Why is administrative expense accounted for in premium calculations?

Administrative expenses are accounted for in premium calculations primarily to ensure the solvency and profitability of the insurer. By including these expenses in the premium, insurers can cover the operational costs associated with running their business, such as salaries, office expenses, technology systems, and other overhead costs necessary for their day-to-day functions.

This practice helps maintain the financial health of the insurer, allowing it to fulfill its obligations to policyholders, such as paying out claims and providing ongoing services. If an insurer does not adequately account for administrative expenses, it risks setting premiums too low, which could lead to financial difficulties, including insolvency. Therefore, accurately incorporating these costs into premium calculations is crucial for the long-term sustainability of the insurance operations.