An insurance premium is the price paid by the policyholder to the insurer to maintain an active insurance policy or cover. It is typically paid annually or monthly.
Contract Function: Paying the premium ensures your contract is in force, meaning the insurer is legally obligated to respond to claims under the policy's terms.
Components of Your Premium
Your total premium is based on a structured risk assessment plus mandatory government charges.
1. Risk Factors (The Insurer's Charge)
The cost is determined by factors that assess the likelihood and cost of a claim:
- Risk Exposure: The nature of your industry, specific business activities, and operational location.
- Chosen Limits: The Sum Insured (for property) or Limit of Liability (for PI/PL) you select.
- Claims History: Your past loss record, which indicates future claims probability.
- Business Metrics: Operational details like revenue, turnover, and number of staff.
2. Statutory Charges (Mandatory Levies)
These levies are added to the insurer's charge and must be paid by the policyholder:
- Goods and Services Tax (GST)
- Stamp Duty (Tax imposed by state/territory governments, rate varies by location).
- Emergency Services Levies (ESL) (Mandatory charge in states like NSW, VIC, and TAS to fund fire and emergency services).
Premium vs. Excess: What's the Difference?
Policyholders often use them interchangeably, leading to confusion about their financial obligations and how they impact the final claim settlement. Understanding the difference is crucial because one is paid to secure coverage, and the other is paid to use it.
| Feature |
Premium |
Excess (Deductible) |
| What it is: |
The fee paid to purchase and maintain the policy. |
The agreed amount paid by you when a claim is made. |
| When it's paid: |
Paid upfront (annually or monthly). |
Paid only at the time of loss (to utilise the claim process). |
| Purpose: |
Transfers risk from the insured to the insurer. |
Shares risk between you and the insurer (co-insurance). |
| Influence: |
Choosing a higher excess lowers the premium. |
Choosing a lower excess raises the premium. |
