Why are weather conditions important to insurance companies?

Weather conditions, both historical and prospective, are extremely important to property insurance companies. This is because rates charged by insurers, which translate into premiums paid by policy holders, are determined in large part by the risk assumed by the insurer. For many kinds of insurance, for example, homeowners, the types of losses covered can be caused by weather incidents (wind, flood, etc.).

Remember that an insurer spreads the risk that it assumes over a large number of insureds. It is important that the insurer charge a premium that is actuarially sound. This means that it has to collect a premium that is commensurate with the risk of loss that it is assuming, so that if a loss occurs, it will have sufficient funds to pay losses that are projected to occur over a stated period of time.

With respect to losses caused by weather conditions or other covered risks, the insurer will, in establishing "actuarially sound" rates, look to its loss experience in the geographic area where the policy is to be issued. This will involve evaluating what it has historically paid for weather related losses, and that which it may be reasonably expected to pay in future years (determined in some instances with the aid of computer modeling).