Classification of Premiums as Net and Gross

The premium charged for a life-insurance contract is supposed to cover all contingencies the company is likely to meet, and these may be conveniently grouped into two classes, viz, mortality and expenses. Mortality has reference to that part of the premium which provides for the occurrence of the event or risk Insured against, while the second element covers the costs incident to the management of a company, such as salaries, rents, commissions, etc., which may be fairly charged against a particular policy. In computing premiums mortality costs are always determined first and to this mortality element is added an amount, determined by a more or less scientific method, called loading, which provides for expenses, and from these calculations is determined the premium charged the policyholder. According, therefore, as to whether the "premium" in question is "loaded" or not, it may be classed as net or gross. The net premium makes provision for mortality losses only, while the gross or "office" premium contains this element plus an addition, or a "loading" for expenses. The gross premium is the only one known to the policyholder, but before it is obtained an actuary must have ascertained the net premium. If, therefore, the gross annual premium is the ultimate object of the study of rate computation this study must begin by first determining the net single premium. From the latter, as will be shown later, the net annual premium can be found. Following this it will be possible to study the various methods of loading in order to ascertain the gross annual premium.

In the preceding chapter, Fundamental Principles Underlying Rate Making, it was shown that the computation of premium rates on any kind of policy required information as to (1) the amount of the policy, (2) the age of the insured, (3) the mortality table to be used in measuring the risk incurred, and (4) the rate of interest assumed on funds possessed by the insurance company. In the computations that follow, risks will always be measured according to the American Experience table of mortality; the rate of interest assumed will be 3 percent, and the face value of the policy will be $1,000 unless otherwise stated. The age of the insured will be stated in each instance.