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How do insurance companies calculate the premium for an event that has a fixed chance of occurring i.e. how do they turn the knowledge of a chance of an incident into premium?
Wiki User
∙ 15y ago
First of all there is no insurance available against any event/risk which has fixed chance of occurence. However, the premium charged by an insurer is calculated as follows, of course as per acturial studies based on law of large numbers:- Premium = (Probable loss x probability of loss)+G&A Expenses + Normal profit
Wiki User
∙ 15y ago
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Insurance refers to the commercial arrangement in which a business establishment accepts the liability of risks faced by individuals for a small sum of fee called premium. Companies providing such insurance are called insurance companies. Insurance companies help to spread the risk of loss among a large number of their clients. For example when a company insure your car for a small sum against accidents, it charges a yearly insurance which is much less than the losses you may have to bear if the accident actually happened. In return it will compensate you for the actual losses incurred if an accident actually happens. In this arrangement the clients of the insurance companies benefit by avoiding a major but uncertain loss which they may be ill prepared to bear by accepting to pay a small but certain premium. Not only they avoid the big loss they also buy the Peace of mind by knowing that if some thin goes wrong, the insurance companies will bear the losses. The insurance companies benefit as the premium is so calculated the even after paying for all the losses occurring against insured events, they will still be left with some surplus profit. Insurance and insurance companies are grouped in two broad classes - life insurance and general insurance. Life insurance is protection against pre-mature death of a person. In case, of premature death of a person, his nominated survivors are paid a sum substantial sum of money. This sum of money is agreed in advance and the insured person pays premium to insurance company in proportion to this. General insurance refers to insurance for any thing other than life. It covers loss of property due to reasons such as theft, accidents, and natural calamities. It also covers expenses for some specific purposes such as medical treatment and liability for payment of compensation to victims of road accidents.
What are the objectives of insurance?
Insurance refers to the commercial arrangement in which a business establishment accepts the liability of risks faced by individuals for a small sum of fee called premium. Companies providing such insurance are called insurance companies. Insurance companies help to spread the risk of loss among a large number of their clients. For example when a company insure your car for a small sum against accidents, it charges a yearly insurance which is much less than the losses you may have to bear if the accident actually happened. In return it will compensate you for the actual losses incurred if an accident actually happens. In this arrangement the clients of the insurance companies benefit by avoiding a major but uncertain loss which they may be ill prepared to bear by accepting to pay a small but certain premium. Not only they avoid the big loss they also buy the Peace of mind by knowing that if some thin goes wrong, the insurance companies will bear the losses. The insurance companies benefit as the premium is so calculated the even after paying for all the losses occurring against insured events, they will still be left with some surplus profit. Insurance and insurance companies are grouped in two broad classes - life insurance and general insurance. Life insurance is protection against pre-mature death of a person. In case, of premature death of a person, his nominated survivors are paid a sum substantial sum of money. This sum of money is agreed in advance and the insured person pays premium to insurance company in proportion to this. General insurance refers to insurance for any thing other than life. It covers loss of property due to reasons such as theft, accidents, and natural calamities. It also covers expenses for some specific purposes such as medical treatment and liability for payment of compensation to victims of road accidents.
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