There are several steps towards calculating the premium on an insurance policy provided by an insurance company in the United States.
The first step is usually conducted by an actuary, who is a professional who specializes in analyzing and managing risk for insurers, this will be an assessment of the general risks covered by the policy in respect of the general risks facing groups of people with similar characteristics to the policy holder. It is not possible for actuaries to identify the risk presented by a specific individual so it is necessary for them to take into account general characteristics to determine the level of risk. For example; in auto insurance younger drivers are considered to be more risky than drivers over the age of 25, this is because in general these younger drivers have more accidents than the older drivers.
Once the level of risk has been assessed by the insurer’s actuarial team, the insurance company must also include additional figures in its calculation of the premium.
The first is the administrative burden of the policy itself, which will include sums like the commission paid to a broker or an agent to find the client and sign them up to the policy, for the actual in house administration such as filing, IT support and other overheads the company will share between policy holders like building rental, and wage bill, etc.
The insurer also needs to build in a profit margin, as a business the insurance company has a responsibility to its shareholders to make a profit. This is also a good thing for policyholders as it ensures the long-term financial stability of an insurance company and suggests that they will be able to meet their obligations in the case of a rush of claims.
These figures are added together to calculate the overall premium for the client.