Insurance Premium
Overview
Every insurance contract turns on one payment: the premium. It is the price of transferring your risk to the insurer, and it is the single thing that makes the whole promise legally binding. Pay it and the insurer is bound to pay your claim; fail to pay it and there is no contract at all. Yet the figure on your policy is not plucked from the air. It is built up, piece by piece, from the insurer's estimate of what your risk will cost.
In this lesson you will learn what a premium really is, how an underwriter decides its size, and how a bare risk cost grows into the office premium you actually pay once expenses, a margin for surprises and a profit are added on. You will rate a premium yourself from real claims figures, and you will work out what an insurer must refund when a policy ends early. These are the calculations WAEC sets almost every year.
Objectives
- Define the premium and explain its function as the consideration in an insurance contract
- Describe the factors an underwriter considers in determining a premium
- Explain loading and state the reasons an insurer adds it to the basic rate
- Explain when a return premium becomes payable and calculate a simple return premium
Lesson Note
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Lesson Evaluation
Congratulations on completing the lesson on Insurance Premium. Now that youve explored the key concepts and ideas, its time to put your knowledge to the test. This section offers a variety of practice questions designed to reinforce your understanding and help you gauge your grasp of the material.
You will encounter a mix of question types, including multiple-choice questions, short answer questions, and essay questions. Each question is thoughtfully crafted to assess different aspects of your knowledge and critical thinking skills.
Use this evaluation section as an opportunity to reinforce your understanding of the topic and to identify any areas where you may need additional study. Don't be discouraged by any challenges you encounter; instead, view them as opportunities for growth and improvement.
- The premium in a contract of insurance is best described as the: A. Amount the insurer pays when a loss occurs B. Consideration paid by the insured for the cover C. Value of the property insured D. Profit made by the insurer Answer: B
- Which of the following is NOT a form of loading? A. Expense loading B. Profit loading C. Pure premium D. Contingency loading Answer: C
- A pure premium of 20,000 naira is loaded with total loadings equal to 40 per cent of the pure premium. The office premium is: A. 24,000 naira B. 28,000 naira C. 8,000 naira D. 20,400 naira Answer: B
- Which factor would an underwriter LEAST consider when rating a private motor policy? A. Age and experience of the driver B. Value of the vehicle C. Purpose for which the vehicle is used D. Blood group of the driver Answer: D
- A one-year policy carries an annual premium of 60,000 naira. The insurer cancels it after six months. The pro rata return premium is: A. 60,000 naira B. 45,000 naira C. 30,000 naira D. 15,000 naira Answer: C
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