Академический Документы
Профессиональный Документы
Культура Документы
Definition
Insurance is a practice of exchanging a contingent claim for a fixed payment
called premium.
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
Premium needs to be paid in advance and regularly to keep the policy in
force.
The principle of assigning premiums according to the underlying risk is an
essential element of actuarial science.
Functions of premium
It should produce total funds sufficient to cover the insurers obligation.
It should distribute the cost of insurance fairly among insured persons
Modes of payment of premium
The premium can be paid at one time, when it is called a single premium. It
can also be paid in instalments i.e. yearly, halfyearly, quarterly or monthly.
Halfyearly, quarterly and monthly mode instalment is obtained by dividing
the tabular premium by 2 or 4 or 12.
For monthly mode, an extra addition of 5% to the tabular premium is made
before dividing the tabular premium by 12
Premium can also be paid through salary savings scheme which is in fact a
monthly mode but for this, no extra is charged.
Cont.
Premium is always payable in advance.
Insurers allow some rebate on the premium for yearly and halfyearly mode
because the insurer earns interest on the advance payment and also because
the administrative expenses are reduced because of lesser frequency of
issuing renewal premium notices and receipts and maintaining the record.
Similarly rebate is also permitted for large sum assured and these rebates
differ from plan to plan.
Components of Premium
Level Premium
Extra Premium
Components of premium
Risk premium
The pure premium needed to cover the expected risks but with no allowance
for expenses, commission or contingencies is to be made. Thus the cost to
meet the risk of death for one year at a particular age is known as risk
premium. The risk premium is based on the probabilities of death at various
ages.
Mortality studies, reflecting the experience of Indians, are made by Mortality
and Morbidity Investigation Bureau (MMIB), set up jointly by the Life
Insurance Council and the Actuarial society of India to help insurers.
Net premium
A net premium is the premium calculated on the basis of the valuation
assumptions to provide the contractual benefits at outset. Its calculation only
allows explicitly for interest and mortality. Thus the net premium covers the
risk factor as well as interest earned on investment of fund by the insurers.
Net premium is always less than the risk premium.
Office premium
The premium arrived at after loading net premium is called office premium.
The premium figures printed in the promotional literature and brochures are
office premiums.
Also known as tabular premium.
Level premium
Premium keeps on increasing as the age increases and this is the natural
premium paying system but it is impractical because the insurer cannot ask
the insured to pay extra premium every year and moreover in the latter years
the cost of insurance would become unaffordable resulting in lapse of
policies.
In view of this insurers charge a level premium and the cost is distributed
evenly over the period during which premiums are paid. The premium
remains the same, and is more than the actual cost of protection in the
earlier years of the policy and less than the actual cost in the latter years.
The excess paid in the early years builds up the reserve.
Loading
The amount added to the pure premium to cover the administrative expenses
is known as loading. When these expenses are added to the net/pure
premium it becomes the gross premium/office premium which is actually
charged from the customer.
Extra premium
It is charged on case-to-case basis; unique for every policy. This may happen
because of grant of some extra benefit in addition to the basic benefits under
the plan like accident benefit or premium waiver benefit. Riders provide
additional benefit or premium waiver benefit
Extra premium may also become chargeable because of decisions relating to
the extent of risk in any particular case.
Determination of premium in property and liability insurance
Class rating method
Used when the factors causing losses can either be easily quantified or there
are reliable statistics that can predict future losses.
These rates are published in a manual, and so the class rating method is
sometimes called a manual rating.
Two methods to determine a class rated premium or to adjust it
Cont.
In the pure premium method, the pure premium is 1st calculated by
summing the losses and loss-adjusted expenses over a given period, and
dividing that by the number of exposure units. Then the loading charge is
added to the pure premium to determine the gross premium that is charged
to the customer.
Pure premium=
Rate change =
Schedule rating
Experience rating
Retrospective rating
Cont.
Schedule rating uses a class rating as an average base, then the premium
is adjusted according to specific details of the loss exposure. Some factors
may increase the premium and some may decrease itthe final premium is
determined by adding these credits and debits to the average premium for
the class.
Cont.
Experience rating uses the actual loss amounts in previous policy periods,
typically the prior 3 years, as compared to the class average to determine the
premium for the next policy period. If losses were less than the class average,
then the premium is lowered, and if losses were higher, then the premium is
raised.
The adjustment to the premium is determined by the loss ratio method, but is
multiplied by a credibility factor to determine the actual adjustment
Experience rating is typically used for general liability insurance, workers
compensation and group insurance.
Cont.
Retrospective rating uses the actual loss experience for the period to
determine the premium for that period, limited by a minimum and a
maximum amount that can be charged. Part of the premium is paid at the
beginning, and the other part is paid at the end of the period, the amount of
which is determined by the actual losses for that period. Retrospective rating
is often used when schedule rating cannot accurately determine the premium
and where past losses are not necessarily indicative of future losses, such as
for burglary insurance.