Guaranteed Cost Policy
An insurance policy where the premium is fixed and cannot be increased during the policy period, regardless of claims experience. The insurer assumes all the risk of higher-than-expected claims costs.
Example
“The small business owner chose a guaranteed cost policy for workers' compensation to ensure predictable insurance expenses throughout the year.”
Memory Tip
Think 'Guaranteed = No surprises' - your premium cost is locked in like a fixed mortgage rate.
Why It Matters
This policy type provides budget certainty for businesses and individuals, making financial planning easier. It protects policyholders from unexpected premium increases due to high claims in their industry or region.
Common Misconception
Many people think guaranteed cost policies are always more expensive than other options. However, they can actually save money for high-risk businesses that might face significant premium increases under experience-rated policies.
In Practice
A manufacturing company pays $50,000 annually for a guaranteed cost workers' compensation policy. Even if workplace injuries cost the insurer $75,000 that year, the company's premium remains $50,000 for the policy period. In contrast, under an experience-rated policy, their next year's premium might increase to $65,000 due to the high claims experience.
Etymology
The term combines 'guaranteed' from Old French 'garantir' meaning 'to protect' with 'cost' from Latin 'constare' meaning 'to stand firm,' reflecting the fixed nature of premiums.
Common Misspellings
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Related Terms
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See Also
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