An insurer offers a 20% per year reduction in premiums if the contractor has a defined safety program in place. The insurer's standard rates are $8 per $1,000 of coverage. The contractor has $300,000 in coverage. How much in premiums will the contractor save over a 3-year period by having a defined safety program in place?

An insurer offers a 20% per year reduction in premiums if the contractor has a defined safety program in place. The insurer's standard rates are $8 per $1,000 of coverage. The contractor has $300,000 in coverage. How much in premiums will the contractor save over a 3-year period by having a defined safety program in place?

• A. $480
• B. $1,800
• C. Between $1,001 and $1,500
• D. $2,000

Answer: (C)

Premium discounts for a defined safety program reduce the annual premium, so you calculate the base premium and then apply the 20% reduction over three years. The standard rate is $8 per $1,000 of coverage, and the contractor has $300,000 in coverage. The base yearly premium is (300,000 / 1,000) × 8 = 300 × 8 = $2,400. With a 20% reduction, the annual premium becomes 2,400 × 0.80 = $1,920. Over three years, this discounted total is 1,920 × 3 = $5,760. Without the discount, three-year premiums would be 2,400 × 3 = $7,200. The savings from the safety program over three years is 7,200 − 5,760 = $1,440. That amount falls between $1,001 and $1,500, making that option the best match.

Premium discounts for a defined safety program reduce the annual premium, so you calculate the base premium and then apply the 20% reduction over three years.

The standard rate is $8 per $1,000 of coverage, and the contractor has $300,000 in coverage. The base yearly premium is (300,000 / 1,000) × 8 = 300 × 8 = $2,400. With a 20% reduction, the annual premium becomes 2,400 × 0.80 = $1,920. Over three years, this discounted total is 1,920 × 3 = $5,760. Without the discount, three-year premiums would be 2,400 × 3 = $7,200. The savings from the safety program over three years is 7,200 − 5,760 = $1,440. That amount falls between $1,001 and $1,500, making that option the best match.