What are the three main factors that determine an insurance premium?

The three main factors that determine an insurance premium are mortality, expense, and interest. Mortality refers to the probability of death within a certain time frame, which significantly influences the cost of life insurance premiums. Insurance companies use statistical data to estimate these probabilities, and the higher the risk of mortality, the higher the premium will generally be.

Expense relates to the operational costs that an insurance company incurs while providing coverage, which includes administrative expenses, marketing, and commissions paid to agents. These costs must be factored into the premiums to ensure the company remains financially viable while meeting its obligations to policyholders.

Interest refers to the return that the insurance company expects to earn on its investments. Premiums collected are invested, and the income generated from these investments helps offset the costs of claims and administrative expenses. A higher expected rate of return can lead to lower premiums, as the insurer can rely more on investment income to support its obligations.

Each of these factors plays a critical role in determining the overall premium a policyholder will pay, reflecting the balance between the risk of claims, the operational costs of the insurer, and the income generated through investments.