What does the term 'Pure Premium' refer to in insurance?

The term 'Pure Premium' specifically refers to the amount that is necessary to cover expected losses and loss adjustment expenses (LAE) associated with an insurance policy. It is calculated based on the insurer's loss experience and is a key component in determining the pricing of insurance products.

By focusing solely on the anticipated costs of claims and the expenses related to managing those claims (LAE), pure premium does not include any additional costs such as operational expenses or profit margins. This distinction is essential in insurance pricing, allowing insurers to separate risk management from business overhead, thereby providing a clearer view of the true cost of risk.

This understanding is critical for actuaries and underwriters when setting rates, as it helps ensure that the premiums collected adequately reflect the risks being insured.