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What is an insurance premium?

What is an insurance premium
Written by Online Starts

An insurance premium is the amount of money an individual or business must pay for an insurance policy. Insurance premiums are paid for policies that cover healthcare, auto, home, and life insurance.

To benefit from the guarantees of your contract, you must pay an insurance premium or contributions to your insurer. The amount of this premium often defines the level of coverage you benefit from. It often happens that the amount of the premium takes too much weight in the choice of contract and guarantees, which is why many French people find themselves under protection. To fully understand your insurance premium, you need to know its characteristics and specificities! So what is its method of calculation? What is the difference between a contribution and an insurance premium? What is a premium call?

Summary

1-Definition of an insurance premium
2-What is the distinction between an insurance premium and a contribution?
3-Understand the calculation of the insurance premium
4-In what cases can the insurance premium increase?
5-How to treat the insurance premium in accounting?
6-What is a premium call?
7-Definition of an insurance premium
8- An insurance premium is an amount that the underwriter of a policy pays to an insurer in 9-exchange for defined guarantees. In other words, it is the final amount that you pay at 10-the anniversary due at the end of the year, to be covered against the risks defined with the insurance company. The insurance premium is therefore annual.

Most insurance contracts are self-renewing, meaning they are renewed every year without you having to do anything. Thus, your premium is also automatically renewed, and if you wish to terminate your contract, you will have to oppose the tacit renewal clause.
Generally, the insurance premium increases depending on the number of coverages you subscribe to. The more guarantees you have in your insurance policy, the more risks are covered. For example, in auto and motorcycle insurance, your insurer will assess the risk you represent and refer to his reference premium to estimate the amount of the most appropriate premium for you and him. The reference premium takes into account the base rate set by the insurer and certain increases provided for by law. It is used as a basis for calculating the bonus-penalty coefficient.

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The insurance premium is made up of 3 parts:

the risk, representing the potential cost of the loss to be insured;
costs, corresponding to the management costs which allow the insurance company to cover its costs (rents, employee salaries, etc.);
profit, that is to say, the margin (positive or negative) that the insurer decides to grant to a certain population in connection with its commercial objectives. For example, if he wants to attract a young population, considered to be at risk, he will accept a negative margin on this population.

What is the distinction between an insurance premium and a contribution?
In insurance parlance, you might hear about premium and premium. These 2 terms represent the same thing: what your insurance policy will cost you. There is still a slight difference, even if this distinction is not however accepted by all (because in all cases, this is what the insured owes to the insurer):

the insurance premium is often accepted as the sum of all contributions, so it represents the total cost of the insurance contract for one year;
we talk about contributions when we want to talk about the monthly cost: this is the amount that you pay monthly (or quarterly) to your insurance company on the basis set by your contract.

So don’t be surprised if the premium amount is higher than the insurance premium!

When you take out an insurance contract, you often have the choice of the pace of your payments. Often, insurers offer all 3 options: monthly or quarterly contributions, or annual insurance premium. With some insurance companies, you may get a reduction if you choose to pay your insurance annually.

If you are looking to get insurance, it is important to compete with different insurance companies before signing any policy. We advise you to do this to find the contract with the most advantageous premium with the guarantees required and your level of risk. Whether you take out new coverage or want to change insurance, do not hesitate to compare the different possibilities, just like when you take an internet subscription or a sports license, for example!

To do this, Reassure me provides you with a free and anonymous online comparator: by providing only a little information about your situation (but not your contact details), you will obtain the best-personalized quotes on the market.
Understand the calculation of the insurance premium
The risk/premium calculation varies depending on the criteria assigned to the type of insurance. There is no definite calculation formula for an insurance premium. The insurer

will mainly look at the following criteria:

policyholder profile: age, state of health, the person responsible for previous claims;
insured object: home, car, mortgage;
location: prices vary by region, or if you live in an urban or rural area;
risk covered: if there are any guarantees, the insurance premium will increase;
deductible, often forgotten, strongly influences the amount of the insurance premium. The higher the insurance deductible, the lower the premium.
The insurance premium also includes taxes set by the government, such as the “terrorism tax”, which finances the guarantee fund for victims of acts of terrorism and other crimes.

You can find below the details of the 4 elements that make up the insurance premium:

Definition What does it correspond to?

Pure premium Amount of the average claim that the insurer must cover Risk premium
Security load Amount in addition to the pure premium, making it possible to resist the natural volatility of claims Margin
Charging for management costs Claims management costs and fixed costs Salaries, rent, equipment, compensation for victims
Taxes imposed by the government Climate change tax, terrorism tax, etc…

Thus, for home insurance, the insurer will look at the place of residence, the status of the insured (owner, tenant), the security of the accommodation (alarm, gate, etc.), the value of the goods present in the accommodation, etc. auto or motorcycle insurance, it will take into account the place of residence, the type of vehicle, the number of kilometers traveled per year, the level of protection desired, the location of your vehicle’s parking…

When you subscribe to mutual health insurance, the criteria will be more focused on your person. Supplementary health premiums are defined by the age group of 5 years: the older you are, the higher your premium will be. They also vary according to gender, as men and women do not have the same health protection needs (pregnancy, for example). The health insurance premium also depends on your needs: you may want greater guarantees for everything relating to ophthalmology, for example.

In the context of a real estate loan, the borrower insurance premium can be assessed according to two methods of calculation: variable contributions calculated on the outstanding capital and the risk premium on the one hand, and fixed contributions calculated on the initial capital on the other hand. In the first case, the contributions decrease over the course of the loan, since they are based on the outstanding capital. In the second case, the rate applied depends on the amount borrowed initially.

In what cases can the insurance premium increase?

In the conditions for increasing the insurance premium, there is an indexation clause that consists of linking the increase in guarantees and contributions to the progression of an index representative of the rise in prices in a field. Most contracts include this clause, which allows the insurance company to automatically readjust the amount of the premium and the level of guarantees in the same proportion. Thus, there is no need to modify the contract itself.

You can find the index amount on the maturity notice you receive each year as your contract anniversary date approaches.

The insurer may decide to increase the amount of the insurance premium, this is referred to as an increase in the insurance premium. However, the contract must include a “review clause” or an “adjustment of contributions”. If the insurance policy contains any of these clauses, the insurance company has the option of increasing the amount of the insurance premium. If the contract does not contain any and the insurer does so anyway, the insured can object to the increase and continue to be covered based on the old tariff. In the event of a dispute with your insurer over the amount of this increase and if you cannot find an amicable solution, you can appeal to the insurance mediator, as an impartial judge to help you settle this conflict.

In all cases, the company must inform its client, who has 15 days to 1 month to request the termination of the insurance if he does not accept this increase. Indeed, the increase in the insurance premium constitutes a valid reason for terminating your contract after the expiry date and without penalty.

Possible causes of an increase in the insurance premium

Various causes may justify the increase in the insurance premium or contributions, including addition or extension of cover, a worsening of the insured’s state of health, a penalty following a road accident, an addition of guarantee imposed by the State (for example a natural disaster guarantee)… In the latter case, the insured cannot contest the increase in the amount of his premium.

How to treat the insurance premium in accounting?

-A company has every interest in protecting itself against certain risks: such as degradation of goods, unpaid bills, loss of turnover, death of the head of the company, legal attacks, etc. Insurance premiums are posted to the “external services 61” account and more specifically to the “insurance premiums” account 616, itself further subdivided:
account 6161 Multi-risk;
account 6162 Compulsory construction damage insurance;
account 6163 Transport insurance;
account 6164 Operational risks;
has 6165 Insolvency customers.

Let’s take an example of car insurance accounting: a company receives a call from its insurer on July 1, 2017. The amount to be paid for the period from 07/01/2017 to 06/30/2018 is € 10,000. , the sum that will be withdrawn on July 15. It will therefore be necessary to record the call of July 1, 2017, in debit on account 616 “Insurance premiums” and in a credit of account 401 “Suppliers” for € 10,000, then note the payment on July 15, 2017, in debit of account 401 “Suppliers” and on credit to the 512 “Bank” account for € 10,000. The adjustment occurring at the end of the financial year must be recorded in account 486 “prepaid expenses”.

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