Pricing Life Insurance

Insurance premium must

Cover losses/ assessments
Cover expenses
Yield a reasonable profit

Present value of future

premiums must equal present
value of future benefits
Term insurance is the simplest
example

Based on mortality statistics

Mortality Tables
Tool used by life insurers to estimate
probabilities of death and survival
Based on actual data
Smoothed
Loaded for safety

Closely connected to population

mortality, but NOT the same
Reflect INSURED lives only
Well enough off economically to buy insurance
Healthy enough to pass underwriting screens

Different Mortality Tables...

... for different purposes
Based on timing of insurance
purchase
Select mortality
Ultimate

Based on product being purchased

Term life insurance
Endowment
Annuity

Mortality

Insurance Policy's Premium

Rate
is the price one pays per unit of
coverage
includes two parts:

Actuarially fair premium (net

premium)
Loading: expenses plus margin for profit
and contingencies

Gross Premium equals

Rate x amount of coverage

purchased

Net Premium
Present value of net premiums
equals present value of benefits
Net single premium (NSP) is the lump
sum amount that equals the present
value of benefits
All premium computations begin with
the NSP
All other payment arrangements are
installment plans to pay off the NSP

Net Single Premium

Premium calculation for 5-year term insurance

Face amount Rs1,000, age 35 using mortality table, Interest@5%

# Living pool # Claims

Benefit (XRs1,000)

P V Factor

V of benefit

9,491,711 20,028
Rs19,074,667
9,471,683 21,217
Rs19,243,819
9,450,466 22681
Rs19,591,848
9,427,785 24,324
Rs20,011,355
9,403,461` 26,236
Rs20,555,906
Total amount needed at

Rs20,028,000 X .9524 =
Rs21,217,000 X .9070 =
Rs22,681,000 X .8638 =
Rs24,324,000 X

.8227 =

Rs26,236,000 X .7835 =
present value

Net Level Premium (NLP)

Net level premium = net single
premium divided by an annuity factor
that spreads payments over the
selected period
Payments may be spread over any
period equal to or less than the
period of coverage

Insurance Pricing
Converting NSP to NLP
Annuity factor more precisely is
Present value of an annuity due to
Rs1 for premium paying period of n
years at age x
Present value of annuity payments/
number of entrants

Insurance Pricing --

Converting NSP

to NLP
Premium calculation for 5-year term insurance
Face amount Rs1,000, age 35 using mortality table
# Beginning # Living
9,491,711

PV Factor

Value

Rs9,491,711 X 1.000 = Rs 9,491,711

Rs9,471,683 X .9524 = Rs 9,020,831
Rs9,450,466 X .9070 = Rs 8,571,573
Rs9,427,785 X .8638 = Rs 8,143,721
Rs9,403,461 X .8227 = Rs 7,736,227
Total
Rs42,964,063
Annuity factor (=Value of promise from each buyer)
= Rs42,964,063 /9,491,711= Rs4.526

Net Level Premium

Remember NSP = Rs10.375, the onetime payment sufficient for five years
of coverage
NLP = NSP/Annuity factor
NLP = Rs10.375/4.526 = Rs2.29 per year
for five years

Total payments over five years are

Rs11.45
What does the Re1.08 higher
premium represent?

Gross premium
Begin with net premiums
Net level premium
Valuation net premium
De loaded premium

Add loading for

Expenses, including taxes
Contingency margin
Profit margin
Dividends?

Check for compliance & competitiveness

Expenses
Constant amount per policy
Flat amount per Rs1,000 of
coverage
% of premium

Contingency Margins
Cover several sources of potential loss
Higher-than-expected mortality
Lower-than-expected interest
Higher-than-expected expenses, taxes
Higher-than-expected lapse rates

Used differently in different types of

policies
Minimal in nonparticipating contracts
Common in participating contracts -- savings
paid back as dividends after experience is known

Legal Requirements for

Rates
Adequate
Reasonable
Not unfairly discriminatory

General Insurance
People exposed to same risk pool
money and share loss suffered by a
few
Insurers facilitate the process by
collection of contribution in advance
and assure compensation in case of
loss
It has to determine premium based
upon experience and projections and
maintain trust to sustain and
compete

General Insurance kinds

Motor Insurance
Fire Insurance
Marine Insurance
Engineering Insurance
Liability Insurance
Personal Accident
Health Insurance
Miscellaneous Insurance

General Insurance
Fire insurance is designed to provide for financial loss
to property due to fire and other related hazards.
Special type of insurance policies have unique
coverage such as risk of consequential damage,
replacement/ reinstatement value, multi location/
floater and industrial all risk.
Marine insurance comprises of hull insurance and cargo
insurance. Hull insurance covers insurance of the
carrier of goods.
Cargo insurance provide cover for losses/damages that
could occur to goods in transit on sea, rail, road and air.

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 Motor/Accident Insurance is statutorily mandated to take care of

those who may get injured in an accident.

Third party liability policy

Comprehensive policy.

Health/medical insurance covers

Re-imbursement of medical expenses related to specific diseases

Hospitalisation.

Some of the available policies are: Individual/ Group Mediclaim

Policy, Bhavishya Arogya Policy, Jan Arogya Bima and overseas
medical cover.
Liability insurance policies cover several types of liabilities

Employee liabilities,

Employee state insurance liability,

Non-industrial risks,

Professional liabilities

Product liabilities.

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Principles of General
Insurance
Insurance is a contract.
Essentials and implications of a
contract apply.
Agreement
Consideration
Competence
Legal Object

Principles of General
Insurance
Principle of Utmost Good Faith
Proposer to declare all information
prejudicial to acceptance of the offer,
voluntarily:
A greater exposure than normally expected
External factors that increase the risk
Previous losses and claims under other policies
Any refusal or special rates by an insurer in the
past
Existence of other non indemnity policies e.g. life
and accidents

Principles of General
Insurance

Proposer to declare all information

prejudicial to acceptance of the
offer voluntarily:
Full facts related to subject matter of
insurance
Fire: Construction, Occupancy, Hazardous
nature, fire detection/ fighting equipment
Marine: Packing- single/ double gunny
bags, old/new drums; Machinery- New/ old;
Vessel carrying goods; Port of shipment;
Destination
Motor: Cubic capacity, carrying capacity,
model, driver/ self driven
Personal Accident: occupation, age height
weight, disability if any, previous medical
history
Theft Insurance: Value, nature of stock and

Principles of General Insurance

Proposer to declare all information prejudicial to
acceptance of the offer voluntarily:
Facts need not be disclosed

Facts
Facts
Facts
Facts
Facts

of law
of common knowledge e. g. flood/ earthquake prone areas
that reduce risk
that survey report will reveal
covered by policy conditions

Duty of disclosure ceases with issue of cover note.

At renewal, all material facts to be disclosed again
Breach
Unintentional: an oversight or considered not material by
insured. Contract is voidable
Intentional: fraudulent/ malafide, contract is void.

Declaration Clause for proposer a must

Principles of General
Insurance
Insurable Interest
Without Insurable Interest the contract is void
Essentials
Some property, right, interest, life, limb, potential
liability capable of being insured
Subject matter of insurance to be the property/
right/ interest
Insured to have a relation with subject matter of
insurance deprivation of which will bring loss/
damage or create liability
Relationship of insured with subject matter duly
recognized by law

Principles of General
Insurance
Insurable Interest
When to be present
Fire and miscellaneous: all time-at
proposal and claim
Marine: claim

Assignment
Transferable by endorsement in marine,
With consent of insurer in fire, motor
and miscellaneous

Principles of General
Insurance

Insurance is a contract of
Indemnity and nothing more (no
profit to insured)
Indemnity provided through
Payment of loss
Repair (motor insurance)
Replacement
Reinstatement e.g. building,
machinery

Principles of General
Insurance
Liability of insurer
Restricted to max of sum assured
In case of under insurance:
(sum insured/ value) X Loss
Insured is self insurer for the rest

Salvage to be considered
In case of building policy, wear tear
and depreciation, inflation between
date of loss and replacement is
included
Additional agreed cost if included in
premium

Principles of General
Insurance

Subrogation after payment to

insured insurer steps into the shoes
of insured and can recover losses
from third party who caused it
In case of Life insurance and accident,
insurer does not get this right and
insured can claim compensation from
third party as additional benefit
Insurer cannot recover more than it
has paid to insured

Principles of General
Insurance
Contribution
In case of insured getting

multiple cover from more insurers on the

same subject, he can claim the loss from
any insurer. Paying insurer can recover
proportionate loss from other insurers
Perils
Insured perils are the ones mentioned in policy
e.g. fire lightening, storm, theft
Excepted/ excluded perils as specifically
mentioned in policy
Uninsured perils not mentioned in policy e.g.
damage due to smoke or water in fire insurance

Intermediaries
Risk
Advisory

Reinsurance
Broker

Corporat
e
Individuals
Cooperatives

Agent

Broker
Surveyor/
Loss Assessor

Insurance
Company

Bancassurance
Actuary

Third Party
Administrator

Other
Intermediaries

IT Systems
Provider

Direct Channels
Minimum physical contact
Call Centres
Ideal for renewal business
Economic dispensing of insurance related
information
Service related guidance and support

e-Intermediaries
Internet based information dispensing

Other remote terminals

Kiosks

Bank as Agent - Bancassurance

Provide readymade customer base
Approx. 70,000 bank branches
Insurance products can be linked with banking
products
Comfort for customers due to regular monetary
transactions with the bank.
Reach potential middle / lower class population
Ease in sale of standard products
Sales experience in other products
Mutual funds
Credit cards
Personal loans

Essential to keep the products simple

Pre-underwritten product guidelines