What determines the pure premium required by an insurer?

The pure premium required by an insurer is fundamentally based on the historical loss experience and expected future losses. This concept reflects the amount of money that needs to be set aside to cover the expected claims that arise from risk exposures. By analyzing past claims data and anticipating future losses, insurers can more accurately estimate how much premium needs to be charged to remain solvent and provide for these potential liabilities.

Understanding loss experience helps insurers identify trends and patterns, which in turn informs their pricing strategy. By taking into account both historical data and projections about future claims, insurers can adjust their premiums to ensure they are collecting enough to cover the losses incurred from insured risks. This makes it a critical factor in the calculation of the pure premium, as it directly impacts the insurer's financial stability and ability to meet its obligations to policyholders.