People face common risks. An insurance policy provides indemnity to the insured in the event the risk occurs. However, it is not known beforehand how many persons on the average suffers losses. People who come together to insure their risks, do so by making their small contribution to a common fund. The contribution is also called premium and is calculated based on the probability of risk. The higher the risk, the more premium is charged to pay claims and vice versa.
- Premium = Premium rate * Sum Insured
The total premium or contribution is the total of premium paid by each of the insured. It is expected that the total losses paid to the insured equals their total contribution to the insurance fund.
- Total Premium = Total Losses
For example:
- 100 TV sets are insured @ $2000 each set.
- Probability of loss every year is 15 sets resulting in a total loss of $30000.
The premium that should be collected from each of the 100 insured should be at least $30000 for claims payment. We are ignoring office expenses and profits for the insured.
- The premium amount = $30000/100 = $300.
Therefore, if each of the 100 insured pay $300, a common fund of $30000 is created to pay the claims.
No comments:
Post a Comment