Georgia Property & Casualty Practice Exam

How does an insurance rate differ from an insurance premium?

1. A rate is the price of insurance for each unit of exposure. A premium is a periodic payment for insurance coverage.

2. There is essentially no difference between them.

3. A rate is the final calculation of what the cost of insurance will be.

4. Premiums include loss costs and expenses, but rates do not.

The correct answer is: A rate is the price of insurance for each unit of exposure. A premium is a periodic payment for insurance coverage.

An insurance rate and an insurance premium represent different concepts in the insurance industry. The definition of a rate is essentially the price of coverage calculated per unit of exposure, such as per $1,000 of coverage or per vehicle, depending on the type of insurance. This rate is determined through various factors such as risk assessment, loss history, and market conditions. On the other hand, a premium is the amount the policyholder actually pays, which reflects the total cost for coverage over a specified period, typically annually or semi-annually. It is derived from the insurance rate multiplied by the unit of exposure needed. Thus, the premium will vary with the rate, type of coverage, and any discounts applied. In summary, recognizing that the rate serves as the foundational cost per unit of exposure while the premium is the actual payment made by the insured encapsulates the essential difference between these terms.