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492 J.Linnerooth-Bayeret al. 21.3.2 Costsof Insurance While there are substantial benefitsprovidedbyprivatelyorpubliclyoffered insur- ance, thecostsof insuranceareconsiderable.Theaveragefinancialcostof insurance generallysurpassesaverage losses,meaning thatun-subsidised insurancepremiums aregreater thanwhat theclient expects to lose.For this reason, clients shouldcare- fullyconsider thecostsandbenefits,andrelyoninsuranceonlyafterconsideringthe alternatives, or in thewords ofVaughan andVaughan (2008, p. 62), only as a last resort. Indeed, without outside subsidies and other forms of support policyholders can expect, on average, a higher financial burden in the long runwith insurance thanwithout it. That insurance results, onaverage, ingreater costs to those insured isoftennot appreciatedandneeds further explanation. The insurance premium tends to be inflated above the ‘actuarially fair value’ or ‘purepremium’ (expected losses) due to the fact that on topof theannual expected losses a riskpremiumis charged.As shown inFig. 21.2, the riskpremiumisdeter- minedbytwofactors:expenseloadandriskload(Pollner2000).Additionally, in the caseofprivateinsuranceaprofitmarginischarged.Ingeneraltermstheexpenseload reflects thecostsof the insurerdoingbusiness,and therisk load includes thecostof holdingcapital, reinsuranceandofassuminguncertaincontractsforhigh-levelrisks. Therisk loaddistinguishescatastropheinsurancefromother typesof insurance, like life and health, since insurers covering catastrophic risksmust be prepared to pay claimsfordisastersthataffectwholeregionsorcountriesatthesametime(co-variate risk).Still, if insurersare sufficientlydiversified, the risk loadwill notonly insulate themfromlarge losses atone time,butwill also in the long run result in significant profits. Fig.21.2 Costs contributing to catastrophe insurance premium SourceAdapted fromCummins andMahul (2009)