What is the definition of an insurance premium?

Insurance premium refers to the amount that an individual or business pays to an insurance company to obtain coverage under a specific insurance policy. This payment can be made as a one-time payment or in installments (monthly or annually) depending on the terms of the policy. The premium is essentially the cost of transferring the risk of potential future losses from the policyholder to the insurance company; in return, the insurer agrees to provide financial protection against covered losses.

Understanding the premium's significance is vital, as it's a fundamental aspect of how insurance works. It reflects the level of risk the insurer must manage, which is determined by the policyholder’s circumstances, such as their health, driving record, property value, and other factors that can influence the likelihood and potential severity of a claim being filed.

The other options do not encapsulate the true nature of what an insurance premium is. Running an insurance company involves various operational costs, while fees charged to brokers and commissions earned by agents relate more to the distribution and selling aspects of insurance rather than the cost of coverage itself. Therefore, the definition of an insurance premium is clearly outlined as the amount the insured pays for the coverage provided by the insurance policy.