Rhode Island Insurance Adjuster Exam

What determines the premium of an insurance policy?

1. Coverage limits and deductibles

2. Only the type of insurance purchased

3. Geographic location of the insured

4. Employee training levels of the insurance company

The correct answer is: Coverage limits and deductibles

The premium of an insurance policy is influenced by several key factors, and one of the most significant is the coverage limits and deductibles chosen by the policyholder. Higher coverage limits generally result in higher premiums because they increase the insurer's potential liability in the event of a claim. Deductibles work inversely; a higher deductible typically lowers the premium because the policyholder assumes more of the risk, meaning the insurer would pay less in the case of a claim. Additionally, while the type of insurance and other factors such as geographic location can play a role in determining premiums, they do not encompass the complete picture. For example, the specific details of coverage (such as add-ons or endorsements) and the deductibles directly affect how much the insurer may pay and how much risk the insured is willing to bear. Consequently, these elements are crucial in premium calculation and influence the overall pricing of the insurance policy. In contrast, options that focus solely on one factor like the type of insurance, geographic location, or employee training levels lack the comprehensive nature of how premiums are determined in practice.