PREMIUM

CALCULATION
Presented by:
Juhi Sharma
Rajat Gupta
Deepak Singh
Definition:
 INSURANCE PREMIUM:

The periodic payment made on an insurance

policy also called premium.

OR

Financial cost of obtaining an insurance cover,

paid as a lump sum or in installments during the
duration of the policy, called as Insurance
Premium.
METHODS OF CALCULATION OF PREMIUM

METHODS

1). VALUE OF SERVICE: 2). COST OF SERVICE:

Premium according to the
The premium should be charged
utility of insurance to each
according to the cost (include all
proponent. But cant be used
expenses and profit margins) to
due to impracticability.
the insurer.
TYPES OF PREMIUM
 NET PREMIUM:
The net premium makes
provision for mortality
losses only or the premium
which is received to pay
the amount of claim
whenever it arises at death
or at maturity or surrender.
It does not provide for
expenses of management.
 GROSS PREMIUM:
The gross premium is
that premium which is
charged by the insurer
to meet the amount of
claims and expenses.
Thus gross premium
includes the net
premium and loading.
PREMIUM SUB DEVIDED IN TO
TWO PARTS

PREMIUM

1.SINGLE 2. LEVEL
PREMIUM PREMIUM
Steps for Calculation of Premium
Determine what constitute a claim
 (a) death,
 (b) survival
 (c) Surrender

Determine when claim are paid

 (a) at the beginning,
 (b) at the end,
 (c) during the year.
 Determine the number of insured.
 Determine the duration of the policy.
 Determine the probable number of claims per year.
 Determine the value of claim per year.
 Determine the number of years of interest involved
and find the present value of a rupee.
 Determine the present value of the claim for each
year.
 Determine the present value of all future claims.
 Determine the net single premium (i.e., present
value of future claims) divided by number assumed
for buying the policy.
Calculation of single premium
 Term Insurance
 Whole life Premium
 Pure endowment Policy
 Ordinary endowment Policy
Net single Premium for 5-year
Term Policy
Year of Age Number Number Amount Present Present
Insuranc attained of Living of Death of claims value of value of
e of Death Re.1.0 claim
4*5*6
1 2 3 4 5 6 7
1 40 96463 273 1000 0.971 2,65,083
2 41 96,190 302 1000 0.943 2,84,786
3 42 95,888 336 1000 .915 3,07,440
4 43 95,552 375 1000 0.888 3,33,000
5 44 95,177 418 1000 0.863 3,60,734
Net single Premium for Whole
Life Plan
Age Probability of Policy Present value Present value
death amount of Rs. 1 @ of the claim
2.5%

45 7340/852554 1000 0.975610 8.399441

46 7801/852554 1000 0.951814 9.039243

: : : : :

99 125/852554 1000 0.257151 0.037703

Total Single Premium:- Rs.551.372587

Net single premium in pure
endowment policy
Probability of Policy Present value of Rs. 1 = Net single
survival amount for the endowment premium
period

0.981 1000 0.863 = 846.603

Net single premium in Ordinary
endowment policy
Description Premium

Net single Premium on the basis of Rs.16.18

death for 5-years

Net single Premium on survival at the Rs.846.60

end of 5-years

Net single Premium on the basis of Rs.862.78

death and survival rate
Annuities
Net single premium in Deferred Annuities
Annuities
 Immediate annuity  Minimum payment
 Life
Annuity Annuity
 Term Annuity  Annuity due
Calculation of Net Single
premium in life annuity
Age Probability of Amount of Present Present
survival annuity value of Rs.1 value of
@ 3% annuity
95 97/249 1000 0.971 94187/249
96 30/249 1000 0.943 28290/249
97 6/249 1000 0.915 5490/249
98 1/249 1000 0.888 888/249
99 0/249 1000 0.863 0/249
Total Rs.517
Premium
Calculation of Net Single premium
for term annuity
Age Probability of Amount of Present value Present value
survival annuity of Rs.1 @ 3% of annuity
71 553332/577445 1000 0.975610 934.87

72 528443/577445 1000 0.951814 871.04

73 502843/577445 1000 0.928599 808.63

74 476611/577445 1000 0.905951 747.75

75 449841/577445 1000 0.883854 688.54

Present value of Rs.4050.79

total amount
Deferred Annuity
Age Prob. of Amount of Present Present
survival of Annuity value of Rs. value of
100,000 1 @ 2.5% Annuity
persons
40 Year of __ After 30 years __
contract
70(deferred 2000/100000 1000 0.477 9.540
date
71 1000/100000 1000 0.465 4.650

72 500/100000 1000 0.454 2.270

Total Rs. 16.46

 Level Premium
 The single premium of a given policy can
be easily converted into level premium by
establishing ratio between net level
premium and net single premium

 The ratio will differ according to the age at

the beginning, nature and duration of the
policy
Calculations of Level Premiums
Year of Age No of No of Amount Present Present
Insurance persons premium of value of value of
living received premium re 1 @ premium
received 3% received

1 40 96463 96463 96463 1000 96463

2 41 96190 96190 96190 0.971 93400

3 42 95880 95880 95880 0.943 90415

4 43 95552 95552 95552 0.915 87430

5 44 95177 95177 95177 0.888 84517

Total 4,52,225
present
value
Method of loading
 Constant addition loading
 Percentage addition loading
 Modified percentage loading
 Constant and percentage addition method
What Is An Actuary
 The actuary is an individual who will analyze
important data such as mortality, sickness, injury
and disability rates and use that information to
aid those involved with insurance. An actuary is
responsible for collecting the data to forecast
future risks and see how these predictions will
affect various aspects of insurance 
Specific Duties of an Actuary
 Review a variety of documents (Statistical)
 Insurance plans
 Annuity plans
 Pension plans
 Mortality
 Disability
 Sickness and Accidents
 Contracts and company policies
Traits Which All Actuaries Should
Possess
 Wonderful mathematical skills
 Good analytical skills
 Creativity
 Research skills
 good computer skills
THANK YOU…