How Are Insurance Premiums Calculated?


Quick Answer

Insurance companies calculate insurance premiums by estimating the likelihood of a claim using available data about a policy applicant's life history, age and health. If the insurance company deems that the probability of a claim is high, the insurance premium will also likely be high and vice versa, according to Investopedia.

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Full Answer

An insurance premium is basically the cost of coverage that insurance companies charge their clients. While insurance companies often quote premiums, the actual charge on premiums may change after the underwriters of the companies are done analyzing and calculating the statistical data on the client.

All potential insurance customers go through an underwriting process before insurance companies provides them with coverage, notes Investopedia. Underwriting usually involves examining important data about a customer such as diseases that run in his family, medical history and motor vehicle reports.

The data are analyzed by actuaries, who are expert statisticians. The main task of actuaries is to predict the likelihood of the potential client to make a claim on his policy. Actuaries also use mathematical calculations to predict the probability of losses due to sickness and death. From these calculations, actuaries create mortality and sickness tables to determine when an individual will likely get sick or die. Based on all the information from the mortality and sickness tables, the insurance company will determine the premium to charge a client.

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