Premium
Regular payment made by a policyholder to maintain insurance coverage.
FAQs
What factors cause insurance premiums to increase?
Insurance premiums increase due to: rising claims costs (medical inflation increasing health insurance costs, repair cost increases affecting auto and property premiums), adverse claims experience (individual policyholder's claims history triggering higher renewal rates), broadened coverage (adding new coverage types or higher limits), market-wide losses (catastrophic events—hurricanes, wildfires—driving industry-wide premium increases), increased risk exposure (business growth, new locations, new products), changes in reinsurance costs (reinsurance premium increases flow through to primary insurance pricing), regulatory changes (new required coverages), and inflationary pressures on insured values (building replacement costs rising faster than insured values).
What is the difference between a premium and a deductible?
The premium is what you pay to maintain insurance coverage—an ongoing cost paid regardless of whether claims occur. The deductible is the amount you pay out-of-pocket per claim before the insurance company covers the remainder. Premiums and deductibles have an inverse relationship: higher deductibles reduce premiums (you're absorbing more risk yourself, reducing the insurer's expected payout) while lower deductibles increase premiums (the insurer covers from a lower threshold). Selecting the right deductible level involves comparing premium savings from higher deductibles against the financial impact of paying that deductible if a loss occurs.
How are insurance premiums recorded in financial statements?
For the insured, insurance premiums paid are typically recorded as prepaid expenses on the balance sheet and expensed ratably as the coverage period passes (e.g., a $12,000 annual premium is recorded as a $12,000 prepaid asset, then reduced by $1,000 per month as insurance expense). Short-duration policies (12 months or less) are handled differently than long-duration policies. For the insurer, collected premiums are recorded as earned premium (recognized over the policy period as the insurer provides coverage) and unearned premium reserve (premiums for the unexpired coverage period, a liability). The accounting for insurance contracts is governed by IFRS 17 and ASC 944.
Related Terms
Deductible
Amount the insured must pay out-of-pocket per claim before insurance coverage begins.
Underwriting
Process of evaluating, pricing, and accepting or rejecting insurance risk based on applicant characteristics.
Actuarial Analysis
Statistical and mathematical analysis of financial risks using probability and data to price insurance and manage reserves.
Reinsurance
Insurance purchased by insurance companies to transfer part of their risk to other insurers.