Consumer Mathematics: Insurance
How to Work out an insurance premium and payout
Use this to compute an insurance premium and the amount paid out on a claim, using the figures given.
Before you start
- Rate calculations 'per RM1000' of cover
- Percentages and ratios of an amount
- Multiplying and subtracting money
- Reading which figure is the sum insured and which is the value
When to use it
Use this to compute an insurance premium and the amount paid out on a claim, using the figures given.
The steps
- Read the sum insured and the premium rate from the question.
- Compute the premium from the rate and the sum insured.
- For a claim, apply any co-insurance or excess the question states.
- Work out the amount the insurer pays.
- State the premium and payout separately and clearly.
Worked example
A house is insured for RM120000. The premium rate is RM2.50 for every RM1000 of the sum insured.
A fire causes RM8000 of damage, and the policy has an excess of RM500 that the owner pays first. Find the premium and the amount the insurer pays on the claim.
- Read the figures: sum insured RM120000; premium rate RM2.50 per RM1000.
- Compute the premium: (120000 ÷ 1000) × RM2.50 = 120 × 2.50 = RM300.
- For the claim, apply the excess the question states: the owner pays the first RM500.
- Work out the amount the insurer pays: claim − excess = 8000 − 500 = RM7500.
- State them separately: premium RM300; payout RM7500.
A second example, with a twist
The property is under-insured, so the co-insurance (average) clause scales the payout down by the ratio of the sum insured to the full value. Goods worth RM200000 are insured for only RM150000.
The premium rate is RM3.00 for every RM1000 of the sum insured. A loss of RM40000 occurs, and the policy has an average (co-insurance) clause: payout = (sum insured ÷ value) × loss.
Find the premium and the amount the insurer pays.
- Read the figures: value RM200000; sum insured RM150000; premium rate RM3.00 per RM1000.
- Compute the premium: (150000 ÷ 1000) × RM3.00 = 150 × 3 = RM450.
- The property is under-insured, so apply the co-insurance (average) clause: payout = (sum insured ÷ value) × loss.
- Work out the amount the insurer pays: (150000 ÷ 200000) × 40000 = 0.75 × 40000 = RM30000.
- State them separately: premium RM450; payout RM30000.
Practise this in a KBAT problem
Frequently asked questions
What does 'RM2.50 per RM1000' actually mean?
For every RM1000 of cover you buy, you pay RM2.50. So divide the sum insured by 1000 to find how many blocks of RM1000 there are, then multiply by the rate.
For RM120000 that is 120 × RM2.50 = RM300.
What is an excess?
An excess is a fixed amount you agree to pay yourself on any claim. The insurer pays the rest of the loss.
So if the damage is RM8000 and the excess is RM500, you pay RM500 and the insurer pays RM7500.
Why does insuring for less than the full value cut my payout?
Because of the average clause. If you insure for only part of the value, the insurer pays only that same proportion of any loss.
Insuring RM150000 of RM200000 (75%) means a loss is paid at 75%, so RM40000 becomes RM30000.