In an insurance policy, the insured is not the only one who benefits from the agreement. As the client avails the insurance policy an agreed amount or a premium had been settled upon to be paid as stated in the policy. The rate of the premiums may vary depending on the insurance company’s policy.
How do insurance companies profit from this industry?
Insurance companies profit from earned premium. Earned premium is the total amount of premiums collected by the insurer based on the ratio of the time passed on the period it has been in effect. The rate amount paid in advance has now been earned by the insurer.
For instance, if you availed an insurance policy of $1,000 for a span of two –year life and there will be no claim or nobody filed for claim in six months, the insurance company will earn $250. You have to take note that even if you cancel the policy, the earned premium will never be returned to the insured.
How insurance companies calculate earned premiums?
There are two ways to calculate earned premiums- exposure method and accounting method. The exposure method calculates the earned premium through the percentage of the total premium that was exposed in the loss during the period it has been calculated and does not take into account when the premium was still collected. On the other hand, the accounting method shows earned premiums the way it is highlighted in the income statements of most insurance companies.
However, if you also want to know how much money your insurer gained from your insurance policy, you can still have your own calculation. Start by considering your original premium value to the and the time when the policy has started to be in effect without any claims filed and putting that percentage of time to the amount of the loan.
The earned premium ensures the benefit of the insurance company in not paying out on the policy. As you are being careful in choosing your insurance policy, the insurer also takes into account to calculate potential losses and risks. That is business. The goal of insurance companies is to lessen payables while keeping profits high. This is why they present low risk policies and if possible deny claims on the basis of some technicality.
When time comes that insurance companies will have to send account statements to the policy owners, the company will never disclose such reality to their clients. As much as possible they will never let their clients know about the big benefits the company will gain.
On the other hand here is the unearned premium. This is a part of the premium which the company has not yet earned. This will not be earned provided that this is not a part of the coverage for the full term of the policy. If the policy holder will resort for early cancellation of the policy, part of the unearned premium will be returned.