Texas Department of Insurance

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Understanding Rates vs. Premiums

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The Texas Department of Insurance has statutory authority to regulate the rates charged by insurance companies.

Quite often, the terms "rate" and "premium" are used interchangeably when discussing insurance. However, those terms represent two very different numbers. A simple explanation is the following formula:

Rate x Exposure Units = Premium

RATE is the cost of insurance per exposure to cover claims payments, expenses, and commissions to agents (if an agent is used) and provide for a reasonable profit. Replacing a house can depend on a variety of factors, such as where you live, the size of your house, type of construction, and changes in building codes which would be contemplated in the rate. Think of rate as the number that an insurance company sets as its price, much in the same way a gas station sets its cost per gallon. EXPOSURE UNIT refers to the item exposed to loss that is insured by the insurance company. For example, the exposure unit in homeowners insurance can be expressed in terms of what it costs to replace a house if it is destroyed. PREMIUM is what you pay as a result of the rate multiplied by the number of exposure units you insure. It is the amount you write the check for once a month, yearly, etc.

For example, if the rate per $1,000 of coverage is $6.00 per year, and you have a home that would be replaced for $200,000 if destroyed, then the annual premium would be $1,200.

See Exhibit 6 for a recent history of average premium and policy size in Texas.


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