AD Banker Comprehensive Practice Exam

On what basis do insurers generally calculate premiums?

1. A weekly basis

2. An annual basis

3. A monthly basis

4. A daily basis

The correct answer is: An annual basis

Insurers typically calculate premiums on an annual basis because this timeframe aligns with the standard duration of many insurance policies. By using an annual basis, insurers can effectively assess risk, manage cash flow, and project long-term earnings. Calculating premiums annually allows companies to take into consideration various factors such as the insured's age, health, the level of coverage, claims history, and overall market conditions to arrive at a stable and appropriate premium amount. Additionally, annual payments can simplify accounting and administrative processes, making it easier for both the insurer and the policyholder to track payments over a defined period. This approach is more practical compared to weekly, monthly, or daily calculations, as these shorter intervals can lead to fluctuations in the premium amounts due to changing risks or conditions, which could overwhelm the underwriting process and complicate customer relations. Therefore, an annual calculation creates a predictable premium structure that benefits both parties involved in the insurance agreement.