Cost of Insurance

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Payments for claims are referred to as the Cost of Insurance or COI. For most kinds of insurance, paid claims are the largest single cost factor. With life insurance, COI charges can account for 75% - 80% or more of the total premium.

To make claims more predictable, insurance carriers pool policies. (According to the "Law of Large Numbers," the larger the pool, the more predictable the risk.) Pooling, which combines low and high risk segments of the pool, averages the COI charges that contribute to premium prices.

While pooling helps carriers manage their risks, averaging impacts pricing values for different members of the pool. That is, averaging cross-subsidizes higher-risk segments with excess "profits" from the lower-risk segments of the pool. (See Problems with Pooled Products.) Consequently, products priced for pools of individual buyers may not represent the best value for lower-risk segments of the pool.

Since different pools of policy holders have different claims experience, premiums will vary depending on the claims experience for the pool being insured. Historically, pools of individual policy holders have the highest claims experience while select pools of professionals, business executives and owners, and high net worth individuals have superior claims experience.

Generally speaking, because professionals, business executives and owners, and high net worth individuals enjoy healthier lifestyles and better health care, they live longer. Products priced for this market generally have lower COI charges than products priced for other groups.

Most buyers only have access to insurance priced for pools of individual buyers (what we refer to as "retail pricing"). While most products will continue to be priced to serve this largest segment of the market, a growing number of buyers are gaining access to experience-rated pricing.

For information about experience-rated pricing and products, contact us for the name of a licensed Insurance Banking Center near you. Or, to learn more about why some products may have lower cost of insurance charges while other product will have higher cost of insurance charges, click here to learn more about the pricing of Policy Expenses , or click here to go directly to the Policy Pricing Calculator (PPC).