What is the purpose of an insurance premium?

The purpose of an insurance premium is to compensate the insurer for the risk they take on by providing coverage. When a policyholder pays a premium, they are essentially entering into a contract where they transfer the financial risk of certain events occurring (like accidents, health issues, or property damage) to the insurance company. This compensation ensures that the insurer has sufficient funds to cover claims made by policyholders when insured events happen.

The premium is calculated based on various factors, including the level of coverage, the insured's risk profile, and the overall likelihood of claims being filed. It is the primary way insurers generate revenue and maintain the financial stability necessary to pay future claims.

While the other options highlight important elements related to insurance, they do not accurately define the primary purpose of the premium. The deductible is the amount the policyholder pays out of pocket before insurance kicks in, while administrative costs, though necessary for the operation of an insurance company, are typically covered by the overall premium revenue rather than being a specific purpose of the premium payment itself. Paying for future claims is a consequence of collecting premiums but does not encapsulate the primary reason for setting premium amounts.