In the insurance field, the premium is the cost of the insurance or economic contribution to be paid by an insured or contracting party to an insurance company for the transfer of risk under the coverages offered by the latter to its clients during a certain period of time. Commonly this can be through the following schemes:
- single payment,
- annual,
- semi-annual,
- quarterly,
- bimonthly,
- monthly.
According to different conditions, the premium is classified in several categories.
Premium types
- Pure risk premium: is the payment that covers only lethal expenses
- Natural ascending premium: it is calculated each year and increases with the age of the insured.
- Decreasing premium: a premium whose amount decreases as time goes by, it is applied in some savings modalities
- Level premium: it is the premium that remains invariable during the term of an insurance policy and can be obtained as an average of different risk premiums.
- Total or tariff premium: the final premium applied to a policyholder, which is obtained from the sum of a premium plus the expenses involved in opening, acquiring and administering an insurance policy.
- Single premium: is the premium paid only once and in a single exhibition covers the entire cost required for the term of an insurance policy.
- Extra premium: is the amount of money that is added to a level premium, which is applied for additional risk factors, such as overweight, pre-existing health conditions, etc.
- Fixed premium: The amount to be paid remains constant during the term of the insurance policy, this is the most common type of premium, and must be paid at the beginning of the risk coverage period.
- Variable premium: The amount to be paid may be different throughout the term of the insurance contract, depending on certain circumstances provided for in the policy. This type of premium is applied by mutual insurance companies, where surplus returns to member-policyholders cause changes from one year to the next.
- Annual premium: The amount payable is calculated as the absolute value of the annual expected loss plus the average profit.
Premium components
The insurer shall take into account:
- The cost that will represent the payment of the insured benefits in the event of a claim, plus the costs of appraisal, procedure, etc., and will be based on the existing statistics on the insured activity.
- The cost of administrative expenses necessary to carry out the activity (staff salaries, office expenses), i.e. internal management expenses.
- The cost of getting the product to consumers. This would be the cost of commercial activity (commissions, prizes, etc.), i.e. external management costs.
