What Is the Basic Premium Factor?
The basic premium factor is the acquisition expenses, underwriting expenses, profit, and loss conversion factor adjusted for the insurance charge for a policy. The basic premium factor is used in the calculation of retrospective premiums. It does not take into account taxes or claims adjustment expenses, which are instead covered in the other components of the retrospective premium calculation.
Key Takeaways:
- The basic premium factor is determined after an insurer sets the standard premium.
- The basic premium factor is the acquisition expenses, underwriting expenses, profit, and loss conversion factor adjusted for the insurance charge for a policy.
- The basic premium factor is used in the calculation of retrospective premiums and does not consider account taxes or claims adjustment expenses.
Understanding the Basic Premium Factor
The basic premium factor is determined after an insurer sets the standard premium. A policy’s retrospective premium is calculated as (basic premium plus converted losses) multiplied by the tax multiplier. The basic premium is calculated by multiplying the basic premium factor by the standard premium.
The converted loss is calculated by multiplying the loss conversion factor by the losses incurred. The basic premium is less than the standard premium because of the basic premium factor. The function is to provide the retrospective insurance company with funds to cover the administration of the retrospective plan.
How Premiums Are Formulated
The insurance charge adjustment allows the calculation to keep the retrospective premium between the minimum and maximum premiums but does not take into account the severity of claims or the loss limit.
The loss experience of an insurer depends on the frequency of claims and the severity of those claims. High frequency, low severity claims give the insurer a less volatile loss experience than low frequency, high severity claims. This is because an insurer is better able to predict through actuarial analysis what the losses from an insured will be if claims are frequently made.
Insured parties that bring high severity claims are likely to have higher premiums using retrospective premium calculations because they are more likely to hit the maximum premium.
The Role of Actuarial Analysis
Actuarial analysis is a type of asset to liability analysis used by financial companies to ensure they have the funds to pay the requiredliabilities. Insurance and retirement investment products are two common financial products for which actuarial analysis is needed.Actuarial analysis uses statistical models to manage financial uncertainty by making educated predictions about future events. Actuarial analysis is used by many financial companies to manage the risks of certain products.
Special Considerations
The calculations required for actuarial analysis are done by highly educated and certified professional statisticians who focus on the correlating risks of insurance products and their clients. Insurance companies typically use a schedule of estimated standard premiums when determining whether to recalculate the basic premium factor. If the standard premium is outside of the table ranges—typically a percentage above the estimated standard premium—the basic premium factor is recalculated.
FAQs
What Is the Basic Premium Factor? The basic premium factor is the acquisition expenses, underwriting expenses, profit, and loss conversion factor adjusted for the insurance charge for a policy. The basic premium factor is used in the calculation of retrospective premiums.
What is an insurance premium answer? ›
An insurance premium is the amount of money an individual or business pays for an insurance policy. Insurance premiums are paid for policies that cover healthcare, auto, home, and life insurance.
What is the basic premium in insurance? ›
An insurance premium is the amount you pay each month (or each year) to keep your insurance policy active. Your premium amount is determined by many factors, including risk, coverage amount and more – depending on the type of insurance you have.
What is premium financing and how does it work? ›
Premium financing uses borrowed money to pay for life insurance premiums. 1 This is most often done in conjunction with policies that pay very large death benefits, enabling the policy owner to avoid tying up their own capital to pay premiums. Instead, they use that capital as collateral for the loan.
What is a premium and how does it work? ›
The amount you pay for your health insurance every month. In addition to your premium, you usually have to pay other costs for your health care, including a deductible, copayments, and coinsurance. If you have a Marketplace health plan, you may be able to lower your costs with a premium tax credit.
What is premium basic? ›
X Premium has three tiers: Basic, Premium, and Premium+, with more features available in each higher tier. Basic: Includes essential Premium features like editing posts, longer posts and longer video uploads, reply prioritization, text formatting, bookmark folders, custom app icons, and more.
How to answer insurance questions? ›
Below are some best practices to consider:
- Contact a lawyer. ...
- Keep in mind that despite the friendliness of the person taking your statement, that person is not your friend. ...
- Ask specifically that your statement not be recorded. ...
- Give brief answers. ...
- Don't volunteer information. ...
- Answer only the question asked.
Broadly speaking, a premium is a price paid for above and beyond some basic or intrinsic value. Relatedly, it is the price paid for protection from a loss, hazard, or harm (e.g., insurance or options contracts). The word "premium" is derived from the Latin praemium, where it meant "reward" or "prize."
What is insurance answers? ›
Insurance is a contract, represented by a policy, in which a policyholder receives financial protection or reimbursem*nt against losses from an insurance company. The company pools clients' risks to make payments more affordable for the insured.
What is the base premium for insurance? ›
Base premium is calculated by multiplying your total remuneration (actual or estimated) by your industry premium rate. For employers with multiple locations, the base premiums will be added together.
A basic car insurance policy has the minimum coverage that's legally required in your state. This usually means having a liability policy to pay for the other driver's car repairs or medical bills, when you caused the accident. It may also include personal injury protection (PIP) if it's required where you live.
What is basic premium and gross premium? ›
Basic premium: Your insurance amount before the NCD. Gross premium: Your insurance amount after the NCD.
How does premium payment work? ›
Insurance premiums are usually a monthly charge that's determined by your insurance company, and if you enroll through work, also by your employer. These payments are how you keep your policy active and available to cover any claims you may file.
Why is premium paid? ›
Definition: Premium is an amount paid periodically to the insurer by the insured for covering his risk. Description: In an insurance contract, the risk is transferred from the insured to the insurer. For taking this risk, the insurer charges an amount called the premium.
What is premium payment method? ›
A premium is the amount of money that an insurance policyholder pays to the insurer in exchange for coverage. There are several different modes of premium payment. The most common payment modes are monthly, quarterly, semi-annual, and annual. Out of all of these, monthly is the most common.
What does base premium mean in insurance? ›
Base Premium means the premiums that are paid towards the Policy and excludes the premiums paid towards the Riders and does not include any taxes and/or levies.
What is a factor premium? ›
The risk premium, thus, is viewed as the extra return that compensates investors for undertaking additional risk. Factor risk premium is a further extension of this principle. It denotes the extra return that investors can anticipate by investing in securities exhibiting certain characteristics or 'factors.
How do you calculate premium basis? ›
The premium basis, sometimes called an exposure basis, is based on a value per $1,000 of gross sales, payroll, or other defined metrics. An easy way to understand it is this: the insurer will use either your gross sales or payroll when determining what to charge your business.
