Premium: Premium is the ‘consideration’ that the policy holder has to pay in order to secure the benefits offered by the insurance policy. The Calculation of premium is highly complex technical process.
Risk, Net and Pure Premium:
The cost to meet the risk of death for one year at a particular age is called the risk premium.
Eg. 1000 persons→ the cost of covering the risk of death of person age 50 for one year. This cost is for insurance of Rs. 20,000 which can be expressed also as Rs. 10 per 1000. The risk premium is based on the probability of death at various ages, mortality tables prepared for the use of insurance offices; contain data relating to such probabilities.
The balance premium remaining with the insurer will be invested and will earn some interest. To the extent of the expected interest earnings, the premium charged can be reduced. The premium worked out after taking into account the interest, is called the net premium or pure premium.
Loadings:
The additions to the pure premium are called loadings. One of the loading is due to administrative expenses. One of them would be for unexpected contingencies and fluctuations.
Level Premiums:
Eg: 10,000 persons at a specified age→ die within one year. Mortality rate at that age would be 0.01%. Risk pre chargeable for persons at that age would be 0.10 per Rs. 1000 SA. To offset this problem insurer spread the risk premium on a uniform basis throughout the term of the policy. Thus the premium remains constant for 20 yrs. Such uniform premium is called Level Premium. This implies that the premium collected in the early years of the policy would be more than necessary for the risk, and less than necessary towards the latter part of the policy.
Office Premium:
The premium figure arrived at after loading the net premium or pure premium is called office Premium. The administrative cost is more if the premium is paid every quarter or month, instead of once in a year. Extra premium may become chargeable because of underwriting decisions, benefits under the plan like accident benefits or Waiver of Premium benefit. Riders provide additional or supplementary benefits.
Life Fund:
It is a long term contract. The income from the life insurance business (Including the earnings from the investments) is kept aside in a Life Fund, earmarked exclusively to meet the liabilities under the life insurance policies. Life fund can be utilized mainly to pay claims and expenses. It represents the reserve for life insurance policies.
A premium is calculated in respect of mortality, Interest and expenses.
The practice followed by all prudent insurers is that periodically, they check the validity of these assumptions to make sure that the business is on sound lines. The process of doing so is called an Actuarial Valuation.
The insurance act in India requires that actuarial valuations be done every year. The method of estimating the liability of the business and of the future premiums is very technical and complex, involving actuarial principles. It has to be done by an actuary with recognized professional qualifications. This is one of the reasons why every life insurer has an actuary, either as a full time employee or as a consultant.
The insurer is required to maintain separate funds in respect of non-participating policies and in respect of participating policies. Separate valuations will be made in respect of these 2 funds. The surplus in the fund for participating policies, not more than 10% of the surplus can be distributed to the shareholders. The rest will have to be distributed to the policyholders as bonus.
Bonus:
The distribution of the valuation surplus to policyholders is done through the declaration of ‘Bonus’ only policy holders who opt for participating or with profit policies would be entitled to bonus. It is declared out of the surpluses determined after actuarial valuations. Surpluses, in a way reflect the profitability of the business or the quality of management of the business.
Non-participating or without profit policies would be paying a slightly lesser amount of premium for the same kind of insurance cover, because of the factor of bonus loading. The most common bonus ‘Simple Reversionary Bonus’ and ‘Compound Reversionary System’ added to the existing SA.
A one time bonus called Terminal Bonus or Final Additional Bonus was declared for policies which had been in force for 15 yrs.
Risk, Net and Pure Premium:
The cost to meet the risk of death for one year at a particular age is called the risk premium.
Eg. 1000 persons→ the cost of covering the risk of death of person age 50 for one year. This cost is for insurance of Rs. 20,000 which can be expressed also as Rs. 10 per 1000. The risk premium is based on the probability of death at various ages, mortality tables prepared for the use of insurance offices; contain data relating to such probabilities.
The balance premium remaining with the insurer will be invested and will earn some interest. To the extent of the expected interest earnings, the premium charged can be reduced. The premium worked out after taking into account the interest, is called the net premium or pure premium.
Loadings:
The additions to the pure premium are called loadings. One of the loading is due to administrative expenses. One of them would be for unexpected contingencies and fluctuations.
Level Premiums:
Eg: 10,000 persons at a specified age→ die within one year. Mortality rate at that age would be 0.01%. Risk pre chargeable for persons at that age would be 0.10 per Rs. 1000 SA. To offset this problem insurer spread the risk premium on a uniform basis throughout the term of the policy. Thus the premium remains constant for 20 yrs. Such uniform premium is called Level Premium. This implies that the premium collected in the early years of the policy would be more than necessary for the risk, and less than necessary towards the latter part of the policy.
Office Premium:
The premium figure arrived at after loading the net premium or pure premium is called office Premium. The administrative cost is more if the premium is paid every quarter or month, instead of once in a year. Extra premium may become chargeable because of underwriting decisions, benefits under the plan like accident benefits or Waiver of Premium benefit. Riders provide additional or supplementary benefits.
Life Fund:
It is a long term contract. The income from the life insurance business (Including the earnings from the investments) is kept aside in a Life Fund, earmarked exclusively to meet the liabilities under the life insurance policies. Life fund can be utilized mainly to pay claims and expenses. It represents the reserve for life insurance policies.
A premium is calculated in respect of mortality, Interest and expenses.
The practice followed by all prudent insurers is that periodically, they check the validity of these assumptions to make sure that the business is on sound lines. The process of doing so is called an Actuarial Valuation.
The insurance act in India requires that actuarial valuations be done every year. The method of estimating the liability of the business and of the future premiums is very technical and complex, involving actuarial principles. It has to be done by an actuary with recognized professional qualifications. This is one of the reasons why every life insurer has an actuary, either as a full time employee or as a consultant.
The insurer is required to maintain separate funds in respect of non-participating policies and in respect of participating policies. Separate valuations will be made in respect of these 2 funds. The surplus in the fund for participating policies, not more than 10% of the surplus can be distributed to the shareholders. The rest will have to be distributed to the policyholders as bonus.
Bonus:
The distribution of the valuation surplus to policyholders is done through the declaration of ‘Bonus’ only policy holders who opt for participating or with profit policies would be entitled to bonus. It is declared out of the surpluses determined after actuarial valuations. Surpluses, in a way reflect the profitability of the business or the quality of management of the business.
Non-participating or without profit policies would be paying a slightly lesser amount of premium for the same kind of insurance cover, because of the factor of bonus loading. The most common bonus ‘Simple Reversionary Bonus’ and ‘Compound Reversionary System’ added to the existing SA.
A one time bonus called Terminal Bonus or Final Additional Bonus was declared for policies which had been in force for 15 yrs.
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