Unit 3- Calculation of premium of Life Insurance plans

Basic Elements in Computation of Premiums-Mortality

The rate at which a given of persons of a given age are expected to die and survive is called the rate of mortality. If the proportion of persons actually dying in a in a given year are less than what is assumed in premium calculation there will be left a small surplus and if the actual no of deaths is more than what was assumed for premium calculation the extra claim will have to be met from the accumulated life fund.

 Since, the morality rate of the persons who are living cannot be calculated, the Insurance go about pricing their product on the basis of the study of past experience of deaths among a similar group of persons conducted either by themselves or some other insurers or in some cases some other outside the insurance business. The study of the mortality of such persons are summarized in the form of tables called, mortality tables

Mortality Tables
For pricing a product that a life insurance co. would like to offer to its customers, first it decides on a mortality table, which is considered to be the closely matching that of the largest customers. By using the mortality table, it can go about the premium that has to be charged for persons of a given age.

Stages in Premium Computation of Premiums

The three main components of Life Insurance Premium are i) Mortality, ii) Interest and iii) Loading for expenses, options, bonus etc. The first step is to arrive at the Pure Premium which can meet all the claims payout that are expected within the first year.

Q No. of persons insured for one year 10000 Age of the Assured 35 years Sum Assured per policy Rs. 10,000/ Mortality Rate at age 35 within one years is 0.0028

 This means out of 10000 person to whom the policy is sold , 28 persons are likely to die within one year term as per the Mortality Table.

 Hence the total claim out go would be

10000x28 =Rs. 2,80,000/-

 Share of each person taking Insurance Cover would be Sum Assured x No. of death in one year Total No. of Insured person
10000 X 28

10000 =Rs. 28/-

Q
Age (x) No. of Person living at age x No. of claims by death (dx) Pure or Natural Premium = and sharing the claims (lx) prabability of Death (qx) x SA(dx)/(lx) (lx) 35 10,000 28 28.00

36

9,972

31

31.09

37

9,941

34

34.20

38

9,907

38

38.36

39

9,869

42

42.56

Q.
No. of persons= 10000; Age = 25 years; Sum assured = Rs 10000; Mortality table = 0.0011 for 25 year aged persons; How much is the premium?

11 persons will die out of 10000 persons; 11x10000=110000;

Premium = 110000/10000 = Rs.11

* This premium arrived after mortaility table calculation is called PURE premium or Natural premium

Calculate
Age (x) No.of persons living at age X and share claims (Ix) 10000 9989 No. of claims by Pure / Natural death ( probability) premium = S.Ax (Dx)1 (Dx)/(Ix) 11 15 ? ?

25 26

27
28 29

9974
9954 9929

20
25 29

?
? ?

Answer
Age (x) No.of persons living at age X and share claims (Ix) 10000 9989 No. of claims by Pure / Natural death ( probability) premium = S.Ax (Dx)1 (Dx)/(Ix) 11 15 11.00 15.02

25 26

27
28 29

9974
9954 9929

20
25 29

20.05
25.11 29.21

Level Premium
The insurer can alternately apply method of level premium by charging single rate of premium uniformly through out the terrn of 5 years from the surviving policy holders then be would be able to meet all the claims

Age (x)

No. of Person living at age x No. of claims by death (dx) Total claims out go. and sharing the claims (lx) prability of Death (qx) x (lx)

35
36 37 38

10,000
9,972 9,941 9,907

28
31 34 38

2,80.000
3,10.000 3,40.000 3,80.000

39
Total

9,869

42
173

4,20.000
17,30.000

 If the uniform amount of premium that the insurer wishes to collect from all the policy holders every year is P there the same can be found out by solving the following equation :-

 (10000 x P) + (9972 x P) + (9941 x P) + (9907 x 9) + (9869 x P) = 17,30.000 P x 49689 = 1730000 P = 34.82


Age (x) No.of persons living at age X and share claims (Ix) 10000 9989 9974 9954 9929 No. of claims by Cost of benefit death ( probability) payment (Dx)1 11 15 20 25 29 Total cost 110000 150000 200000 250000 290000 1000000

25 26 27 28 29

 Level Premium: (10000xP)+(9989xP)+(9974xP)+(9954xP)+(992 9xP) = 1000000 Px(10000+9989+9974+9954+9929)=1000000 Px49846 = 1000000 P = 20.06;