Category: Actuarial fundamentals · Reviewed by Taylor Watts, Broker · New Business · Last reviewed
The risk premium is the pure premium plus a margin reflecting the volatility (uncertainty) around the expected loss. It is the amount an insurer would charge to break even after compensating for risk, but still before expenses, commission and profit.
If insurers charged exactly the pure premium for every risk, half of all single-period results would be losses. The risk loading compensates the insurer (or the capital provider) for bearing parameter uncertainty, model uncertainty and process variance. It is typically a function of the variance or standard deviation of the loss distribution.
Risk premium is the dominant pricing concept in non-proportional reinsurance: the burning cost analysis estimates the pure premium, then a risk margin reflects parameter uncertainty and tail volatility before the deal is loaded for brokerage, capacity provider profit and reinstatements.
Maintained by Matt Bartlett, Director, Apex Insurance Brokers Limited. FCA FRN 724952. Companies House 07014570.
Apex Insurance Brokers serves UK professional services firms and commercial businesses. Call 0117 325 0027, email hello@apexinsurancebrokers.co.uk, or request a quotation.
Get a quote