Insurance premium: principle, calculation and composition

What is an insurance premium?

The insurance premium is the sum paid by the insured to the insurer in return for the guarantee of a risk granted to him by the latter. It is therefore the price of the insurance, which is payable in advance.

Good to know : If the financial mass constituted by the premiums is used to pay the claims and the operating costs of the insurance company, a non-negligible part is allocated to the constitution of the legal reserves imposed on all insurers. Not to mention the share of taxes paid into the public treasury.

Difference between premium and contribution

There are none. It is the same thing, that is to say the sum of money requested from the insured client in return for the guarantee. So why two different names?

Historically, this differentiation comes from the time when mutual insurance companies and mutual insurance companies were born. The habit has been taken to differentiate the two types of insurers by a vocabulary linked to the form of the insurer (societies with capital and mutual societies). Thus, for insurance companies, we speak of “insured” to designate their customers; while the customers of mutuals and companies in the form of a mutual are referred to as “members”. And if the insured pay premiums, the members pay a contribution. This difference in terminology is therefore only a vestige of the will displayed at the time by the mutuality to differentiate itself from for-profit insurance companies.

What is the insurance premium made up of?

The premium (or contribution) is made up of different elements:

  • The so-called pure premium (also called technical premium) which results from the application of the insurer’s tariff;
  • Mandatory additional premiums (for example, the additional premium for natural disasters, technological disasters, attacks);
  • The so-called commercial loading costs (premium costs and accessories resulting from administrative costs: policy cost, costs for establishing notices of expiry, management and marketing costs, premium splitting costs, etc.);
  • Levies intended to supply the various guarantee funds (FGAO, FGTI, etc.):
  • Taxes (or tax loading costs, the rate of which varies according to the branch of insurance and even the type of contract).

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How is the insurance premium calculated?

The premium is derived from the tariff, itself resulting from actuarial calculations based on claims statistics specific to the branch of insurance concerned. Insurers have no constraints and set prices freely.

The insurance premium results from the guarantees subscribed, but also from the particularities of the risk and therefore from the pricing parameters specific to each type of insurance.

For example, the surface or the number of rooms of a property, the geographical area where it is located, the capital insured on the furniture, the outbuildings – in Multi-risk Housing.

In car insurance, the profile of the subscriber – age, seniority of the licence, loss ratio and bonus/malus coefficient, the area of ​​use and the professional use clause; but also the make, model and power of the vehicle come into play.

In personal insurance (health, death insurance, borrower’s insurance, individual accident and/or illness, etc.) and depending on the type of contract, consideration of criteria such as age, medical history, profession, sports practiced, the fact of being a smoker or a non-smoker, etc.

Premium call and insurance premium payment

It is the responsibility of the insured to pay the insurance premium requested by the insurer in advance. This payment must be made within 10 days of the expiry of the contract. The request for payment or premium call will be materialized by the sending by the insurer of a notice of expiry which indicates to the insured the total amount to be paid, as well as the details of this premium.

Depending on the method of payment chosen by the insured at subscription, the premium, although annual, can be divided and payable half-yearly, quarterly or even monthly. In the latter case, the notice of expiry is in the form of a schedule indicating the dates scheduled for the collection of monthly payments.

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