What are premiums in insurance?
To benefit from the guarantees in your policy, you must pay an insurance premium or contributions to your insurer. The amount of this premium often defines the level of coverage you receive.
It often happens that the amount of the premium takes too much weight in the choice of contract and guarantees, which is why many French people find themselves under-protected.
To fully understand your insurance premium, you need to know its characteristics and specifics! So what is its method of calculation? What is the difference between a premium and an insurance premium? What is a premium call?
Definition of an insurance premium
An insurance premium is an amount that the policyholder pays to an insurer in exchange for defined coverage. In other words, this is the final amount you pay on the anniversary due at the end of the year, to be covered by the risks defined with the insurance company. The insurance premium is therefore annual.
Generally, the insurance premium increases depending on the number of coverage you have.
The more coverage you have in your insurance policy, the more risks are covered. In-car and motorcycle insurance, for example, your insurer will assess the risk you represent and refer to its reference premium to estimate the amount of the premium that is most appropriate for you and him.
The reference premium takes into account the basic rate set by the insurer and certain increases provided for by law. It serves as the basis for calculating the bonus-malus coefficient.
The insurance premium consists of 3 parts :
the risk, representing the potential cost of the claim to be insured ;
the costs, corresponding to the management costs that allow the insurance company to cover its expenses (rents, salaries of employees…) ;
profit, that is, the margin (positive or negative) that the insurer decides to grant to a certain population in connection with its business objectives. For example, if it wants to attract a young population, considered to be at risk, it will accept a negative margin on that population.
What is the difference between an insurance premium and a contribution?
In the language of insurance, you will be able to hear about premiums and contributions. These 2 terms represent the same thing: what your insurance policy will cost you.
There is still a slight difference, although this distinction is not accepted by all (because in all cases, this is what the insured owes to the insurer) :
the insurance premium is often accepted as the sum of all contributions, so it represents the total cost of the insurance contract for one year ;
we talk about contributions when we want to talk about the monthly cost: this is the amount you pay monthly (or quarterly) to your insurance company on the basis set by your contract.
So, do not be surprised if the premium amount is higher than the insurance contribution!
When you take out an insurance contract, you often have the choice of the pace of your payments. Insurers often offer the 3 options: monthly or quarterly contributions, or annual insurance premium.
At some insurance companies, you can get a discount if you choose to pay your insurance annually.
If you are looking to insure yourself, it is important to compete with different insurance companies before signing any policy.
We advise you to find the contract with the most advantageous premium concerning the required guarantees and your level of risk. Whether you subscribe to a new cover or want to change insurance, do not hesitate to compare the different possibilities, just like when you take an internet subscription or a sports license for example!
Understanding insurance premium calculation
The risk/premium calculation varies according to the criteria assigned to the type of insurance. There is no defined calculation formula for an insurance premium. The insurer will primarily look at the following criteria :
subscriber profile: age, state of health, liability for previous claims ;
insured object: home, car, home loan ;
location: rates vary by region, or if you live in urban or rural areas ;
covered risk: If there are any guarantees, the insurance premium will increase ;
deductible, often forgotten, strongly influences the amount of the insurance premium. The higher the insurance deductible, the lower the premium.
The insurance premium also includes taxes set by the government, such as the “terrorism tax”, which helps finance the guarantee fund for victims of acts of terrorism and other crimes.
Thus, for a home insurance, the insurer will look at the place of residence, the status of the insured (owner, tenant), the security of the housing (alarm, gate…), the value of the goods present in the housing … For a car or motorcycle insurance, it will take into account the place of residence, the type of vehicle, the number of kilometers traveled per year, the desired level of protection.
When you subscribe to a health mutual, the criteria will be more focused on your person. Supplementary health premiums are defined by the age group of 5 years: the older you are, the higher the amount of your premium will be.
They also vary according to gender, as men and women do not have the same health protection needs (e.g. pregnancy). The health insurance premium also depends on your needs: for example, you may want more coverage for everything related to ophthalmology.
The borrower insurance premium, in the context of a home loan, can be assessed according to two methods of calculation: the variable contributions calculated on the outstanding capital and the risk premium on the one hand, and the fixed contributions calculated on the initial capital on the other hand.
In the first case, the contributions decrease over the loan, since they are based on the outstanding capital. In the second case, the rate applied depends on the amount initially borrowed.
In what cases can the insurance premium increase?
Conditions for increasing the insurance premium
There is an indexation clause that involves linking the increase in guarantees and contributions to the progress of an index representative of the increase in prices in an area.
Most contracts include this clause, which allows the insurance company to automatically and in the same proportion readjust the amount of the premium and the level of coverage. Thus, there is no need to change the contract itself.
You can find the amount of the index on the notice of maturity that you receive each year as the anniversary date of your contract approaches.
The insurer may decide to increase the amount of the insurance premium, this is called the revaluation of the insurance premium. However, the contract must include a “review clause” or a ” contribution adjustment clause “. If the insurance policy contains one of these clauses, the insurance company has the opportunity to increase the amount of the insurance premium.
If the policy does not contain any and the insurer does so, the insured may object to the increase and continue to be covered based on the old rate. In the event of a dispute with your insurer over the amount of this increase and if you cannot find an amicable solution, you can call on the insurance ombudsman, as an impartial judge to help you resolve this dispute.
In any case, the company must inform its client, who has 15 days to 1 month to request the termination of the insurance if he does not accept this increase. Indeed, the increase in the insurance premium is a valid reason to terminate your contract out of maturity and without penalty.
Possible causes of an increase in the insurance premium
Various causes may justify the increase in the insurance premium or contributions, among which an addition or extension of guarantees, a worsening of the insured’s state of health, a malus following a road accident, an addition of guarantee imposed by the state (for example a natural disaster guarantee)… In the latter case, the insured cannot contest the increase in the amount of his premium.
How to treat the insurance premium in accounting?
A company has every interest in protecting itself against certain risks: such as the degradation of goods, unpaid bills, loss of turnover, the death of the head of the company, attacks in court, etc. The accounting of insurance premiums is done on the account of the “external services 61” and more precisely on the account 616 “insurance premiums”, itself still subdivided into :
6161 Multi-Risk account ;
account 6162 Compulsory construction damage insurance ;
account 6163 Transport insurance ;
account 6164 Operating risks ;
counts 6165 Insolvency clients.
Take an example of accounting for auto insurance: a business receives a call from its insurer on July 1, 2017. The amount to be paid for the period from 01/07/2017 to 30/06/2018 is € 10,000, which will be deducted on 15 July. It will therefore be necessary to record the call of 1 July 2017 in debit on account 616 “Insurance Premiums” and in credit of account 401 “Suppliers” for 10 000 €, then to record the payment on 15 July 2017 in debit of account 401 “Suppliers” and in a credit of account 512 “Bank” for 10 000 €. The accrual occurring at the end of the financial year must be recorded in account 486 ” deferred charges “.
What is a premium call?
A premium call is a notice of maturity requesting payment of the insurance premium. The amount of the insurance premium to be paid as well as the deadline for payment must be recalled on this document.
The main maturity must be distinguished from the secondary maturity: the first defines the date until which you are covered, the second represents the splitting of your contributions (monthly, quarterly, semi-annual). In the context of a health mutual, for example, the call for contributions must be received at least 3 weeks before the expiry date of the contract.