The Gross Premium - Loading
In The Net Level Premium premiums were classified in one case as net or gross. The net
premium, or that portion which cares for policy claims was analyzed at length.
The gross, or office, premium includes the above plus an amount called loading,
the purpose of which is to pay for expenses incurred in writing and caring for
insurance policies and to provide a margin for possible contingencies. Chief
among the latter are errors in the net premium, due to failure to realize expected
mortality or interest, losses arising from forfeitures, and the creation of
a fund from which dividends may be paid. The practice of paying dividends has
become so firmly established that the loadings on participating policies are
almost invariably made with the further idea of creating a surplus for future
dividends.
The subject of loading shares with that of distribution of surplus the distinction
of furnishing insurance actuaries some of the most difficult problems with which
they must contend. This is due to the complexity of the expense item and the
difficulty of charging it proportionately against any policy-holder in such
a way as to obtain substantial equity. With the enormous size attained by many
of our largest life-insurance companies, with the various activities carried
on by them, with agency organizations covering the entire United States and
in many cases European countries as well, the aggregate of expenses incurred
within a single year totals to a vast sum. This money, of course, must come
from the policyholders through their yearly contributions of premiums. The problems
arise in large part through, the difficulty of determining what portion of particular
items of expense shall be charged against one policyholder as compared with
another.
Sections in Chapter 17.
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