Pure premium is the part of an insurance premium that is meant only to pay for expected claims, without including expenses, taxes, or profit.
Understanding Pure Premium in Everyday Language
When you pay for insurance, the total premium you see on your bill is made up of several parts. One of the most important—but least understood—parts is the pure premium.
Pure premium represents the money an insurance company expects to pay out in claims for a specific type of coverage. It is based purely on risk and loss experience. That means it focuses only on expected losses, not on the cost of running the insurance company or making a profit.
In simple terms, pure premium answers this question: How much money is needed just to cover claims?
What Pure Premium Does Not Include
To really understand pure premium, it helps to know what’s left out of it.
Pure premium does not include:
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Administrative and operating expenses
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Employee salaries
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Marketing and advertising costs
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Premium taxes and fees
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Extra funds for unexpected situations
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Profit for the insurance company
All of those items are added later to calculate the final premium you pay. Pure premium is the starting point.
A Simple Example of Pure Premium
Let’s say an insurance company studies past data and determines that, on average, it pays $600 per year in claims for each auto insurance policy it sells.
That $600 is the pure premium.
Now, the insurer still needs to pay employees, maintain offices, cover taxes, and earn a profit. So they might add another $400 to cover those items. This brings the total premium charged to the customer to $1,000.
In this example:
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Pure premium: $600
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Other costs and profit: $400
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Total premium paid: $1,000
Pure premium is the foundation that everything else is built on.
How Insurance Companies Calculate Pure Premium
Insurance companies calculate pure premium using large amounts of data. They look at past claims, how often losses occur, and how expensive those losses are.
Actuaries—specialists who analyze risk—use statistics and probability to estimate expected losses. The more accurate the data, the more accurate the pure premium.
This process helps insurers set premiums that are fair, stable, and sustainable over time.
Why Pure Premium Matters to Policyholders
Even though you don’t see pure premium listed separately on your policy, it still affects how much you pay.
If expected losses increase—due to higher repair costs, medical expenses, or more frequent claims—the pure premium goes up. When that happens, overall insurance premiums often increase as well.
Understanding pure premium helps explain why insurance prices change, even if your personal situation stays the same.
Pure Premium vs. Total Premium
It’s easy to mix these up, but they are very different.
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Pure premium covers expected losses only
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Total premium includes losses, expenses, taxes, and profit
Think of pure premium as the “risk cost,” while the total premium is the full price of insurance.
Where You’ll Hear the Term Pure Premium Used
Pure premium is commonly used in:
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Actuarial analysis
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Insurance pricing discussions
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Rate filings with regulators
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Workers’ compensation and auto insurance
It’s more of a behind-the-scenes concept, but it plays a big role in how insurance works.
Why Pure Premium Is Important in the Insurance System
Pure premium helps keep insurance fair and financially sound. By separating expected losses from other costs, insurers can better understand risk and price coverage appropriately.
This approach protects policyholders by ensuring claims can be paid, while also keeping insurers financially stable.
Why Pure Premium Is Worth Knowing
Pure premium may sound technical, but it explains a basic truth about insurance: a big part of what you pay goes directly toward covering claims.
By understanding pure premium, you gain insight into how insurance pricing works and why premiums rise or fall over time. It’s a simple concept with a big impact—and a key building block of the insurance world.
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