The gross premium is that premium which is charged by the insured to meet the amount of claims and expenses. Thus, the gross premium includes the net premium and loading. Loading is the process to add the expenses to net premium. The loading may add a certain amount to meet the bonus charges on participating policies.
The policy-holders are required to pay this gross premium and they even do not know the net premium. Therefore the gross premium is also known as ‘Office Premium’. The policyholder are, thus, required to pay amount to meet the cost or claim, expenses of business, and loading for bonus if the policy is participating one.
Allocation of Expenses :
As has been made it clear that the expenses of business are allocated amongst the net premiums. So, in allocation, the insurer faces two problems (i) Allocation of expenses over various policies and (ii) Allocation of expenses over duration of the policy.
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The allocation of expenses over various policies should be equitable. It means that every policy should be allotted the due share of its expenses, some policies involve higher expenses than others and should, therefore, bear higher loading.
The policies involving lesser expenses should be lesser share of the total expenses. The total expenses are, therefore, classified so that equitable distribution can be easily done.