Insurance companies look at the total cost of claims and divide by the total number insureds to calculate a gross premium. Then the administrative cost of the insurance is added in to the total cost of claims, a risk factor is calculated and a premium emerges.
If the total cost of all claims from a child support insurance program were $120,000 per year and 1000 people participated by paying premiums, the gross premium would be $120 per year. ($120,000 divided by 1000).
But the administrative costs must be added to the total claims to account for advertising, sales, claims adjustment and payment of expenses, an amount which is typically 30% of the claims cost. Thus, the administrative costs are $18,000, or a total of $138,000.00.
A risk factor could be calculated at 3 percent of cost of claims and administration, or a risk factor cost of $4,140, bringing the total cost of the program to $142,140.
Divided by 1000 premium paying customers, the total premium per customer is $142.14 per year.
