Premium

A premium is a monetary payment made by an insured individual to a liability insurance carrier (insurer). This is a contractually established fee between the insured and insurer, which provides the insured (e.g., a physician) coverage for the defense and payment of medical liability claims that may arise during a set policy period according to type of policy. Policy payout limits (liability limits) are defined on initiation of the agreement by both parties, and premiums vary depending on the ceiling of such limits; that is, the higher the coverage amount, the higher the premium. Premiums are calculated based on various factors taken into consideration during the insured's initial evaluation (or re-evaluation if a policy renewal situation) process (see Occurrence Screening). In the event of a settlement or loss of a negligence (malpractice) case, the liability insurance company provides payment (an “award”) to a third party (e.g., an injured patient). This payment is also called an indemnity. Most policies also provide payment on behalf of physicians for the legal costs associated with the defense of a claim.

Premiums provide a mechanism for insurers to spread the risk of insurance among policyholders. They are, for all practical purposes, set at rates that would be sufficient to pay present and future losses, cover the insurers' administrative and operating expenses, generate investment income, and allow the company to continue as an ongoing business. Reinsurance describes the situation where an insurance company buys insurance from another company to cover part of any potential losses it might incur in the usual course of its business.