The premium of an insurance policy is the periodic amount you pay to the insurer in exchange for the coverage that the policy provides. It is calculated using several factors such as the insurer's cost of providing coverage, the risk involved in the policy and other elements like type of insurance and personal details.
The formula for determining the premium of an insurance policy is:
Premium = Risk Cost + Expense Cost + Profit Cost
Risk Cost = This includes the expected cost of the claims, or losses, that the insurer might incur during the life of the policy. It is normally calculated by factoring in the probability of a certain risk.
Expense Cost = This comprises of the cost of managing the policy, such as administrative and operational expenses, as well as commissions paid to agents and brokers.
Profit Cost = This is a percentage of the premium reserved by the insurer as a profit.
The formula for calculating premium varies from insurer to insurer, as each company has its own rating system and factors to consider. It is important to remember that the premium usually varies based on the type of policy and the specifics of the risk. Factors such as the age of the policyholder, the type of coverage and the region where the coverage is being sought may also have a bearing on the premium.
To give an estimate of the premium, an insurer will usually request several pieces of information from the policyholder, such as age, gender, driving history, limit and other coverage details. They may also use other measures such as the Credit-based Insurance Score (CBI) to help determine the price of the premium.
To get an accurate estimate of the premium for a policy, it is best to contact a licensed insurance broker. The broker will be able to help you find the right policy at the right price.