What is an Insurance Premium?

An insurance premium is the fee paid to obtain insurance coverage. The insurer agrees to take on the risk stated in the insurance policy in exchange for this payment. Thus, the payment is made to shift risk from the insured party to the insurer.

The amount of an insurance premium depends on many factors, including the nature of the coverage, the degree of price competition faced by the insurer, the risk profile of the insured party, and the probability of a claim being made by the insured party. Premiums are devised by actuaries, who include a variety of risk factors in their calculations.

Accounting for an Insurance Premium

The insured party pays the premium to the insurer either in advance of coverage or over the course of the coverage period. If the insured party fails to pay a premium, the related insurance coverage is cancelled, though it may be restored if the premium is subsequently paid. The insurer can recognize this premium as income when it is earned, though it also incurs a liability to pay for any losses sustained by the insured party, in accordance with the terms of the associated insurance contract.