Provisional Premium
A temporary or estimated premium charged at the beginning of a policy period when the final premium cannot be determined immediately. The final premium is calculated later based on actual exposure data, payroll, or other variable factors, with adjustments made accordingly.
Example
“The contractor paid a provisional premium of $5,000 for workers' compensation insurance, with the final amount to be adjusted based on actual payroll at year-end.”
Memory Tip
Think 'PROVIsional' - it's a PROVisional estimate that will be adjusted later when actual information is available.
Why It Matters
Provisional premiums help businesses get immediate insurance coverage even when exact exposure amounts are unknown, preventing coverage gaps. Understanding this concept helps you budget for potential premium adjustments and ensures you're prepared for year-end audits that may require additional payments.
Common Misconception
Many policyholders assume the provisional premium is their final cost and don't budget for potential adjustments. In reality, provisional premiums are estimates that will likely change based on actual business operations, payroll, or sales figures throughout the policy period.
In Practice
A restaurant pays a provisional premium of $3,000 for general liability insurance based on estimated annual sales of $500,000. At year-end, their actual sales were $650,000, resulting in an additional premium of $900 (30% increase in exposure). The total final premium becomes $3,900, requiring the business to pay the $900 difference.
Etymology
From Latin 'provisio' meaning 'foresight' or 'provision for the future,' combined with 'premium' from Latin meaning 'reward' or 'prize.'
Common Misspellings
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Related Terms
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See Also
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