An insurance premium denotes a payment for insurance paid by force of law in the event of compulsory insurance or voluntary insurance under the terms of the contract by which the insurance fund is formed.
The insurance premium as a concept, in accordance with its content, has three forms of manifestation:
- legal - manifests itself in a pre-agreed monetary value of the insurance obligation, which is confirmed by the insurance contract concluded between the parties;
- economic - acts as part of the national income allocated by the insurer in order to guarantee their interests against negative or undesirable effects of possible adverse events (insured events);
- mathematical - is expressed as a periodically repeating payment to the insurer by the insured.
The cost of insurance services is displayed in the amount of the insurance premium paid by the insurer to the insurer, that is, in other words, this is the cost of the services of the insurer provided to the client in case of an insurance event. The calculation of the insurance premium is made according to the insurance rate. Legislatively, the insurance rate is defined as the rate of the insurance premium from the insurance object or unit of the sum insured.
The insurance premium must be sufficient to:
- coverage of expected claims throughout the insurance period;
- creation of insurance reserves;
- cover the costs of the insurance company in the conduct of business;
- providing a certain amount of profit.
That part of it, at the expense of which the insurance fund is formed, that is, intended exclusively for insurance payments, is called the net premium, while the part aimed at covering the expenses of the insurer during the insurance is called the load. Net premium, therefore, is the cost of insurance, excluding the costs of its holding, the insurer has. In fact, an insurance premium is a combination of net premium and load, it is also called gross premium.
Types of Insurance Premium
The various technical aspects of the premium are characterized by different concepts.
By appointment, it is divided into:
- risk premium designed to cover risk;
- the funded contribution, which is present in life insurance contracts and covers the payments of the insured when the insurance expires;
- net premium, which covers insurance payments for a specific period of time for a certain type of insurance;
- a sufficient contribution equal to the sum of the load and net premium, which are included in the costs of the insurer;
- the insurer's tariff rate , which consists of a sufficient contribution, as well as premiums necessary to cover costs associated with various preventive measures, propaganda and advertising, and more.
By the nature of the risks, the insurance premium is classified as in-kind, which covers the risk for a specific period of time, and a fixed one that does not change with time, that is, constant.
Insurance premiums are subdivided according to the form of payment into:
- one-time, which are fully paid in advance by the insured;
- the current installment is a certain part of the one-time premium, as it is part of the obligations undertaken by the insured with respect to the insurer;
- installment premium - a one-time premium is divided into an annual one, which takes into account the economic capabilities of the insured, and it, in turn, can be divided into monthly, quarterly, semi-annual (equal parts).
It is customary to divide insurance premiums by time of payment, by their reflection in the balance sheet of the insurance company and by value.