How is the insurance premium determined?

How is the insurance premium determined?

• A. Premium equals rate per unit only.
• B. Premium equals exposure units only.
• C. Premium equals rate times exposure units.
• D. Premium equals the sum of rate and exposure.

Answer: (C)

Premium is determined by multiplying the rate by the number of exposure units. The rate is the price assigned to each unit of risk, reflecting factors like coverage, class, claims history, and other rating variables. The exposure units measure how much risk is being insured—such as the insured value of property, payroll, or miles driven. The product of these two gives the base premium: price per unit times how many units exist. After this base, adjustments like discounts or surcharges can modify the final amount. Using only the rate or only the exposure would miss one of the essential factors, and adding them would not correctly reflect how premiums are calculated.

Premium is determined by multiplying the rate by the number of exposure units. The rate is the price assigned to each unit of risk, reflecting factors like coverage, class, claims history, and other rating variables. The exposure units measure how much risk is being insured—such as the insured value of property, payroll, or miles driven. The product of these two gives the base premium: price per unit times how many units exist. After this base, adjustments like discounts or surcharges can modify the final amount. Using only the rate or only the exposure would miss one of the essential factors, and adding them would not correctly reflect how premiums are calculated.