Dr. Amitabh Mishra

Dr.
Amitabh Mishra
⚫ An insurance premium is the money charged by
insurance companies for coverage.
⚫ Premium is the consideration money that a

policyholder has to pay in lieu of the benefit that the
insurer promises to confer on the happening of the
scheduled eventuality.
⚫ Insurance is a contract and the policyholder /insured.
Premium forms the obligation on the part of the

insured.
Dr. Amitabh Mishra

⚫ Insurance premiums differ from company to company, so it
is advisable that individuals shop around for insurance
premiums.
⚫ It is important to note that, sometimes, insurance premiums

quoted are slightly different from the premiums charged.
⚫ The amount of insurance premiums charged by the

insurance companies is determined by statistics and
mathematical calculations done by
the underwriting department of the insurance company.
Dr. Amitabh Mishra

Dr. Amitabh Mishra
Premiums
Net/Pure
premiums Gross/Office
premiums
Net Single Net level Gross Single Gross level

premiums premiums premiums premiums
Dr. Amitabh Mishra
⚫ Net premium: Net premium is based on
◦ Mortality &
◦ Interest rate
⚫ Gross premium: Gross premium is based on

◦ Mortality
◦ Interest rate
◦ Expenses &
◦ bonus loading
Dr. Amitabh Mishra

⚫ Single premium: The premium can be paid at one time, when it is
called a single premium.
⚫ Level premium: Premium can also be paid in instalments i.e.
◦ Yearly,
◦ half–yearly,
◦ quarterly or
◦ monthly.
⚫ Single premiums are rare except in pension plans. Tabular premiums are given in
yearly mode. Half–yearly, quarterly and monthly mode instalment is obtained by
dividing the tabular premium by 2 or 4 or 12. However before going for this division,
one has to allow for certain rebates which are allowed at different rates for different
modes under different plans.
Insurers allow some rebate on the premium for yearly and half–yearly mode. However
this rebate varies from plan to plan.

Dr. Amitabh Mishra
Dr. Amitabh Mishra
⚫ There are three important elements in the
computation of premium. They are
Important
elements in the
computation
of premium
Expenses of
management, Expected yield on
Mortality,
its investment.
Dr. Amitabh Mishra
⚫ The mortality tables are prepared by the insurers on
the basis of their experience over a number of years. \
⚫ Though the rate of mortality increases with the
increase in age, all insurers charge a level premium
which remains constant over the entire duration of the
policy term.
⚫ It is the actuarial science which provides the method to
assess such increasing risk and convert it into a level
premium.
Dr. Amitabh Mishra

⚫ Any insurer has to incur expenses for conducting the insurance business.
⚫ These expenses are not of constant nature. They keep on increasing due to
inflationary market conditions.
⚫ Huge expenses are incurred for

◦ Procurement of new business,
◦ Payment of commission to the agent and
◦ Incidental expenses like preparation of policy document etc.
◦ Servicing of the policies, e.g.
🞄 Collection of renewal premium,
🞄 valuation to determine bonus payable,
◦ Payment of Survival Benefit and Death claim and Maturity Benefit etc.
Dr. Amitabh Mishra
⚫ As the above two elements go to increase the
premium rate, the expected yield on investment of
the collected endowment component of premium
goes to reduce the premium rate.
⚫ However, as the future yield cannot be determined

exactly, it is necessary for a prudent insurer to
keep a reserve to take care of unexpected fall in
the rate of yield.
Dr. Amitabh Mishra

Calculation of
Dr. Amitabh Mishra

⚫Net single premium is that premium which is
received by the insurer in a lump sum and is
exactly adequate, along with the return earned
thereon, to pay the amount of claim wherever it
arises whether at death or at maturity or even at
surrender.
⚫It does not provide for expenses of management

and for contingencies.
Dr. Amitabh Mishra

1. Determine what constitutes a claim
(a)death, (b) survival or (c) both.
2. Determine when claims are paid

(a) at the beginning, (b) at the end, or (c) during
the year.
3. Determine the number of insured.
4. Determine the duration of the policy.
5. Determine the probable number of claims

per year.
Dr. Amitabh Mishra

6. Determine the value of claims per year.
7. Determine the number of years of interest

involved and find the present value of a rupee.
8. Determine the present value of the claim

for each year.
9. Determine the present value of all

future claims.
10.Determine the net single premium,

(i.e., present value of future claims)
divided by
number assumed for buying policy.
Dr. Amitabh Mishra
⚫ The following factors are assumed while
calculating the net single premium.

◦ As many policy of a given type is issued as are the no. of person”
◦ Premiums are collected in advance or in the beginning of the
period.
◦ All collections are immediately invested and will remain

invested until money is needed for the payment of claims.
Dr. Amitabh Mishra

◦ The insurer will receive an assumed rate of interest.
◦ The interest or dividend or any return of the

invested funds is immediately invested for re-
earning.
◦ Mortality rate will be the same as given in the

mortality table and will he uniformly distributed
throughout the year.
◦ All policies are of the same amount, say, Rs. 5,000.
◦ Claims will be paid only at the end of the period.

Dr. Amitabh Mishra
Calculation of net single premium is different in
different types of policies
Dr. Amitabh Mishra

⚫ This is the simplest type of insurance contract
whereby, payment is made only when the life
assured dies within the term specified.
⚫ Nothing will be paid if death does not occur

during the designated term. This is also called
temporary insurance.
⚫ The premium is received in advance and it will not

be returned if life assured survives.
Dr. Amitabh Mishra
⚫ The premium is paid only once in a single sum at the
inception of the policy.
⚫ Death claims will be paid at the end of the year in
which they occur and not at the end of the term.
⚫ Thus the probability of death in each year along with
the present value, of the claim for each year will be
calculated because the death may occur at any moment
and the insurer may be required to pay.
The term may be
one, two, five or seven years.
Dr. Amitabh Mishra

⚫ A person wants a term insurance is for a period of
5 years.
◦ Rate of return on investment is 3 per cent and the
mortality experience is like the one shown in the oriental
1953-54 Experience Life Table.
◦ The person is proposing at the age of 40 for the period of 5

years.
◦ Each person dead will be paid Rs. 1,000. The number of

details can be known from the table.
Dr. Amitabh Mishra

Age No. of person No. of Mortality rate per 1000
living death (No. of deathx1000)/
No. of person living
40 96463 273 (273x1000)/96463 = 2.83

41 96190 302 =3.14
42 95888 336 =3.50
43 95552 375 =3.92
44 95177 418 =4.39
45 94759 467 =4.03
Oriental 1953-54 Experience Life Table
Dr. Amitabh Mishra

⚫ The insurer will earn a fixed return on the investment,
therefore, only the present value of the claim should be
taken as a premium. Thus, the net single premium for each
year will be calculated:
(Number of deaths x Amount of claims x Present value of Re. 1)

=
Present value of claims
Dr. Amitabh Mishra

⚫ Where,
◦ P= The present value,
◦ S= The amount of which present value is to be calculated
◦ i = The rate of interest and
◦ n = The number of years for which present value is to be

calculated.
Dr. Amitabh Mishra

⚫ The present value of the first year,
◦ S= Rs. 1, n = 1, & i = .03
⚫ Present value for the 1st year of insurance P=
⚫ The present value of the 2nd year,

◦ S= Rs. 1, n = 2, & i = .03
⚫ Present value for the 2nd year of insurance P=
Dr. Amitabh Mishra

⚫ The present value of the 3rd year,
◦ S= Rs. 1, n = 3, & i = .03
⚫ Present value for the 3rd year of insurance P=
⚫ The present value of the 4th year,

◦ S= Rs. 1, n = 4, & i = .03
⚫ Present value for the 4th year of insurance P=
Dr. Amitabh Mishra

⚫ The present value of the 5th year,
◦ S= Rs. 1, n = 5, & i = .03
⚫ Present value for the 5th year of insurance P=
Dr. Amitabh Mishra

Year Age Amount Presen
No. of No. Present Value of claims
of Attai claimed t value
person of 4x5x6
insura n ed per death of
living death
nce Rs1.0
1 2 3 4 5 6 7
(273x 1000x .971)=

1 40 9646 27 1000 .971
265083
3 3
(302x 1000x .943)=
2 41 9619 30 1000 .943
284786
0 2
(336x 1000x .915)=
3 42 9588 33 1000 .915
307440
8 6
(375x 1000x .888)=
4 43 9555 37 1000 .888
333000
2 5
(418x 1000x .863)=
5 44 9517 41 1000 .863
360734
7 8 Dr. Amitabh Mishra
⚫ Present value of all claims = 15,51,043
⚫ Total premium charged on all 96,463 policies (no. of living
person) = 15,51,043
◦ It was assumed that “as many policy of a given type is issued as are the no.
of person”
⚫ Therefore, premium per policy= 1551043/96463
= Rs. 16.18/
Dr. Amitabh Mishra

⚫ Thus, the present value of claim for the first year will
be 273 x 100 x 0.971 = 265083 because the number of
deaths are 273 and the total amount of claim, so, would
be 2,73,000. If multiplied by factor of present value it
gives present value of claim.
⚫ Thus the net single premium will be the same whether

it has to be calculated on the basis of group policy or
on the basis of single policy; the probability method is
generally used for calculation of premium.
Dr. Amitabh Mishra

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Dr.

insurance companies for coverage.

⚫ Premium is the consideration money that a

⚫ Insurance is a contract and the policyholder /insured.

Premium forms the obligation on the part of the