What is Insurance Premium in Accounting?

An insurance premium refers to the money paid for a policy by an individual or a corporation. Premiums are required for health, auto, house, and Life Insurance plans. It is the Income for the insurance firm after it is earned.

It also carries a risk because the insurer is responsible for any claims made against the policy. The policy's termination may occur if the individual or corporation fails to pay the premium.

Insurance Premium Payments

Your insurer will bill you a premium if you sign up for a policy. This is the policy's cost. Policyholders have many payment choices for their insurance premiums. A few insurers also enable the policyholders to pay the insurance premiums in quarterly, monthly or semi-annual instalments, while others may require full payment before coverage begins.

Several factors determine the cost of the premium, including:

• Coverage type
• Age
• Residential area
• Details of claims filed previously
• Adverse and hazard selections

Auto or Car Insurance

In an Auto Insurance policy, the threat of a claim getting filed against a teenage driver living in some urban location may be far higher than that of a teenage driver residing in a suburban location. Generally, the bigger the risk gets, the more the cost of the insurance policy turns out to be, and, thus, the premium amount rises too.

Life or Health Insurance

In life insurance, the age when you begin with the coverage and other risk variables will decide your premium amount (like your current health). The younger you are, the fewer insurance premiums will be. However, the older you are while taking the coverage, the higher the insurance premiums will be.

How to Calculate Insurance Premium?

After the conclusion of the policy time, the insurance premiums may still increase. Suppose the threat of giving a specific insurance type increases or the price of Offering coverage rises. In that case, the insurer may raise the premium for the claims made in the prior period. Insurance companies hire actuaries to estimate risk levels and premium amounts for specific insurance policies. AI and advanced algorithms are radically changing how insurance is valued and marketed.

There is a heated argument between those who believe algorithms will eventually replace human actuaries and those who think that growing the use of algorithms will demand more human actuaries' participation and propel the profession to the next level.

Insurers use premiums paid by policyholders or customers to cover obligations related to their underwriting policies. They could also invest in the premium to increase their profits. This is helpful for an insurer to maintain its prices competitive by offsetting some prices of Insurance Coverage provisions.

Insurance firms are required to maintain some amount of liquidity, even if they invest in assets with varying returns and liquidity. State insurance regulators then analyse the number of liquid assets needed for insurers to pay the claims.

Insurance Premium Example

If the actuaries of an insurance company review an area for one year and determine that it has a low-risk Factor, they will only charge very low premiums that year. Still, if they see an increase in a significant disaster, crime, high losses, or claims payouts by the year-end, they will review their results and start changing the premium charged for that area the following year.

As a result, the rate in that area will rise. This is something that the insurance company must do to stay in business. People in the neighbourhood may then shop and travel elsewhere. People may switch insurance companies if premiums in that location are priced higher than before. The insurance company's profitability or loss ratios will likely decline. It loses consumers in that area who are unwilling to pay the premium it wants to charge for its identified risk.

Fewer claims and fair premium prices for the risks allow the insurance business to keep costs low for its target customers.

Conclusion

The coverage type that is purchased by the policyholder, their age, where they live, as well as their claim history, and moral hazard and adverse selection, all these factors influence insurance premiums. Insurance premiums may increase further after the policy period expires or if the risk involved with providing a specific type of insurance rises. It may also alter if the coverage quantity changes.