What is 'Insurance Premium'
An insurance premium is the amount of money that an individual or business must pay for an insurance policy. The insurance premium is income for the insurance company, once it is earned, and also represents a liability in that the insurer must provide coverage for claims being made against the policy.
BREAKING DOWN 'Insurance Premium'
The price of an insurance premium for a given insurance policy can vary and depends on a variety of factors. Among those factors are the type of insurance coverage, the likelihood of a claim being made, the area where the policyholder lives or operates a business, the behavior of the person or business being covered, and the amount of competition that the insurer faces. For example, the likelihood of a claim being made against a teenage driver living in an urban area may be higher or lower compared to a teenage driver in a suburban area. In general, the greater the risk associated with a policy, the more expensive the insurance policy will be.
Policyholders may choose from a number of options for paying their insurance premiums. Some insurers allow the policyholder to pay the insurance premium in installments, such as monthly or semi-annual payments, or may require the policyholder to pay the total amount before coverage starts.
Insurance premiums may increase after the policy period ends. The insurer may increase the premium if claims were made during the previous period, if the risk associated with offering a particular type of insurance increases, or if the cost of providing coverage increases.
Insurers use the insurance premium to cover the liabilities associated with the policies they underwrite. They may also invest the premium in order to generate higher returns and offset some of the costs of providing the insurance coverage, which can help an insurer keep prices competitive. Insurers will invest the premiums in assets with varying levels of liquidity and return, but they are required to maintain a certain level of liquidity. State insurance regulators set the amount of liquid assets required to ensure insurers can pay claims.
Actuaries, Artificial Intelligence and the Future of Insurance Premium Prices
Generally, insurance companies employ professionals known as actuaries to determine risk levels and premium prices for a given insurance policy. The emergence of sophisticated algorithms and artificial intelligence is fundamentally changing how insurance is priced and sold, and there is an active debate happening between those who say algorithms will replace human actuaries in the future and those who contend the increasing use of algorithms will require greater participation of human actuaries and send the profession into a "next level."