Insurance premium

The following Insurance & Reinsurance practice note provides comprehensive and up to date legal information covering:

  • Insurance premium
  • Calculating the insurance premium
  • Additional premium
  • Timing of insurance premium payments
  • Premium payment warranties
  • Conditions precedent regarding insurance premium
  • Marine insurance—transmission of premium and the role of the broker
  • Non-marine insurance—transmission of premium and the role of the broker
  • Net accounting and bordereaux
  • Return of premium
  • More...

Insurance premium

An insurance premium is the sum paid for insurance or reinsurance cover and is the consideration paid by the (re)insured for the (re)insurer’s contractual obligation to indemnify it against risks specified in the policy.

The premium is used by (re)insurers primarily to:

  1. establish reserves for known and unknown losses

  2. pay claims

  3. generate investment returns

  4. purchase reinsurance to protect its net account

  5. comply with regulatory solvency margin requirements

  6. pay Insurance Premium Tax (IPT) to HMRC. For more information on IPT, see Practice Note: Insurance premium tax

Calculating the insurance premium

It is the role of underwriters and actuaries to calculate the premium in accordance with their assessment of the risk. How it is calculated depends greatly on the particular class of insurance.

Calculating a life and health premium is mainly a mathematical task carried out by actuaries based on large data sets of longevity and morbidity statistics, taking into account prevailing and long-term inflation rates and anticipated returns on investments.

Certain classes of general insurance, such as motor, may also be rated in this way where there is a sufficiently large body of statistical data and where the number of policies underwritten on similar terms is large enough to price policies by reference to aggregate data rather than factors specific to each particular risk.

For many classes of general insurance, particularly commercial insurance, the underwriter’s qualitative assessment of the risk,

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