Calculating the value of the premium: determining ‘any risk’
It is very important that an insurer has sufficient resources with which to meet any claims made. To ensure this, insurers employ underwriters to determine the ‘risk’, that is, the possibility of a loss occurring to the interest a policyholder wishes to insure. The higher the possibility of a loss occurring, resulting in a claim being made against the insurer, the higher the premium to cover that risk will need to be. This charge forms the basis of the ‘fair and equitable’ premium.