Risk is expensive. Most people are risk averse. Both people and companies must be compensated in some way for accepting more risk. This is why individuals with poor driving records pay more for insurance and investors require higher returns on riskier investments.
The expense of managing risk is directly correlated with the expected losses. Expected losses can be determined by multiplying the severity (cost) by the frequency. Losses can be both direct or indirect. The actual cost of replacement is the direct loss. Indirect losses can be things such as additional service or processing fees, lost time, lost income, inconvenience, additional costs (rental car, hotel), etc.
In private insurance markets individual insurance costs are primarily influenced by three factors: premium loading, adverse selection and moral hazard.