Gross Premium

Dr. Handayani, S.Si, MM, MHP, HIA, FLMI, AFSI, AAK, AAIJ, AMRP, FSAI
Expenses
An insurance company must charge a premium high enough not only to cover
benefits but also expenses. There are various types of expenses. Categories of
expenses are:
Per-premium expenses. Expenses which vary as a percent of premium. Examples are
commissions and premium taxes.
Per-policy expenses. Expenses which are a fixed amount per policy, regardless of
policy size. Examples are premium collection expenses and policy issue expenses.
Per-face amount expenses. Expenses which vary by size of policy. Usually expressed
per 1,000 of face amount. An example is underwriting (to some extent). We will
usually specify the size of the policy we’re considering and combine these with the
per-policy expenses.
Settlement expenses. Expenses incurred in settling a death (or other) claim. These
can depend on the size of the claim or they can be fixed.
Expenses
Expenses other than settlement expenses may vary between the first year of a policy
and the other years, the renewal years. First year commissions are usually a higher
percentage of premiums than renewal commissions. Many other expenses such as
underwriting and policy issue occur only in the first year.

To calculate the gross premium G by the equivalence principle, equate G times an

annuity-due for the premium payment period with the sum of:
1. An insurance for the face amount plus settlement expenses;
2. G times an annuity-due for the premium payment period of renewal percent of
premium expenses, plus the excess of the first year percentage over the renewal
percentage;
3. An annuity-due for the coverage period of the renewal per-policy and per 1,000
expenses, plus the excess of first year over renewal expenses.
REMARK

𝐴𝑥 = 1 − 𝑑 𝑎ሷ 𝑥

𝑎𝑥:𝑛 = 𝑎ሷ 𝑥:𝑛+1 − 1

𝑎ሷ 𝑥 = 𝑎𝑥 + 1
Example 1
For a fully discrete 5-payment 10-year deferred 20-year term insurance
of 1,000 on (30), you are given:

I. The following expenses:

Year 1 Year 2 - 10
% of Premium Per Policy % of Premium Per Policy
Taxes 5% 0 5% 0
Sales Commission 25% 0 10% 0
Policy Maintenance 0 20 0 10

II. Expenses are paid at the beginning of each policy year.

Express the equation !

Solution 1
Horizontal expenses reading:

𝐺 𝑎ሷ 30:5 = 1,000 10ȁ𝐴130:20 + 0.05𝐺 𝑎ሷ 30:5 + 0.15𝐺 + 0.1𝐺 𝑎ሷ 30:5 + 10 + 10𝑎ሷ 30:10

𝐺 𝑎ሷ 30:5 = 1,000 10ȁ𝐴130:20 + 0.15𝐺 𝑎ሷ 30:5 + 0.15𝐺 + 10 + 10𝑎ሷ 30:10

𝐺(𝑎ሷ 30:5 − 0.15 − 0.15𝑎ሷ 30:5 ) = 1,000 10ȁ𝐴130:20 + 10 + 10𝑎ሷ 30:10

1,000 10ȁ𝐴130:20 + 10 + 10𝑎ሷ 30:10

𝐺=
0.85𝑎ሷ 30:5 − 0.15
Solution 1
Vertical expenses reading:

𝐺 𝑎ሷ 30:5 = 1,000 10ȁ𝐴130:20 + 20 + 0.3𝐺 + 0.15𝐺𝑎30:4 + 10𝑎30:9

𝐺(𝑎ሷ 30:5 − 0.3 − 0.15𝑎30:4 ) = 1,000 10ȁ𝐴130:20 + 20 + 10𝑎30:9

Note:
𝑎ሷ 30:5 − 0.3 − 0.15𝑎30:4 = 𝑎ሷ 30:5 − 0.3 − 0.15 𝑎ሷ 30:5 − 1 = 0.85𝑎ሷ 30:5 − 0.15

1,000 10ȁ𝐴130:20 + 20 + 10𝑎30:9

𝐺=
0.85𝑎ሷ 30:5 − 0.15
Solution 1
Note:
20 + 10𝑎30:9 = 20 + 10 𝑎ሷ 30:10 − 1 = 10 + 10𝑎ሷ 30:10

1,000 10ȁ𝐴130:20 + 10 + 10𝑎ሷ 30:10

𝐺=
0.85𝑎ሷ 30:5 − 0.15
Example 2
For a fully discrete 10-payment 20-year endowment insurance of 1,000
on (40), you are given:

I. The following expenses:

Year 1 Subsequent Years
% of Premium Per Policy % of Premium Per Policy
Taxes 4% 0 4% 0
Sales Commission 25% 0 5% 0
Policy Maintenance 0 10 0 5

II. Expenses are paid at the beginning of each policy year.

III. The premium is determined using the equivalence principle.

Express the equation !

Solution 2

The numerator has all non-percent-of-premium expenses: benefits of

1,000𝐴40:20 and per-policy-expenses of 10 + 5𝑎40:9 . The denominator
has the benefit premiums after percent of premium expenses. Those
are 9% every year plus another 20% in the first year, so the denominator
should be (1 – 0.09)𝑎ሷ 40:10 – 0.2 :

1,000𝐴40:20 + 10 + 5𝑎40:19
𝐺=
0.91𝑎ሷ 40:10 − 0.2
Solution 2
Horizontal expenses reading:

𝐺 𝑎ሷ 40:10 = 1,000𝐴40:20 + 0.04𝐺 𝑎ሷ 40:10 + 0.20𝐺 + 0.05𝐺 𝑎ሷ 40:10 + 5 + 5𝑎ሷ 40:20

𝐺 𝑎ሷ 40:10 = 1,000𝐴40:20 + 0.09𝐺 𝑎ሷ 40:10 + 0.20𝐺 + 5 + 5𝑎ሷ 40:20

𝐺(0.91𝑎ሷ 40:10 − 0.20) = 1,000𝐴40:20 + 5 + 5𝑎ሷ 40:20

1,000𝐴40:20 + 5 + 5𝑎ሷ 40:20

𝐺=
0.91𝑎ሷ 40:10 − 0.20
Solution 2
Vertical expenses reading:

𝐺 𝑎ሷ 40:10 = 1,000𝐴40:20 + 10 + 0.29𝐺 + 0.09𝐺𝑎40:9 + 5𝑎40:19

𝐺 𝑎ሷ 40:10 − 0.29 − 0.09𝑎40:9 = 1,000𝐴40:20 + 10 + 5𝑎40:19

Note:
𝑎ሷ 40:10 − 0.29 − 0.09𝑎40:9 = 𝑎ሷ 40:10 − 0.29 − 0.09 𝑎ሷ 40:10 − 1 = 0.91𝑎ሷ 40:10 − 0.20

1,000𝐴40:20 + 10 + 5𝑎40:19
𝐺=
0.91𝑎ሷ 40:10 − 0.20
Solution 2
Note:
10 + 5𝑎40:19 = 10 + 5 𝑎ሷ 40:20 − 1 = 5 + 5𝑎ሷ 40:20

1,000𝐴40:20 + 5 + 5𝑎ሷ 40:20

𝐺=
0.91𝑎ሷ 40:10 − 0.20
Example 3
For a fully discrete 30-year term insurance on (25) for 1,000

Expenses are
• 55% of premium plus 10 in year 1
• 10% of premium plus 5 in other years

1,000 10𝐸25 = 549.97, 1,000 20𝐸35 = 286.00,

1,000𝐴25 = 81.65, 1,000𝐴55 = 305.14

𝑖 = 0.06

Calculate the gross annual premium using the equivalence principle

Solution 3
First we calculate 𝐴125:30 and 𝑎ሷ 25:30

1,000𝐴125:30 = 1,000𝐴25 − 1,000 30𝐸25 𝐴55

30𝐸25 = 10𝐸25 20𝐸35 = 0.54997 0.28600 = 0.15729

1,000𝐴125:30 = 81.65 − 0.15729 305.14 = 33.6543

Solution 3
𝐴25:30 = 𝐴125:30 + 30𝐸25

𝐴25:30 = 0.0336543 + 0.15729 = 0.19094

1 − 𝐴25:30 1 − 0.19094
𝑎ሷ 25:30 = = = 14.294
𝑑 0.05660
Solution 3
By the equivalence principle,

𝐺 𝑎ሷ 25:30 = 1,000𝐴125:30 + 0.45𝐺 + 5 + 0.1𝐺 𝑎ሷ 25:30 + 5𝑎ሷ 25:30

14.294𝐺 = 𝐺 0.45 + 0.1 14.294 + 33.6543 + 5 + 5 14.294

𝐺 14.294 − 1.8794 = 110.1234

110.1234
𝐺= = 𝟖. 𝟖𝟕𝟎𝟓
14.294 − 1.8794