Insurance guide - risk & premium

The following factors have a bearing on the premium to be charged and often are deciding factors in assessing the probability of insuring the risk in question.

- The risk element must be present and of sufficient magnitude to require insurance.
- The risk insured by the company must have a wide spread to avoid the probability of localised risk, endangering the financial structure of the company.
- The risk must be such that accurate information is available to ensure that the probable degree of risk can be mathematically calculated, so as to ensure that the premiums charged are in proportion to the risk involved.
- If an insurance scheme is to be viable, the cost of the insurance must be within the reach of a large enough section of teh community to ensure a wide enough spread of risk and that sufficient funds are available to make compensation
- The degree of risk (frequency of the event happening) is related to the premium. If the degree of risk is high, the premiums will be high.
- Where the amount insured is high and this is coupled with a high degree of risk, the premiums demanded will be proportionately high.
- The premiums must be sufficient to meet the liabilities of the company and to provide for reserves and an adequate return on capital to the insurance company owners. (Of course, the insurance have a further income generation option available to them, other than premiums. They can invest the premiums in high interest accounts and the stock market etc. This source of income is very significant, and comanies that excel in this field have the scope to grow and compete agressively).

Read the first article of this series

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