factor do insurance companies consider when setting policy costs?

Insurance companies primarily consider risk when setting policy costs because it provides a quantifiable measure of the likelihood of a claim being made. The risk assessment involves evaluating various factors that can influence the probability and potential loss associated with a policy. This includes analyzing the applicant's personal information, such as driving records for auto insurance or health conditions for life insurance, to determine how likely they are to file a claim. A higher risk often translates into higher premiums since the insurer anticipates a greater chance of having to pay out.

While other factors like coverage amount, claim history, and policyholder age do play a role in determining insurance costs, they are generally secondary to the overall risk assessment. For example, a higher coverage amount typically means higher premiums, but that increase is driven by the assessed risk of payout. Similarly, a policyholder's claim history may indicate past risk, but the current risk profile is what primarily dictates pricing.