What is the formula for calculating premium?

The formula for calculating premium is appropriately captured as "Risk + Expenses - Interest." Understanding this formula involves recognizing the components that contribute to setting an insurance premium.

In this context, "Risk" refers to the likelihood of a claim being made based on the insured individual's risk profile. Insurers assess various factors, such as age, health status, and lifestyle, to determine the level of risk associated with insuring the individual. Higher risks usually lead to higher premiums.

"Expenses" encompass the costs incurred by the insurance company for administrative tasks, commissions, and maintaining the policy. These operational costs must be factored into the premium to ensure the insurer remains financially viable.

"Interest" is tied to the investment income that an insurer generates through the premiums received. As premiums are collected, they can be invested, and the interest earned on these investments can offset some of the premium cost. By subtracting interest from the total of risk and expenses, the formula reflects how investment income can help minimize the overall cost the policyholder needs to pay.

Together, this formula provides a comprehensive means of establishing a fair premium based on the insurer's risk exposure, operational costs, and earning potential from investments.