What is a "surcharge" in insurance pricing?

A surcharge in insurance pricing refers to an additional charge applied to a policyholder's premium due to a specific risk factor. This risk factor could be related to various elements, such as the policyholder's driving record for auto insurance, the location of the insured property, or specific health conditions in life insurance policies. Essentially, surcharges are used to reflect the increased likelihood of a claim being filed based on these risk factors, thereby adjusting the cost of the premium to align with the risk being assumed by the insurer.

Understanding surcharges is crucial for policyholders as it highlights how individual circumstances can directly impact their insurance costs. This mechanism ensures that those who present a higher risk pay more for their coverage, which is a fundamental principle of risk management in insurance.