How is my insurance premium calculated?

By Chizoba Morah AAA
A:

An insurance premium is the money charged by insurance companies for coverage. Insurance premiums for services differ from company to company, so it is advisable that individuals shop around for insurance premiums. However, it is important to note that, sometimes, insurance premiums quoted are slightly different from the premiums charged. The difference between the quote and the actual charge can be attributed to the way the insurance premium is calculated. The amount of insurance premiums charged by the insurance companies is determined by statistics and mathematical calculations done by the underwriting department of the insurance company.

The level of insurance premium charged to a customer depends on statistical data that exists about life history, age and health. For example, an 18-year-old man who drives a red sports car is more likely to pay a higher insurance premium than a 50-year-old man who drives a four-door sedan. Every customer that applies for insurance goes through the underwriting process. The underwriting process involves investigation into familial diseases, analysis of reports like medical information bureau and motor vehicle reports. After the information is gathered and analyzed, they are typically analyzed by a statistician, called actuaries, hired by the insurance companies. After analyzing the data, the actuary tries to predict how likely the insurance applicant will make a claim on their policy. The higher the probability of a claim, the higher the premiums usually are.
The actuaries are also responsible for studying mathematical data and compiling "mortality and sickness" tables, which are used to predict prospective losses due to death and sicknesses. The mortality and sickness tables are basically tables that assign probability to gender and ages about the likelihood to get sick or die. The actuaries use these tables to develop models that determine how likely it is for a particular individual to get sick or die at a particular time, based on the data gathered for that individual. Based on the results of the analysis of data and the information generated from the mortality and sickness tables, a premium is assigned or charges to the client. (To learn more about the industry, check out The Industry Handbook: The Insurance Industry)

RELATED FAQS

  1. What are some examples of common fringe benefits?

    Learn how offering fringe benefits can be a strategic recruitment and retention tool for employers and drastically increase ...
  2. What's the average salary of an actuary?

    Get insight into the intriguing career of risk analysis and forecasting. How much do actuaries make, and how is this field ...
  3. What is an equity-indexed annuity?

    Understand what an equity-indexed annuity is, its advantages and disadvantages, and how it differs from other annuity investments.
  4. Who are the best-rated life insurance companies in the US?

    Learn about what makes an insurance company the best. Read about the best life insurance companies in the U.S. in 2014, following ...
RELATED TERMS
  1. Basket Deductible

    A single deductible that is designed to pay for losses from different ...
  2. Associate In Fidelity And Surety Bonding (AFSB)

    A designation earned by bond producers, bond underwriters, and ...
  3. Bare Walls Coverage

    A type of insurance coverage that applies to communally used ...
  4. Contents Rate

    The premium required to insure the contents of a property rather ...
  5. Corporate Reimbursement Coverage

    A feature of liability insurance that covers the insured company ...
  6. Coverage Trigger

    An event that must occur in order for a liability policy to apply ...

You May Also Like

Related Articles
  1. Insurance

    Finding The Best Health Insurance You ...

  2. Insurance

    Avoid The No-Health-Insurance Penalty ...

  3. Insurance

    Rating Assurant Prepaid Vs. Delta PPO ...

  4. Insurance

    Who (Besides Retirees) Can Get Medicare?

  5. Insurance

    Should You Borrow From Your Life Insurance?

Trading Center