What Does Valuation Premium Mean?
A valuation premium, in the context of insurance, refers to the rate an insurance company sets based on its policy reserves and liabilities. After determining the policy reserves are adequate to cover payouts, the insurer calculates a valuation premium that would cover its liabilities. In doing so, the insurance company ensures it has enough assets to cover its policies.
Insuranceopedia Explains Valuation Premium
Calculating a valuation premium ensures the insurer stays financially solvent and has the necessary means to answer to the claims that may arise from the policies it underwrites. Therefore, the higher the risk or the higher the value of the covered asset or item, the higher the valuation premium is likely to be. However, an insurance company may choose to set one lower than the calculated amount if statistical records and experience indicates doing so can be justified. In this case, the insurer must establish a deficiency reserve to hold the difference.