Pure Premium

Pure premium is the average amount an insurer expects to pay in claims for one policy before adding expenses, profit, and risk margins. It works because total expected claim cost can be broken into two parts: how often a claim happens (frequency) and how much the average claim costs when it does happen (severity), so multiplying them gives the expected cost per policy.

Use this when pricing insurance, analyzing loss experience, or estimating expected claim costs from historical data. It is especially useful in ratemaking, where you need a base claim cost before loading for admin costs, commissions, and profit.

• Using total claims paid instead of average claim severity
• Confusing frequency as a percentage without converting it to a decimal
• Treating pure premium as the final insurance price instead of just the expected claim cost