Premium income is the money an insurance company receives from collecting premiums, which is one of their main sources of income. It must cover all expenses and claims, and is regulated by a governing body. Projections are made by the underwriting department to determine premium income for the year.
Premium income generally refers to the money an insurance company receives from collecting premiums from customers. Not all of this money is considered profit because claims must also be paid with this money, as well as administrative expenses. However, it is one of the main sources of income for many insurance companies, along with investment income. Premiums are generally regulated by a governing body and therefore cannot be excessive or outside of a certain range for the industry and protections offered.
Insurance companies generally count premium income at the end of the year due to changes an insured might make during the year. For example, if a customer prepays for a policy and later cancels it, the unused portion of the premium is generally known as the unearned premium. That portion is often refunded to the person who paid the premium, less any administrative fees imposed.
Unsurprisingly, premium income is the main source of income for an insurance company. Their sole raison d’être is to collect premiums and cover losses submitted as claims. Therefore, the income is vital to the overall operations of the insurance business. While other sources of income are important, they are generally based on money received from premium collections.
As an example of how premium income affects other sources of income, look at investment income. Without receiving premium income, there is no other money to invest. Therefore, it all starts with the collection of bonuses. Also, the income from those premiums must cover all expenses or the company could face a loss, especially if other sources of income do not offset the expenses.
To determine what premium income can be, or should be, for a given year, the underwriting department of an insurance company makes projections. Those projections, due to the law of large numbers, become more accurate as the company adds more policyholders. In other words, the larger the number of people in the group, the more predictable the losses will be. The amount is calculated and the premiums are evaluated.
In general, premium income is based on annual figures, although some companies may set up easier monthly payment plans for customers. In general, the goal is to ensure that, at the end of the year, income from premiums and other sources meets or exceeds the expenses incurred. This is determined by looking at year-end balance sheets.
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