Insurance is one of the major components of personal finance. Premium is something an insuree has to pay to the insurer to get the benefits when the norms of the policy are met. But, do you know premium as a term is itself very complicated? Here, we going to look at the term ‘premium’ and bifurcate it to get a better understanding.
Quantum of new business done by an insurance company in one year is known as Gross Premium. This measures the new business’ amount earned by a company in one year. Another name of Gross Premium is Written Premium.
For example, suppose an insurance company, ABC Life, gets 1000 new customers in one year. All 1000 of them buy the same policy which requires them to pay Rs 100 each in a year. Then ABC Life’s Gross Premium of that particular year will be 1000 x 100 = Rs 1,00,000.
Insurance is a risky business. An insurance company takes the risk of their insuree upon themselves in return for some pre-decided amount (premium). No one can predict perfectly that the insuree will meet the norms of the policy and raise a claim. Thus, an insurance company face various kinds of risks.
To limit their risk, these insurance companies take the help of a reinsurance company. These reinsurance companies charge a part of premium from insurance companies and take some part of the risk on themselves. If the insuree files a claim, both the reinsurance and insurance companies are liable to pay the benefits in a proportion decided earlier.
It represents premiums earned on the part of an insurance policy which has expired. Premiums which are collected for an active portion of an insurance policy are considered unearned premiums.
Earned premiums can be used to pay for expenses but unearned premiums still posses the risk that the insuree can file for a claim. Thus, the earned premium becomes a very important metric.