KEW WORDS
Actuary Equivalence principle
Provisions for adverse deviation Risk premium part
Insurance premium Unearned premium
Insured period Net premium
Gross premium Technical interest rate
Frequency of premium payment Premium loading
1. As we know, the premium of non-life insurance is composed of three parts:
1. risk premium,
2. provision for adverse deviation,
3. profit loading.
2. The risk premium itself is usually called net premium, and the risk premium and the
premium loading together are called gross premium
3. Dividing the premium into two parts indicates that the insurer uses the collected premiums
for two fundamentally different purposes. The greater part of the premium, the risk premium
serves as the cover for the undertaken benefit liabilities. That is, if the insured event occurs,
(death or living at the end of the term), then the insurer pays the benefits defined in the
policy from the sum accumulated from the payments of this part. The smaller part of the
premium, the premium loading serves as the cover of expenses (wages, office rent, profit,
commission, etc.) of the insurer.
4. The premium serves the above two purposes also in the case of unit linked insurance, that
is, to cover the expenses of the insurer and the undertaken risks, but dividing the premium
into the above two parts is somewhat problematic. The problem comes from the construction
of the insurance. The insurance is designed so that the total premium – with the exception of
two components – goes to the asset funds. The premium of the death risk and the rider
insurances, the administration fee and the fund management fee are from time to time
subtracted from the asset funds.
5. The payment of the premium and its timing, the subtraction
of the above factors and their timing is different as a main rule, and due to this different
timing the value of units changes. This way it is theoretically impossible to define these
subtractions as a percentage of the premium – only some kind of subsequent – approximate
– calculation is possible after each period. The two above mentioned components, that don’t
go into the asset funds are the bid-offer spread, and the value of those initial units created
from the given premium payment that will be certainly subtracted. These elements definitely
belong to the expense part of the premium, but the expenses of the insurance are higher
than these.
6. Despite the above, the premium of modern life insurance can be understood relatively
easily due to its transparent structure, this way here we will focus on the introduction of the
premium of traditional life insurance in the following.
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