An insurance premium is not a guess about what will happen to one customer. It is a calculation about a large group, adjusted for the cost of being wrong.
The pool, not the person
Insurers cannot know which individual will make a claim, but across a large enough group the proportion who do is reasonably stable.
The core of a premium is therefore the expected cost of claims across the pool divided among its members, which is why a customer who never claims still pays.
Pools must be large and reasonably homogeneous for this to work, which is why unusual risks are priced individually or declined altogether.
Rating factors sort people into groups
Insurers use characteristics that correlate statistically with claim frequency or severity to place applicants into narrower groups with more similar expected costs.
The factors are chosen for predictive power within the data, and correlation is sufficient for the purpose even where the underlying reason is not fully understood.
Which factors may lawfully be used is restricted in many jurisdictions, and those restrictions differ from place to place and change over time.
Expected claims are only part of the price
On top of the expected claims cost sit the insurer's own expenses: distribution, claims handling, administration and regulatory compliance.
A further loading covers uncertainty, because the actual outcome will differ from the expectation and the insurer must survive an adverse year.
Capital has to be held against that possibility, and the cost of holding it is a real component of every premium charged.
Reinsurance sits behind the visible price
Insurers transfer part of their exposure to reinsurers, particularly for events that could produce many claims simultaneously, such as storms or floods.
The cost of that cover feeds directly into consumer premiums, which is why prices in a region can rise after catastrophes elsewhere in the world.
When reinsurance capacity tightens, the effect passes through to households and businesses that had no claim and no change in their own circumstances.
Investment income moves the equation
Premiums are collected before claims are paid, and the money is invested in the interval, which for long-tailed risks can be a period of years.
Returns on those holdings offset part of the claims cost, so higher prevailing interest rates allow lower premiums for the same underlying risk.
This is why insurance pricing cycles track financial conditions as well as claims experience, and why a quiet claims year does not automatically produce cheaper cover.