Are you planning to purchase liability insurance? Great decision indeed! While deciding on any particular policy, the first question that often hits the mind of any buyer is –‘what will be the premium I need to pay’? See, we were right! This question is in your mind as well!

In this case, this article will be of much help to you. Here, we are going to discuss what an insurance premium is and the factors are taken into account by insurance providers to calculate the premium for a policy. Please note that these factors vary from one payee to another. Before paying the insurance premium for a given plan, you, as the policyholder, must consider various additional factors as well. After going through this blog, you would be able to make informed decisions while purchasing insurance coverage that suits your unique needs the best.

Here we go!

Let’s start with the basics!

What is an insurance premium?

The money paid by an individual or a business for an insurance policy is known as the insurance premium. The insurance company receives income from the premium once it is earned. It also carries a liability because the insurer is obligated to provide coverage for any claims brought up in relation to the policy. They can also invest the gains received from premiums to generate profits and cover some of the expenses associated with the coverage. However, they need to abide by IRDA Investment Regulations when it comes to such investments. As per these regulations, insurance companies can invest in shares and debentures, but only up to a specified percentage. For example, insurers offering life insurance must invest at least 50% of their collected funds in Government Securities and other approved funds.

How is the insurance premium calculated?

Purchasing insurance is one of the most important financial choices someone can make. If you want to purchase a life insurance policy, you must understand the meaning of insurance premiums as a policyholder. You should also be able to identify your unique needs in order to appropriately calculate the sum assured. These insurance premiums are meticulously calculated based on a number of aspects of the insured's life. Therefore, you need to be aware of these factors that could raise or lower the amount. Some of these factors are as follows-

  • Age - Age is one of the key considerations for insurance companies when determining the premium. Therefore, in order to avoid paying higher life insurance premiums, it is often advised to buy insurance coverage when you are younger. The age at which you start receiving benefits under a life insurance policy, together with other risk variables, will affect the amount of your premium. Your premiums will often be lower the younger you are, and vice versa. Generally speaking, the cost of insurance coverage ((and thus, the insurance premiums) increases with the related risk.
  • Gender - For insurers, the insured's gender is also important. Studies indicate that women generally live roughly five years longer than men, which may contribute to this. As a result, women might pay a little less for life insurance.

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  • Profession/nature of employment - The insurance premium is also based on the nature of your work. Those working in high-risk industries like mining or oil and gas may need to pay higher premiums.
  • Medical ailments and history - The insured's life risks are determined by their medical history and hence, this is a crucial consideration for insurance providers. The insurance premium may be more if there is a family history of serious conditions like cancer and heart disease.
  • Lifestyle choices - The insurer may impose a higher insurance premium on people who routinely participate in life-risking activities like mountain climbing, racing, and other such activities.

Some other factors that are considered while calculating insurance premiums are-

  • Area of residence
  • Smoking and other lifestyle habits
  • Income
  • Height and Weight
  • Likelihood of claims being made by the insured
  • Marital status and dependents
  • Global travel history
  • Debts

Insurance premiums and actuaries

Actuaries are typically used by insurance providers to calculate risk factors and premium prices for specific insurance policies. An actuary helps reduce risk by estimating the financial impact of uncertainty using math and statistics. Artificial intelligence and advanced algorithms are fundamentally altering how insurance is marketed and priced. There is a heated argument going on between those who believe that in the future, algorithms will take the place of human actuaries and those who believe that as algorithms become more prevalent, human actuaries will need to participate more.

How Can Deductibles Affect Insurance Premiums

How can deductibles affect insurance premiums?

An insurance policy's deductible is part of the loss in respect of a claim that the policyholder needs to bear. It may come in two forms- Amount of Excess and Time Excess. The amount of Excess is mentioned either as a fixed amount or a percentage of the sum insured/ claim amount. In other words, the insurer is only liable to pay the part of the claim that exceeds the deductible amount.

For example, let us assume your fire insurance claim is Rs. 1,50,000 and your policy's deductible is Rs. 50,000. Then, the insurance company is liable to pay Rs Rs. 1,00,000 (which is, Rs 1,50,000 - Rs 50,000 ) only. If the deductible is mentioned in the form of ‘Time Excess’, the policyholder will not be entitled to the claim relatable to a specific period (mentioned usually as a number of days).

The purpose of the deductibles set by all insurance companies is to discourage policyholders from submitting petty claims. The likelihood of frequent claims resulting from careless behaviour is also reduced because the insured knows in advance that he needs to share the expense of a claim to some extent.

How can premiums help insurance providers?

Insurance providers use the premiums that customers and policyholders pay to them to pay for liabilities related to the policies that they insure. For greater returns, they can also invest in the premium. This can help an insurance provider maintain competitive pricing by offsetting some of the costs associated with offering insurance coverage. Insurance businesses must always maintain a particular amount of liquidity, even though they may invest in assets with different degrees of liquidity and returns. The amount of liquid assets required to guarantee that insurers can pay claims is regulated by insurance regulators in India.

The footnote:

We hope the discussion above will help you understand what an insurance premium is and the factors considered by insurance providers to calculate it. We have also discussed other important matters related to insurance premiums. For the best recommendation on any insurance, you may contact BimaKavach. Here, you can get the best advice for any insurance product in just 5 minutes.