Risk premium

Reviewed by Apex Insurance Brokers · Last reviewed 2026-06-22

Reviewed by Apex Insurance Brokers · Last reviewed 2026-06-22

Reviewed by Apex Insurance Brokers · Last reviewed 2026-06-22

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.

Why add a margin?

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.

Common loadings

• A multiple of the standard deviation of the loss.
• A function of the cost of capital allocated to the risk.
• A Wang-transform distortion of the loss distribution.
• An Esscher transform.

In reinsurance

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.

References

• IFoA. Practical Guide to GI Pricing.
• Swiss Re (various). Pricing methods in non-proportional reinsurance.

Cross-references

• Pure premium
• Office premium
• Burning cost reinsurance

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