What is Insurance Premium? - Definition

Insurance Premium is the amount of money that the an Individual or a Business pays to purchase an Insurance Policy and obtain Insurance Coverage. Insurance Premium is the income for the Insurance Company, and it guarantees protection against financial losses that occur because of covered events.

 

How does Insurance Premium work?

Insurance Premium is the income earned by the Insurance Company and in return the Insurance Company provides coverage to the Insured for losses against covered events. In case of an admissible claim, the Insurance Company has to provide reimbursement for losses to the Insured. Depending on the type of Policy, Premium can be paid on a monthly, quarterly, semi-annually or an annual basis. If the Insured fails to the pay the Premium on time, then the Insurance Policy can lapse and the Insured can be left without coverage.

Which factors determine Insurance Premiums and how to Calculate it?

There are many factors which determine the Insurance Premium to be paid for the Policy. Different types of Policies such as Motor Insurance, Health Insurance , Life Insurance will have different types of Premiums. The basic principle is that the Insurance Premiums are based on the expectation of loss and Actuaries use statistics to set Premiums for Insurance Policies. Depending on the type of Policy, the factors which determine the premium will vary. For example, the Premium for a Health Insurance Policy will depend on the Sum Insured and the features opted for while the Premium for a Motor Insurance Policy will depend on the Prior Claims Experience, Add-On Covers chosen etc. For Commercial Insurances like a Fire Insurance Policy , the Insurance Premium depends on the Sum Insured, Riskiness of the Industry and Prior Claims Experience while for Liability Insurances, Insurance Companies generally need to know the Size and Revenue of the Company, Prior Claims Experience, Riskiness of the Industry to decide Insurance Premiums.

How can Policyholders reduce their Insurance Premiums?

Insurance Premiums vary from Insurance Company to Insurance Company. There are some measures that Policyholders can undertake to reduce Insurance Premiums as listed below:

Compare Premiums amongst Insurers: Policyholders should compare Insurance Premiums amongst multiple Insurance Companies by availing multiple quotes with the assistance of an Insurance Broker . This helps in availing the lowest Insurance Rates.
1. Increasing Deductible: An Insurance Deductible is the amount of loss that the Insured must bear from his own pocket before the Insurance Company starts paying out the claim. So, if the Policyholder increases the deductible amount, the Insurance Premium charged by the Insurance Company will reduce accordingly.
2. Removing Unnecessary Add-on Covers: Including Add-On Covers to your Insurance Policy increases Insurance Coverage, however, Insurance Premiums also increase commensurately. But, many a times, Add-On Covers are unnecessary and not suitable to business requirements. Policyholders should carefully evaluate Add-On Covers included in the Policy and remove the unnecessary Add-On Covers which will reduce Premiums.
3. Safety Measures: Installing adequate Safety Measures such as CCTV Devices, Fire Alarms, Sprinkler Installations also reduces Insurance Policy Premiums.
4. Avail Discounts: Insurance Companies provide a range of discounts such as No-Claim Bonus in Motor Insurance and Fitness Discounts in Health Insurance. Policyholders should avail such discounts and reduce their Insurance Premiums.

What does the Insurance Company do with Insurance Premiums?

Premiums represent Income for the Insurance Company. Insurance Companies invest these premiums in various assets such as stocks, bonds etc which is used to pay out Insurance Claims , take out operational expenses. If the Insurance Premium and Investment Income is more than Insurance Claims and Operational Expenses, then the Insurance Company will make a Profit.