PSI Ohio Insurance Practice Exam 2025 – Complete Preparation Guide

The gross premium of an insurance policy is calculated by adding the expected costs associated with insuring policyholders, which includes mortality costs (the predicted cost of paying out death benefits) and expenses incurred in administering the policy. This total then accounts for the expected investment income from premiums that will be held with the insurer (interest earned on the premium until claims are paid).

In this context, the formula essentially represents the total premium required to ensure the risk is covered while also considering operational costs. By adding expenses to the mortality costs and then subtracting expected interest income, the formula reflects the necessary amount needed to cover both the anticipated payouts and operational needs, ensuring the insurer remains financially viable.

So, the calculation accurately captures the components that policymakers consider when creating premiums that are fair for the policyholder while allowing the insurance company to maintain its operations and cover its liabilities.