A higher percentage of people have some understanding of what a typical insurance policy is and its importance as a protective cover against risk. This is evident as millions of people and businesses subscribe to various insurance policies to protect their properties and prevent loss. However, fewer people have a clear understanding of what premium is and how it affects insurance coverage.
Premium in the insurance industry is the total sum of funds an assurer (individual or organization) pays to an insurer (insurance company) periodically to maintain an agreed insurance policy that exists between the two parties. In other terms, the premium refers to the total cost of an insurance policy.
Regardless of the kind of insurance policy, some amount of money must be paid as premium, which is also subject to periodic review. Default in payment of premium always leads to policy cancellation.
Premium paid by an assurer serves as income for an insurer. It is calculated based on certain factors, which include location, personal information, risk factor, and more, to arrive at a fair rate that is profitable and also competitive.
The frequency of payment of premium depends on the agreement between the parties. Therefore, payment of premiums can be monthly, quarterly, bi-annually, or yearly. In some cases, an insurer may require an assurer to pay premium upfront. This type of condition is given for assurers with a history of canceled insurance policy as a result of default in payment of premium.
The amount of premium an assurer pays depends on the extent of coverage and the level of risk involved. As such, an assurer needs to sift through the numerous policies offered by various insurance companies before making a decision. This helps the assurer to select the best policy regarding the premium rate.
Additionally, the assurer must understand the factors that affect the amount of premium he or she is likely to pay. Some of the factors that affect the premium are:
Most insurers offer a variety of insurance products for a particular insurable item. This means that an insurance company can have two or more house insurance policies for its clients.
Each policy would naturally provide a different degree of coverage. For example, a standard property insurance policy of an insurer may protect against theft, injury, and firebreaks. However, it may not provide coverage against earthquakes or floods.
The same company’s advanced property insurance policy may provide coverage for all the mentioned risks plus earthquake and flood but at a higher premium than the standard policy. Therefore, the more risks an insurance policy covers, the higher the premium the assurer pays.
The value of an item covered by an insurance policy determines the rate of premium paid. For example, a set of jewelry that costs $1 million would have a lower premium than another set that costs $5 million. This practice makes sense as the higher the value of an insured item, the more money an insurance company would have to pay to replace it.
Furthermore, an assurer may be able to pay less premium for similar coverage that has a higher total deductible. This method allows an assurer to pay less total premium for an insurance policy for a longer duration. Health insurance policies provide this type of option for assurers.
The history, present circumstance (financial or otherwise), and location are considered while determining the sum of the premium of an insurance policy. These factors are usually considered differently by each insurer.
The financial and ethical history of an individual or a company can significantly affect the premium they pay. So, an individual with bad credit or history of default of payment of premium may likely pay a higher premium. Likewise, another individual with good credit and a history of prompt payment may get a discount on the premium. Slightly different factors would be considered for every type of policy that is offered by an insurance company.
The location of an insured property significantly affects the amount of premium. Properties located in disaster-prone locations tend to have higher premiums than those located in locations with fewer chances of such disasters.
Some insurance companies have specific clients that they try to secure. Therefore, specific products and discounts are produced by such insurers to attract a particular set of clients. So, an insurer may decide to make products and services that would attract middle-aged workers that look to save and retire in a couple of years.
In some cases, insurance companies may decide to increase their market penetration by going into other business segments. For example, a car insurer may decide to go into medical insurance if less competition is present in such markets, or it sees untapped opportunities. Such a company may also decide to provide premium at a subsidized rate to its clients to ensure patronage.
Apart from the payment of insurance claim when a disaster occurs, an insurance company must collect sufficient premium to ensure it stays in business. Typically, an insurer would invest all the premiums it collects from its assurers.
The investment of premium is carried out to guarantee payment of claims, provide a return of investment to clients with investment accounts, and generate significant value that is sufficient to pay for all expenses and provide sufficient return for shareholders of the insurer. Therefore, in all circumstances, an insurance company must ensure that the total sum of premiums it collects from clients exceeds its net expenditure.
For an assurer to get a bargain with regards to the premium rate, he or she must look for an insurer that is interested in him or her. An assurer must be willing to ask for a discount when premium rates are high. Therefore, an assurer must have an agent or a broker that they trust to benefit from insurance policies.
An assurer must also be willing to look for other insurers when the premium rates are high. Scouting for alternative insurers helps to educate the assurer about the average rate of premiums. Therefore, the assurer must always be willing to push to get the best deals that insurance companies are ready to offer.