4 Factual Determinants of Insurance Premiums

4 Factual Determinants of Insurance Premiums

Without any shadow of doubt, insurance is an important mechanism that succors the individuals, states and the nation at large. You ought to or might have been maintaining one or more policies because of the peace of mind, confidence and security against financial losses that insurance proffered. Then, let me ask this question. Have you ever taken the pain of knowing the nitty-gritty of the premium you paid to the Underwriters annually, whether it’s reasonable or otherwise? The purpose of this article is to bring you to the limelight and be acquitted with the composition of the premium you paid.

Risk premium: Anyway, insurance is all about risk and in order to rate a risk appropriately the underwriter must know the degree of exposure of that property to a particular risk. So that portion of the premium that is allocated to the risk element of the cover is refers to as risk premium which accounted for about 50% of the total premium.

Expense loading: Based on the literary meaning of expenses. This is the apportionment that covers the expenses of the insurance companies like overhead, lighting and heating, rents, staff salaries etc. Conservatively, this will accounted for about 25% of the premium paid to the insurers.

Profit loading: Insurance like any other business operates on the principle of profit centre. To this end, they are in business to make an increasing profit on annual basis. Borne on this fact, the underwriter put this into consideration in charging their premium. The profit element is about 15% of the premium chargeable.

Contingency loading: As you are fully aware that the financial market is dizzy and highly volatile. And to make the situation worst, here come the issue of global economic meltdown that ravaged the whole world. Guess what, insurers behave like a seer (prophet) that is they subjected their businesses to reasonable foreseeability. That part of the premium that is used to cushion the effect of bad wealth or unfavourable business year(s) is referred to as contingency loading.

Here you are, ‘am sure you are no more a novice on factors that constitute the determination of office premium. Have a good day and see you again, your insurance intelligence is my concern.

Source by Adewale Olofinnika
#Factual #Determinants #Insurance #Premiums insurance

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