Gross premium
Pure premium loaded with expense, profit margin and cost of capital allowances, constituting the price paid by the policyholder.
Pure premium of 360 EUR, target expense ratio of 30%, profit margin of 5%: the gross premium is 360 / (1 − 0.30 − 0.05), or about 554 EUR. It is the final price the policyholder pays, also called the loaded premium. It is built by loading the pure premium, the expected claim cost, with acquisition and administration costs (expense loading), a target profit (profit loading) and the cost of the regulatory capital tied up (capital cost loading). The simplified formula divides the pure premium by one minus the target expense ratio and the target profit margin. The gross premium also covers actuarial uncertainty (risk loading) and, in some markets, insurance taxes. It comes out of the pricing process and opens the negotiation with the policyholder or broker.
Textbook case: pure premium 360 EUR, target expense ratio 30%, profit margin 5%: gross premium = 360 / (1 − 0.30 − 0.05) = 360 / 0.65 ≈ 554 EUR.
gross premium, office premium, loaded premium
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