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Insurance Premium Calculation Guide

This document discusses the calculation of insurance premiums. It defines premium as the amount paid by the insured to the insurer in exchange for the insurer's agreement to cover financial loss. There are two types of premiums: net premium, which is based on mortality and interest rates, and gross premium, which also includes expenses and profit loading. The document provides steps for calculating a net single premium, which is a lump sum that exactly covers future claims based on mortality rates and interest earned. It also lists assumptions used in premium calculations, such as mortality rates. Finally, it demonstrates calculating a net single premium for a 5-year term life insurance policy using a sample mortality table and interest rate.

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Mayaz Muhammad Momshad
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194 views10 pages

Insurance Premium Calculation Guide

This document discusses the calculation of insurance premiums. It defines premium as the amount paid by the insured to the insurer in exchange for the insurer's agreement to cover financial loss. There are two types of premiums: net premium, which is based on mortality and interest rates, and gross premium, which also includes expenses and profit loading. The document provides steps for calculating a net single premium, which is a lump sum that exactly covers future claims based on mortality rates and interest earned. It also lists assumptions used in premium calculations, such as mortality rates. Finally, it demonstrates calculating a net single premium for a 5-year term life insurance policy using a sample mortality table and interest rate.

Uploaded by

Mayaz Muhammad Momshad
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PDF, TXT or read online on Scribd
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Assignment No. 07 Name of the Assignment Page No.

Assigned Date: Calculation of Premium


19.07.2020

1. Concept & Definition of Premium


Premium is the consideration of insurance contract.

According to Oxford Dictionary, “premium means an amount or money to be paid regularly for
an insurance policy”.

According to P.H. Collin, “insurance premium means annual payment made by a person or a
company to an insurance company”.

To conclude, premium is the price paid by the insured to the insurer in consideration of the
insurer’s undertaking to indemnify the risk of financial loss of insured.

2. Types of Premium
The premium if two types:

(i) Net Premium


Net premium is based on the mortality and interest rate.
The net premium is further divided into two parts:
a. Net Single Premium
Net single premium is paid in one lump sum.
b. Net Level premium
Net level premium is paid periodically in installments. This premium may be yearly, half-
yearly, quarterly and monthly.

(ii) Gross Premium


Gross premium depends upon on the mortality, the assumed interest rate, the expenses, and
the bonus loading.

3. Calculation of Net Single Premium


Net single premium is that premium which is received by the insurer in a lump sum and is
exactly adequate, along with 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.
Assignment No. 07 Name of the Assignment Page No.

Assigned Date: Calculation of Premium (Continued)


19.07.2020

4. Steps for Calculating of Net Single Premium


(N.B. you must have to write the 10 steps from the provided supporting documents)

5. Assumptions underlying the Rate Computations of Net Single Premium


(N.B. you must have to write the 8 assumptions from the provided supporting documents)

6. Calculation of Net Single Premium for Term Insurance Policy

❖ Term Insurance

(N.B. you must have to write the details about Term Insurance; write MetLife Insurance instead
of Oriental and Tk. instead of Rs. where applicable from the provided supporting documents)

Table 1: MetLife 1953-54 Experience Life Table


Age Number of Persons Living Number of Death Mortality Rate per 1000
40 96,463 273 2.83
41 96,190 302 3.14
42 95,888 336 3.50
43 95,552 375 3.92
44 95,177 418 4.39
45 94,759 467 4.03

The number of details can be known from the table we assume that each person dead will be
paid Tk. 1000. The next factor of calculation is that 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 as follows:

Number of deaths × Amount of claims × Present value of Tk. 1 = Present value of claims

Here, formula for calculating Present Value is, P = S {1/(1+i) n}

Where, P stands for Present Value


S for the amount/sum of which present value is to be calculated
i for the rate of interest and
n for number of years for which present value is to be calculated
Assignment No. 07 Name of the Assignment Page No.

Assigned Date: Calculation of Premium (Continued)


19.07.2020

Table 2: Net Single Premium for 5 years Term Insurance Policy


Year of Age Number of Number Amounts of Present Present
Insurance Attained Living of Death Claims per Value of Tk. Value of
(n) Death 1 @ 3% claims
interest rate (iv×v×vi)
i ii iii iv v vi vii
1 40 96,463 273 1000 0.971 265,083
2 41 96,190 302 1000 0.943 284,786
3 42 95,888 336 1000 0.915 307,440
4 43 95,552 375 1000 0.888 333,000
5 44 95,177 418 1000 0.863 360,734

Present value of all claims = Tk. 1,551,043


Total premium to be charged on all 96,463 policies = Tk. 1,551,043
Tk. 1,551,043
Therefore, premium per policy = 96,463

= Tk. 16.08
Calculate per policy premium….

(N.B. you must have to prepare this assignment with your own handwriting, softcopy is not allowed)

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