Security surcharge
The safety factor is the insurance of insurers as part of the insurance premium collected. It serves to absorb unexpectedly high claims settlement costs .
target
Insurance companies operate a risk business. They protect each individual in a collective from any damage that may occur and thus bear the potential overall risk. Every policyholder has to pay a premium for this. The sum of the premiums - or, depending on the amount of damage - a deduction from the sum is then used to offset the costs incurred. Due to the law of large numbers, it is possible that each individual only pays a relatively small sum, but that a potential overall risk can be covered. The greater the number of insured persons, the less chance the law is undermined, so that the theoretical probability of occurrence can be assumed as the actually expected number of insured events.
However, the insurers also protect themselves against deviations in the calculated probabilities upwards and downwards. To do this, they ask for a security surcharge that increases the calculated premium by an estimated expected value. This reduces the probability of loss of the insurance in the event of damage that exceeds expectations.
calculation
The safety margin is determined as follows:
Nettorisikoprämie + Sicherheitszuschlag = Risikoprämie + Betriebskostenzuschlag - Abschlag für Kapitalerträge aus Kapitalanlagen + Gewinnzuschlag + Versicherungsteuer = Bruttoprämie
The risk premium consists of the net risk premium as the expected value of the claims expenditure, the gross risk premium contains the safety premium, which is intended to absorb unexpectedly high losses.
Derivation of the safety margin
The gray area in the figure shows how the probability of loss-making deals for an insurance company is reduced if it includes a safety surcharge in the total premium. The probability distribution is shifted to the right by the safety margin, which then indicates the expected value of the insurance profit. If the insurance were to plan without a safety surcharge (starting position; marked in red in the figure), the profit would be neutral - based on the empirical values made - since the amount of the expected damage corresponds to the insurance premiums paid. The distribution of profits is assumed to be a skewed distribution , since the profit opportunities are limited to the amount of the premiums paid, while the losses are (almost) unlimited.
The safety margin is not only determined by mathematical laws, but also by the laws of the market. Supply and demand influence the surcharge, but also vice versa. An increasing demand increases the collective. In this way, the calculation of the probability of occurrence of damage cases becomes more detailed and the safety margin can be reduced. In turn, an increase in the surcharge leads to a drop in demand and thus to losses in profit and sales. At the same time, the collective becomes smaller and the probability of occurrence cannot be precisely calculated. This then ends in a further increase in the safety margin in order to be able to compensate for the lower forecast of the probability of occurrence.
literature
- Farny, D. (2000): Versicherungsbetriebslehre, 3rd revised. Ed., Karlsruhe, insurance industry.