Cost Loading And Risk Loading

1336 Words Apr 16th, 2015 6 Pages
Expense loading and risk loading are the two factors that lead to an increase in premium loadings. Expense loading is the amount included in the premium charged by an insurance company to cover its costs. The most common problems of international asymmetries in insurance markets are moral hazard and adverse selection. Moral hazard occurs when the choices of individuals lead to incentives that alter their behavior. Adverse selection, on the other hand, occurs when a product or service is selected by only a certain group of people who offer the worst return for the company.
Deductibles, coinsurance, policy limits and exclusions are examples of contractual provisions that limit insurance coverage. Deductible, which consists of per occurrence deductible and aggregate deductible, is the expenses that the insured have to pay before the insurance company covers the remaining costs. Coinsurance, on the other hand, is a co-sharing agreement between the insured and the insurer in which the insured pays a share of the payment made against a claim. A policy limit, which is also one of the contractual provisions, is defined as the maximum amount that the insurer will pay. In deductible, insurer pays losses before the losses are reimbursed but in a self-insured retention (SIR), the insured pays the losses up to deductible. In commercial policies, if the SIR is relatively large, then the policy is called an excess policy and the SIR is called the attachment point. When an insured is…
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