What is the function of an insurance premium?

The function of an insurance premium is to represent the amount paid by the insured for coverage. This payment is essential for the insurer because it constitutes the fundamental revenue source for the insurance company, allowing them to provide financial protection and cover claims made by the policyholders. Premiums are typically calculated based on various factors, such as the level of coverage, the risk associated with the insured entity, and the type of insurance.

A premium ensures that the insured has access to the coverage specified in the insurance policy, helping them mitigate potential financial losses from unforeseen events. It is important to understand that premiums can vary significantly depending on the policyholder's risk profile and the specifics of the insurance being offered. This connection between premium payments and the coverage provided is a foundational principle in the functioning of insurance.