Property and Casualty Insurance Practice Exam

What is a deposit premium?

1. A final premium payment at the end of coverage

2. An initial charge adjusted later based on actual costs

3. A monthly subscription fee for insurance

4. A one-time fee for temporary coverage

The correct answer is: An initial charge adjusted later based on actual costs

A deposit premium refers to an initial charge that an insurer collects at the beginning of the policy period, which is subsequently adjusted based on the actual risk exposure or costs incurred during that period. This type of premium is commonly used in certain types of insurance, such as workers' compensation or liability policies, where the final premium is determined after the policy period ends, based on actual payroll or sales figures. The primary purpose of a deposit premium is to allow the insurer to start coverage while giving both the insurer and the insured a mechanism to adjust the amounts owed based on real data. This helps ensure that the premium reflects the true risk and cost associated with the insured entity over time, which can be beneficial for both parties. Through this method, the insured may not be required to pay the entire premium upfront, and it allows for flexibility in pricing as conditions change.