Why is premium calculation more influenced by primary loss compared to excess loss?

The reasoning behind this choice lies in the frequency and cost distribution of claims in insurance. Primary losses, which typically involve smaller claims, occur more often and accumulate to affect the overall premium calculations for insurance providers. In worker’s compensation or similar insurance contexts, these minor injuries represent the vast majority of incidents that employers deal with regularly.

Consequently, employers experience a higher incidence of primary loss claims than excess losses. Since premiums are primarily based on the likelihood of claims, the constant flow of minor claims and the operational risk presented by such injuries heavily influence the total premium costs.

In contrast, excess losses, which are typically related to severe and less frequent incidents, don’t play as significant a role in calculating premiums. Though they can be exceedingly costly, their infrequency limits their overall impact on the determination of premium rates. Insurers can manage these through different strategies, such as reinsurance or by setting a higher deductible.

Thus, the frequency of minor injuries significantly drives the premium calculations, reflecting the ongoing risk that employers face in their day-to-day operations, which is why this choice accurately captures the essence of how primary losses impact premium costs.