Gross Premium refers to the total premium amount that an insured must pay for their insurance policy. It includes not only the net premium which is the basic calculation to cover anticipated losses and expenses, but also accounts for the operational and administrative costs associated with issuing the policy, along with the commissions payable to intermediaries (brokers and agents).
Components of Gross Premium
- Net Premium: The calculation that primarily covers projected claims payments and benefits, before loading for the carrier’s administrative expenses or profits.
- Loading Charges: Includes all costs loaded onto the net premium such as:
- Agent and broker commissions
- General administrative costs
- Profit margins
- Miscellaneous Costs: These could be any other incidental costs added to the premium such as fees for regulatory compliance or taxes applicable to the policy.
For life insurance policies specifically, the Gross Premium also includes dividends, which are returns of a portion of the insurer’s profits back to the policyholders.
Importance of Gross Premium
Understanding the gross premium is crucial for insurance buyers because it effectively impacts the total cost of an insurance policy. Knowing its components helps policyholders understand what they are paying for and evaluate whether the policy offers a good value for their needs.
Reference Regulatory Framework
Many components of insurance payments including premium computation, the handling of commissions, and disclosures are regulated by statutes such as the Insurance Act (specific to each country) and various regulatory guidelines aimed at protecting the consumer. It is recommended to consult relevant legal frameworks like the:\n- Insurance Act in Australia
This knowledge serves essential to evaluate and comprehend the structure of various insurance products and their overall financial implications.
