Other Than Life (OTL) Practice Exam

What does pure premium refer to?

1. The total premium required by the insurance company

2. The premium required to pay losses that have occurred

3. The premium required for anticipated losses

4. The rate or unit of a premium required

The correct answer is: The premium required for anticipated losses

Pure premium refers specifically to the portion of an insurance premium that is allocated to cover anticipated losses over a specific period. It represents the expected cost of claims that an insurance company predicts will occur based on statistical data and historical loss experience. This figure is calculated without factoring in expenses such as operational costs, overhead, commissions, or profit margins. By focusing on anticipated losses, pure premium gives insurers a foundational framework to evaluate the risk associated with insuring particular policies. This makes it a critical concept in determining how much premium should be charged to adequately cover future claims while ensuring the sustainability of the insurance pool. In contrast, total premium includes more than just anticipated losses; it accounts for administrative costs and profit. The pure premium specifically isolates the expected claim costs, which is why it is widely used in underwriting and rating calculations in insurance.