What Is an Insurance Surcharge?

Additional premiums are a source of funds for various business and administrative expenses, and are calculated based on a predetermined expense ratio. Additional premiums include a wide range of standards and methods used by different countries to classify them.

Additional premium

Additional premiums include a wide range of standards and methods used by different countries to classify them. For example, Japan divides premiums into new contract fees, maintenance fees, and fees. The new contract fee refers to the expenses incurred by the insurer in the year when the contract was established, such as advertising expenses, medical examination fees, commissions for agents and brokers, and various document printing costs. The maintenance fee refers to the start of the contract. Necessary expenses incurred to maintain and maintain the insurance policy until the termination of the contract, such as the cost of sending premium calls, contract changes, policy mortgages, claims processing, and compensation litigation, as well as staff salaries, depreciation of fixed assets, etc. ; Fees include accounting fees, toller's salaries, service fees for collecting insurance premiums, and costs required for investment.

Another classification method of additional premiums is to divide the additional premiums into original costs, administrative costs, agency fees, and claims costs. The original costs are similar to the new contract fees mentioned above, and the administrative costs are insurance contracts. The daily operation and management expenses after establishment, including wages, office expenses, accounting, actuarial expenses, new insurance R & D expenses, etc., agency handling fees refer to commissions of agents, brokers, and service fees of premium collection personnel; claims expenses include investigation fees and Legal costs, etc.

Additional premiums can also be divided into initial costs and renewal costs based on when the costs occur. The initial fee is the fee incurred in the first year of the new contract, and the renewal fee is the fee incurred from the second year.

There are four calculation methods for additional premium: proportional method, fixed ratio method, mixed method, and constant method.

(1) Proportional method. A certain percentage of the pure premium is taken as an additional charge, regardless of the type of life insurance and the age of the policyholder. The additional premium in this way is directly proportional to the pure premium. Applicable to additional premium items that vary in proportion to premiums.

(2) Fixed method. It is based on a uniform proportion of the insurance amount as the additional premium. According to the past business data, the cost of each unit of insurance is determined as a fixed fee, which is generally expressed as a 1,000 yuan insurance premium for a fixed amount of additional premiums. This method is suitable for expense items that are closely related to the amount of insurance, such as business fee commissions.

(3) Hybrid method. It is a combination of the proportional method and the fixed method, that is, the additional premium is divided into two parts: one is determined by the same proportion of the insurance amount, and the other is determined by a certain proportion of the pure premium.

(4) Constant method. Regardless of the type of insurance, the amount of insurance, the level of insurance premiums, and the age of insurance, the same amount of additional premiums will be added to each insurance policy. This method is applicable to expense items related only to the number of policies.

In practice, the hybrid method is generally used. After the various costs are determined, the present value of each cost is accumulated to obtain the present value of additional premiums. According to the principle of break-even, the present value of total premiums = present value of insurance premiums + additional Present value of premiums. Then divide the present value of the additional costs by the present value of the 1 yuan down payment annuity in the premium payment period, and you can get the equal expenses distributed in each premium payment period. If the total premium is calculated on an annual basis, the annual premium is equal to the sum of the annual pure premium plus the annual additional cost.