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Understanding Insurance Premiums: Definition and Examples

The amount billed at the time of purchasing the policy is a simple definition of the insurance premium. In short, insurance premiums are the cost of insurance.
Here’s a basic explanation to help you understand what it’s definition is and how it works.

What is Insurance Premium?

We all know that it takes money to buy insurance, but when it comes to buying insurance for the first time there is a new term called “premium”. In general, a premium is the amount paid by a person (or company) for a policy that provides vehicle, home, health or life insurance.

How Do Insurance Premiums Work?

Insurance premiums have a basic calculation which is then matched against personal information, location and other information. This will be a calculation of whether the prospective customer will get a discount added to the calculation of the basic premium so that he gets a discount on the premium fee.
Additional information is used to get the desired price or higher insurance premium or even cheaper. The following is a more detailed description of the four factors that determine premiums.
Insurance premiums have varying terms of payment. It can be yearly, semi-annually, or monthly. The decision to pay the premium up front is the decision of the insurance company because they can require it. They apply this because of the cancellation of insurance policies that are not paid by other customers.
Basically, the premium is the basis of the “insurance payment”. In certain cases the premium may be taxed subject to local insurance laws and the contract provider that a service fee may be added to the premium. Further information on local regulations regarding premium fees can be found in the OJK guidelines.
Any expenses for additional fees and other service fees will be detailed separately on the customer’s premium or account statement. Such fees will not be considered a premium.

What is the price of insurance premiums?

Insurance premium will be prices vary according to the type of insurance selected, as well as the risk.
That is the main reason that drives one to work with an insurance professional who can spend premiums on several insurance companies with satisfactory results.
Many people who do a comparison of insurance prices, find different premiums with other premiums in other insurance companies that save more money, usually companies like that are companies that provide more bonuses.

What are the Factors Affecting the Premium Price?
Insurance premiums are determined by four main factors:

1. Types of Insurance Coverage

Different optional offers are offered by insurance companies when a customer is interested in an insurance policy. This has an impact on the amount of customer premium costs that are adjusted to the amount of coverage entered.
For example, in home insurance premiums, an insurance policy that covers all risks will cost far above the insurance policy which only covers the risks stated in the policy.

2. Total Insured and Cost of Premium

Purchasing life insurance, health insurance, vehicle insurance, or other insurance will definitely incur a lot of premiums if the amount of coverage is higher.
There are two ways to determine it, the first way is very simple and the second way is more complex, but the best way is used to save premium costs.
It is possible to change the amount of the insured to the desired value. For example, insuring a house for IDR 2 billion will have a different price than insuring a house for IDR 10 billion. In simple terms it states that the amount of value insured will affect the high premium. This is an easier way. Of course, we can pay less for the equivalent amount of coverage if we buy a policy with a high deductible rate. In an additional health or health insurance policy the customer can take as well as a variety of policy options such as higher co-payments or relatively longer waiting times.

3. Personal History of Insurance Customers

Other determinants of insurance premiums that will be charged to the applicant are insurance history, place of residence and other life factors. All insurance companies have varying criteria.
There are companies that determine insurance prices that depend on personal factors, ranging from loan history to the frequency of vehicle accidents as well as customer claims history and work. These are often referred to as discounts on the cost of an insurance policy.
In the case of life insurance, another risk influence for the person being insured is age and health condition.
Just like any other corporate, insurance companies have targets. Insurance companies compete with each other by determining the profiles of potential customers they will target and offering plans and discounts to become more attractive in Indonesia. their targets.
Perhaps the target market of an insurance company is the elderly or retirees, while another company has a target market for new families and millennials.

4. Insurance Business Competition and Target Locations

An insurance company will deviate from its rates because it wants to attract as aggressive a segment as possible. The insurance company can change the cost of insurance premiums drastically temporarily or even permanently in the scenario of the insurance company being successful and earning high profits in its market.

Who Determines Insurance Premiums?

Of course, insurance companies employ people who are experts in various fields to determine risk. For example, an insurance company hires an actuary to determine:
The number of risks and the level of danger The cost of claims or when a customer experiences a disaster, it is the actuary who must determine estimates and actions based on these data.

The actuary will determine how much the customer must pay in accordance with the which exists. It also does a calculation for how much money an insurance company should have to make sure that they raise enough money to pay for potential claims and also make money.
The formation of underwriting can be helped by the data collected by actuaries. After that, the underwriter will be given guidance to guarantee the risk, and one of them is to determine the price. The company will determine the amount of money as the price of the insurance plan they offer to their customers.

Insurance Premiums Are Used For What By Insurance Companies?

Insurance companies receive premium payments from their customers and ensure they have sufficient funds in the form of liquid assets to be able to pay people’s claims.
Premiums from customers will be taken by the insurance company and set aside to be invested every year when the customer does not file a claim. If insurance companies can get more money than they for operational costs, claim costs, and other costs, it is an advantage for them.

Why Do Insurance Premiums Change?

When insurance companies experience rapid profits they may not increase insurance premiums. However, when they experience a decline in profits, namely when insurance companies have to pay a lot of claims from customers, they may have to rethink the structure of their insurance premiums and the risk factors in what is covered. Likely, the premium is raised in that scenario.

Examples of Changes in Insurance Premiums and Increases in Rates

One customer with another customer in the same insurance company can get a much different price. This can occur based on various personal factors, price reductions, or place factors, as well as competition with insurance companies from each customer profile.
The actuary will review an area to determine the risk factors. If the area shows a picture If it is low, the premiums charged to customers will be minimal or cheaper in that year. If at another time actuaries see an increase in crime, the occurrence of natural disasters, declining profits, or an increase in customer claims, they will review and increase the premium fee which is then charged to customers in the area during the new year. This is important for insurance companies to implement so that their business can survive. However, customers in these locations can then make an alternative and go to another insurance company.
By setting premium prices higher than before in the area, customers can change insurance companies. When insurance companies lose customers from the area because they are not willing to pay premiums that have been raised, it is likely that the profitability ratio will increase and losses will decrease. Declining claims and a corresponding premium price based on risk insurance companies not to change fees for their other customers.

Tricks to Get Lower Insurance Premiums

Finding the insurance company most interested in insuring you is a surefire trick to getting the lowest insurance premiums. When insurance company fees suddenly increase, customers should ask their agents about ways to reduce premiums.
Look for other companies if the insurance company does not want to change the premium charged. While looking for other companies, compare the prices, maybe will get a better price. By doing your research you will get a comparison to find the most suitable average cost of insurance.
Ask an insurance agent or professional to explain the reasons why premium costs are increasing. In addition, to help understand if you are in a position to find a suitable price and how if there is an opportunity to get a discount on the cost of insurance premiums.

Points What to Remember

Insurance premiums are the amount of money paid to the insurance company for the insurance policy you purchased. The determinants of insurance premiums are your insurance history, place of residence and other life factors. Insurance premiums will vary according to the type of insurance selected. To get the right price for the premium insurance, you need to do price comparisons with insurance companies that are interested in insuring you.