Category: Actuarial fundamentals · Reviewed by Chrissie Anderson, Client Executive · Last reviewed
The pure premium is the expected loss cost per exposure unit, ignoring any loading for expenses, profit, contingencies or capital cost. It is the unconditional expected value of claim payments that the insurer must make in respect of the risk.
Pure premium = expected frequency × expected severity
Or, for a more sophisticated decomposition:
Pure premium = E[N] × E[X | N ≥ 1]
where N is the number of claims and X is the severity per claim. For aggregate losses on a portfolio, the collective risk model (Tweedie, compound Poisson, etc.) is typically used.
In a typical commercial rating sheet:
US actuarial literature often uses “pure premium” interchangeably with “loss cost”. UK and European literature treats them as broadly synonymous in general insurance contexts.
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