What is Profit loading?

The purpose of every business activity is to earn profits and insurance business is no exception to this. Just like all other for-profit entities, insurance companies also need to earn sufficient amount of profit in order to cover up business expenses and cost of capital to keep the stakeholders especially investors happy.

Profit loading is simply an amount added (by the insurance company or insurer) to an insurance premium to cover business expenses and contingencies including cost of capital.

Profit loading is also known as expense loading or simply loading.

Contingencies are simply those loses which are connected with uncertain events and are payable only if those contingencies are fulfilled. For example there can be a clause under the insurance contract that if loss exceeds a particular amount then the whole amount of loss will be paid.

If insurance company only demands the premium which is the total of possible claims that can be made by the insuree under the insurance contract (also known as pure premium) then insurance company will have no benefit in conducting insurance business. Therefore, just like other normal businesses insurance company must cover its “trading cost” which are claims and must earn ABOVE its business costs (which is both claims and other business expenses) in order to prosper. That additional amount earned which is above the cost of claims and other business expenses is called profit loading. And the gross total is termed as simply premium or target premium.

Following is the mathematical equation for more understanding about how these figures are connected:

Premium = Claims + Expenses + Profit loading

Where;

Premium is the amount that will be demanded from the insuree
Claims
is the total amount of losses insured
Expenses
are different business expenses of the insurer

Profit loading is usually expressed in “times” of claims agreed and business expenses or in “percentage” of expected claims and business expenses. It can be expressed as following in the mathematical form:

P = (1 + r) X

Where:

P is the target premium that insurer will charge under the contract of insuring the losses of the client (insuree).
r
is the profit loading expressed in percentage
X is the sum of claims expected to be fulfilled and other business expenses like admin expenses, sales staff commission etc.

2 COMMENTS

  1. tudo o que você está fazendo comigo agora é 100% seguro e garantido, então você não tem nada com que se preocupar e você nunca se arrependerá de fazer negócios comigo, em vez disso, você ficará feliz por ter me conectado, você trará mais clientes para fazer negócios e também lhe garanto que você ganhará muito dinheiro com este investimento e será eternamente grato por ter me conectado, então você não tem nada com que se preocupar, ok

  2. tudo o que você está fazendo comigo agora é 100% seguro e garantido, então você não tem nada com que se preocupar e você nunca se arrependerá de fazer negó comigo, em vez disso, você ficará feliz por ter me conectado, você trará mais clientes para fazer negócios e também lhe garanto que você ganhará muito dinheiro com este investimento e será eternamente grato por ter me conectado, então você não tem nada com que se preocupar, ok

Comments are closed.