PSI Ohio Insurance Practice Exam

How is an insurance policy's gross premium calculated?

1. Interest + expenses - mortality

2. Mortality - interest + expenses

3. Expenses + mortality - interest

4. Interest - expenses + mortality

The correct answer is: Mortality - interest + expenses

To accurately calculate the gross premium of an insurance policy, it is essential to understand the components involved in the formula. The gross premium represents the total amount that an insured must pay for coverage over a specified period, and it consists of three main components: mortality, interest, and expenses. Mortality reflects the risk associated with the insured individuals; it's the likelihood of claims being made due to death or other insured events. Expenses include the operational costs incurred by the insurer in administering the policy, such as commissions, administrative costs, and other overheads. Interest represents the time value of money, acknowledging that the insurer can invest the premiums collected before claims are paid. The formula for calculating gross premium can be described as: Gross Premium = Mortality + Expenses - Interest In this context, mortality and expenses together represent the costs and risks faced by the insurer, while interest is deducted because it compensates for the insurer's income from investing the premium funds. Thus, the right answer's formulation logically combines these elements in a way that ultimately reflects the overall cost of the insurance policy to the insured.