Insurance premiums and its different types

Insurance Premiums

In our previous blog, we have discussed the operations of insurance companies and how these companies are able to make money.

In this blog, we will discuss regarding insurance premiums and its different types.

Insurance as a service is necessity and every second person owns an insurance of some kind. This brings up an important question that do people know how many types of premium exists in the market and how the premiums are decided? Here, we will discuss the premiums in details along with its types and how these premiums are determined. 

Insurance Premium is the amount you pay an insurer in return of which you get the insurance coverage. In simple words, it is the cost of one’s insurance policy. One can choose the insurance policy based on the coverage and period like term insurance or annuity plan, but the priority factor is on the choice of premium that one will have to pay for the insurance.

Factors affecting the Premium amount:

a)      Personal Information (including age, location, habits, annual income, family size, etc.)

b)      Type of Coverage

c)      Amount of coverage

d)     Previous claims and incident history

e)      Government taxes and any state or territory duties or levies

f)       Competition

For example, when you apply to insure your property, first of all insurer will check the worth of property (market value), then analyzes what are the risks involved with that property that requires insurance.

  1. Insurer’s decision will be based on certain data, like if property is in the suburb area where chances of theft is high in that case level of risk is higher and therefore you may have to pay higher premium compared to your property in the urban area where risk factor is low.
  2. Insurers may also look at some other factors such as property’s age, material used and claims history.

All the factors will help insurers to decide an appropriate premium and coverage. In some instances, they may not offer insurance if they believe the risk is too high.

If you are buying the life insurance policy, then the age at which you start your coverage will decide the premium, along with any such factors such as current health condition. The younger you are, lower will be your premiums.

Competition also plays a key role in deciding the insurance premium. Every insurance company wants to attract most of the customers and in order to do so, prices of premiums are priced competitively. If one company reduces the price of premium, then the peer group also lower down the prices in fear of losing customer.

Types of Insurance Premium

While purchasing an insurance policy, one has the option to pay fixed premium till the end of the period or to pay with some flexibility.

  1. Level premium is the basic form of the premium where the policyholder has to pay fixed amount of premiums till the maturity period
  2. Flexible premium is a bit complicated in which the policyholder get the option to make certain changes in the insurance policy  in future such as one can increase the number of persons in the term insurance plan or increase the sum assured of an insurance policy. According to these changes premium amount will also vary.

Premium can be paid monthly, quarterly, semi-annually or annually.

 Rate Making (Pricing of Insurance Premiums)

Rate making is the process of determination of rates or the premiums which is to be charged for the insurance coverage.

Rate Making in Life Insurance

Insurance companies generally employ actuaries to determine the risk levels and premium prices for the insurance policies. Emergence of Artificial Intelligence is fundamentally changing the pricing and selling of insurance in the market.

To read the first Blog (Insurance - Introduction) in this Series. Click here 

For second Blog (Types of Insurance) in this Series. Click here 

For third Blog (Insurance Companies - How do they generate revenue?) in this Series. Click here 



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