What Is the Basic Premium Factor?
The basic premium factor is the acquisition expenses, underwriting expenses, profit, and loss conversion factor adjusted for the insurance charge for a policy. The basic premium factor is used in the calculation of retrospective premiums. It does not take into account taxes or claims adjustment expenses, which are instead covered in the other components of the retrospective premium calculation.
Key Takeaways:
- The basic premium factor is determined after an insurer sets the standard premium.
- The basic premium factor is the acquisition expenses, underwriting expenses, profit, and loss conversion factor adjusted for the insurance charge for a policy.
- The basic premium factor is used in the calculation of retrospective premiums and does not consider account taxes or claims adjustment expenses.
Understanding the Basic Premium Factor
The basic premium factor is determined after an insurer sets the standard premium. A policy’s retrospective premium is calculated as (basic premium plus converted losses) multiplied by the tax multiplier. The basic premium is calculated by multiplying the basic premium factor by the standard premium.
The converted loss is calculated by multiplying the loss conversion factor by the losses incurred. The basic premium is less than the standard premium because of the basic premium factor. The function is to provide the retrospective insurance company with funds to cover the administration of the retrospective plan.
How Premiums Are Formulated
The insurance charge adjustment allows the calculation to keep the retrospective premium between the minimum and maximum premiums but does not take into account the severity of claims or the loss limit.
The loss experience of an insurer depends on the frequency of claims and the severity of those claims. High frequency, low severity claims give the insurer a less volatile loss experience than low frequency, high severity claims. This is because an insurer is better able to predict through actuarial analysis what the losses from an insured will be if claims are frequently made.
Insured parties that bring high severity claims are likely to have higher premiums using retrospective premium calculations because they are more likely to hit the maximum premium.
The Role of Actuarial Analysis
Actuarial analysis is a type of asset to liability analysis used by financial companies to ensure they have the funds to pay the requiredliabilities. Insurance and retirement investment products are two common financial products for which actuarial analysis is needed.Actuarial analysis uses statistical models to manage financial uncertainty by making educated predictions about future events. Actuarial analysis is used by many financial companies to manage the risks of certain products.
Special Considerations
The calculations required for actuarial analysis are done by highly educated and certified professional statisticians who focus on the correlating risks of insurance products and their clients. Insurance companies typically use a schedule of estimated standard premiums when determining whether to recalculate the basic premium factor. If the standard premium is outside of the table ranges—typically a percentage above the estimated standard premium—the basic premium factor is recalculated.
FAQs
The basic premium factor is determined after an insurer sets the standard premium. A policy's retrospective premium is calculated as (basic premium plus converted losses) multiplied by the tax multiplier. The basic premium is calculated by multiplying the basic premium factor by the standard premium.
What is the basic premium factor? ›
The basic premium factor (BPF) is used in the retrospective formula to represent expenses of the insurer, such as acquisition, audit, administration, and profit or contingencies but not taxes.
What is a premium and how does it work? ›
The amount you pay for your health insurance every month. In addition to your premium, you usually have to pay other costs for your health care, including a deductible, copayments, and coinsurance. If you have a Marketplace health plan, you may be able to lower your costs with a premium tax credit.
What does base premium mean in insurance? ›
Base Premium means the premiums that are paid towards the Policy and excludes the premiums paid towards the Riders and does not include any taxes and/or levies.
What is premium basic? ›
X Premium has three tiers: Basic, Premium, and Premium+, with more features available in each higher tier. Basic: Includes essential Premium features like editing posts, longer posts and longer video uploads, reply prioritization, text formatting, bookmark folders, custom app icons, and more.
How do you calculate the basic premium? ›
The basic premium is calculated by multiplying the basic premium factor by the standard premium. The converted loss is calculated by multiplying the loss conversion factor by the losses incurred. The basic premium is less than the standard premium because of the basic premium factor.
On what basis premium is calculated? ›
The premium payable under a life insurance policy varies according to the policy buyer's age, selected coverage (or Sum Assured), medical history, gender, lifestyle, and annual income, among other factors. Moreover, the amount of premium for the same life coverage may vary from one insurer to another.
What is a premium for dummies? ›
Premium can mean a number of things in finance—including the cost to buy an insurance policy or an option. Premium is also the price of a bond or other security above its issuance price or intrinsic value. A bond might trade at a premium because its interest rate is higher than the current market interest rates.
How is the premium calculated? ›
Insurance premiums depend on a variety of factors, including the type of coverage being purchased by the policyholder, the age of the policyholder, where the policyholder lives, the claim history of the policyholder, and moral hazard and adverse selection.
How are premiums paid? ›
An insurance premium is the amount you pay to your insurer regularly to keep a policy in force. You may be able to pay premiums monthly, quarterly, every six months or annually, depending on your insurance company and your specific policy.
Basic premium: Your insurance amount before the NCD. Gross premium: Your insurance amount after the NCD.
What is premium basis? ›
Rates & Premium Basis
The premium basis, sometimes called an exposure basis, is based on a value per $1,000 of gross sales, payroll, or other defined metrics. An easy way to understand it is this: the insurer will use either your gross sales or payroll when determining what to charge your business.
What is a premium example? ›
premium noun [C] (EXTRA)
something extra given or an extra amount charged: You get a lipstick as a premium with the purchase of this makeup. Our customers are willing to pay a premium for a superior product. If you get something at a premium, you pay a high price for it, esp.
Is basic economy the same as premium economy? ›
In the battle between premium economy vs. economy, it isn't just the seats and overall space that's more, well, premium. It's the amenities, too — you'll have different meal options than you would in the main class cabin, as well as other perks like amenity kits and priority boarding.
What is a factor premium? ›
At the heart of factor investing lies the factor premium - the additional return investors gain by exposing themselves to specific risk factors. While many attribute these premiums to compensation for risk, the realm of behavioral finance offers deeper explanations.
How do you calculate premium basis? ›
The premium basis, sometimes called an exposure basis, is based on a value per $1,000 of gross sales, payroll, or other defined metrics. An easy way to understand it is this: the insurer will use either your gross sales or payroll when determining what to charge your business.
What is the basic of premium rate in life insurance? ›
Premium in life insurance refers to the amount that a policyholder will pay either in a lump sum or regularly to purchase the insurance policy. It is also known as policy premium. The insurers normally provide monthly or annual premium amounts for the life insurance plans.
