Premium

Premium

The price charged by a insurance company for an insurance is called premium.

It is the monetary consideration paid by the insured to the insurer for the insurance guarantee granted by the policy.

Characteristic of the Premium

It is Monetary Consideration for the insurer for a promise to compensate loss.

It can be remitted by the assured personally or through institution.

Payment of first insurance is the acceptance of the contract.

Non payment of the premium may cause the lapse of the policy.

The rate of the premium is determined by the class of risk involved.

Factor affecting the Premium Rate

Mortality Rate

Interest Rate

The rate of expenses

Reserve fund

Bonus or guaranteed additions

Age and health conditions

Types of policies

Competitors Rate

Classification of premium

Net Premium: It is a part of the premium which is essential for discharging the death or maturity. It is classified as

Net Single Premium

Net installment premium

Gross Premium:

Calculation of Premium

Net Premium = Mortality Rate + Rate of Interest

No. of assured

Assumptions

Premium is collected in the beginning of the contract

In

Meaning of Premium

Premium is the consideration money that a policyholder has to pay in lieu of the benefit that the insurer promises to confer on the happening of the scheduled eventuality

Types Of Premium:

Net Premium: Net Premium is a part of total premium, which is essential for discharging the death of maturity claims. It is calculated by multiplying the mortality rate by total sum insured. Net premium is further classified in two categories i.e. Net Single premium and net installment premium

Gross Premium: Net Premium +Insurance expenses incurred by insurer

Factors affecting Premium Rate

Mortality rate

Interest Rate: The money so collected by the LIC towards premium can be invested in some profitable schemes and earn profit by way of interest. The rate of premium is reduced accordingly on the basis of income earned by the way of interest

The amount of expenses incurred by insurer

Reserve Fund: Insurance companies require huge amount of funds to compensate unexpected events . Therefore all the insurer add little amount to the premium for this requirement

Factors affecting Premium Rate

Provisions for the payment of bonus to the insured after a definite interval of time

Age and health conditions of insured

Type of policies

Rate of tax rebate: usually income tax rebate is allowed on premiums paid. In those policies where the tax rebate is higher, the premium rate is kept higher.

Competitors rates charged

Plans or methods for computation of premiums

1. Assessment Plan: Under this plan, premium is determined at the time of payment of claims, not at the time acceptance of insurance proposal. This method is not followed at the present time.

2. Natural Premium Plan: Under this method, Premium is determined on the basis of mortality table used by different insurers

3. Level Premium Plan: In this plan uniform premium rate is paid throughout the insurance period

Calculation of Insurance Premium

Calculation of net premium: Net premium refers to the premium which is sufficient to discharge the payment of insurance claim, but no provision of other expenses are included in it.

Net premium = Mortality rate +Rate of Interest

No. of Assureds

Calculation of Insurance Premium

Calculation of gross Premium: Gross premium is calculated by considering mortality rate, interest rate as well as administrative and other expenses

Gross Premium = Net premium + Loading

Loading: loading refers to the process of including the expenses of operative cost and other kind of expenses to net premium. These expenses include expenses incurred for getting new business, collection of premiums, service charges and other office expenses

Distribution Channel

A multi-channel strategy is better suited for the Indian market. Indian insurance market is a combination of multiple markets. Each of the markets requires a different approach.Apart from geographical spread the socio-cultural and economic segmentation of the market is very wide, exhibiting different traits and needs.

Various Distribution Channel

Agents

Banks

Brokers

Internet

Corporate Agents

Various Distribution Channel

Agents: Agents are the primary channel for distribution of insurance. The public and private sector insurance companies have their branches in almost all parts of the country and have attracted local people to become their agents.Today's insurance agent has to know which product will appeal to the customer, and also know his competitor's products to be an effective salesman who can sell his company, the product, and himself to the customer.To the average customer, every new company is the same. Perceptions about the public sector companies are also cemented in his mind. So an insurance agent can play an important role to create a good image of company.

Banks: Banks in India are all pervasive, especially the public sector banks. Many insurance companies are selling their products through banks. Companies which are bank owned, they are selling their products through their parent bank.The public sector banks, with their vast branch networks, are helpful to insurance companies. This channel of selling insurance is known as Bank assurance.

Brokers: Now a days different financial institution are selling insurance. These financial institutions are known as brokers.They are taking some underwriting charges from the insurance companies to sell their insurance products.

Internet: In this technological world internet is also a channel of selling insurance. This can be as direct marketing.

Corporate agents: Corporate agency is a cross selling type of channel. Insurance companies tie-up with business houses in other industries to sell insurance either to their employees or their customers. Insurance industry, during the past 2 years has witnessed a number of such strategic tie-ups and alliances. Corporate