What is a Developed Premium

A developed premium is an initial quote from an insurer based largely on the policyholder’s risk profile.

BREAKING DOWN Developed Premium

A developed premium quote is often adjusted once the insurer receives more information about the potential policyholder. At first, insurers have only the most basic details about those looking for a quote on a policy until the individual or business offers more in-depth details. Insurers will generally determine the initial insurance premium quote, estimating using an average policyholder’s risk profile and later alter the estimate using experience modifiers.

Developed premiums factor in the static costs to insurance companies irrespective of individual policyholders’ risk profiles. These costs include salaries for company personnel, vehicles, overhead, claims adjusters and so on: the cost of doing business. The general idea is that those policyholders with riskier profiles will be charged a higher premium than those with less risk factors. The developed premium  must, however, always cover the baseline costs to support the insurance company’s business.

Insurers may also charge a fraction of this developed premium for additional coverage to this insurance policy. The coverage is intended to kick in for claims that would otherwise qualify as an absolute exclusion. An example of this might be a personal liability insurance policy that includes personal umbrella liability insurance which costs 3% of the developed premium.

A Broader Look at Insurance Premiums

Factors that determine the ultimate premium an insurance buyer will pay include the type of insurance coverage, the likelihood of the policyholder filing a claim, the region of the country where the policyholder lives or operates a business, the behaviors of the policyholder, and, of course, the insurance market. Insurance premiums have the potential to increase in the period after the policy period ends. An insurer might raise prices if there were any claims filed during that previous period, if the cost of providing coverage increases and if the risks associated with the original insurance offer change.

While, historically, insurance companies have employed insurance professionals known as actuaries to determine premium prices for a given insurance policy based on their risk analysis, the insurance industry, as all other financial services, is seeing the emergence of complex algorithms and development of artificial intelligence, which greatly changes how insurance is priced and sold. There are questions of whether algorithms will be able to completely replace human actuaries; many observers and industry insiders point to the need for greater participation of human actuaries who are experts with these algorithms and can note discrepancies or unexpected trends that emerge by using them.