Also known as a subject premium or an underlying premium, a base premium is that amount of the premium on an insurance policy that is utilized to determine the amount of reinsurance premium that applies to the coverage. This type of premium is helpful in calculating the total premium involved when an insurance provider chooses to reinsure the policies written to clients, effectively passing on the risk associated with those policies to another insurer while still retaining the ultimate liability for those policies. Since many insurance companies routinely work with reinsurance providers to help minimize their risk, calculating the base premium properly is a very important task.
The process for calculating a base premium typically involves identifying the premium that is charged to the client for the insurance coverage, then allowing for what is known as the rating factor. The rating factor will vary, based on the type of insurance involved as well as elements that also had some impact on arriving at the premium paid by the client such as location, age of the insured, and other relevant details. After evaluating the degree of risk associated with the reinsurance request, the reinsurance company can provide a quote to its client.
If the quote arrived at by identifying the base premium and the related factors is acceptable, then the two providers enter into an arrangement that essentially allows the original insurer to continue interacting with the covered party and remain liable for the covenants found in the insurance contract. What will change is that the reinsurance company will pay out any claims made and approved related to those covered policies. In the event that the reinsurance company should default in some manner, the original insurer remains accountable to the covered party and will have to settle the claims directly.
Since reinsurance is a viable means of reducing risk associated with a number of different types of insurance policies, most providers have guidelines in place for assessing the base premium. Both individual polices and group policies may be reinsured, based on the level of risk that the reinsurance company is willing to take on in return for charging a certain monthly or annual premium. Since premiums of all type are subject to review from time to time, there is always the chance that the base premium will increase or decrease when it is time to renew the arrangement for another term, a practice that helps the reinsurance company to keep risk within acceptable parameters.
