irda - chapter 3 premiums & bonuses
TRANSCRIPT
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Chapter Three
Premiums & Bonuses
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Objectives of LearningUnderstand the concept of premiumFactors affecting product pricingUnderstand how profitability is built in the
pricingUnderstand the concept of BonusKnow different types of BonusesKnow how to calculate the premium
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WHAT IS PREMIUMPremium is the amount which is paid by the
insured to the insurer for an insurance Contract
Policyholder
Insured pays the premium
Insurer
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Frequency of Premium
Every year
Monthly Quarterly Half-yearly Yearly
Premium to be paid at periodic interval.
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WHAT IS PREMIUM Premium paid should be enough to
manage the insurance business and to pay the claim as they arise
Insurance Claim
Premiums are calculated by the Actuary
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Key Factors in Premium calculation
1. Mortality Rates
2. Investment Earnings
3. Expenses
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Mortality Factor
MORTALITY TABLEMALE FEMALE
AGE LIVING DYING LIVING DYING
Shows how many people in each age group are expected
to die in a given year
Mortality Factor is the rate at which people may die
This TableIs constructedBased on past data
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Risk PremiumThe cost to meet the risk of death for one
year at a particular age is called the Risk Premium
The risk premium is based on probabilities of deaths at various ages
•Risk premium would be adequate to pay the death claims
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Investment EarningsIn case of endowment policies claims have to be paid
after survival of some years
The actual premium collected has to be more than the risk premium
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Investment Earnings
A part of the premium is invested
by the insurer to earn some interest When the investment earnings
are expected to be more, lower premiums are charged
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Net or Pure PremiumThe premium worked out after taking into
account the interest is called the Net or Pure premium
Risk Premium Net Premium+ Interest Factor
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Expenses FactorExpenses are like
Marketing,establishment,agent commission etc
A contingency factor is also provided as a safety margin to meet unforeseen events like earthquake or riots or epidemic
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LoadingsThe administrative expenses have to be met
out of the premiums paid by the policyholdersThese additions to net premium are called
LoadingsThe loadings also provide for unexpected
contingency and fluctuations
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Office or Gross PremiumThe premium figure arrived at after loading the net or pure premium is called Office Premium
Net Premium Office Premium Expense Factor+
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Different Types of PremiumRisk premium: the amount required to purchase one
year of coverage.
Pure or Net premium: risk & interest factor in totality.
Office premium: administrative expenses + unexpected contingencies + fluctuation.
Tabular premium: Published premium rate table.
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Level PremiumAs per the mortality table as the age increases the chargeable premium also increases
If the premium becomes too high in the later years the policy can lapse
The level premium system allows a person to pay the same premium throughout the term of
the policy
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Level PremiumThe premium collected is
more than necessary for risk coverage in the early years.
The extra premium is invested and insurer earns interest on them
This is to offset against the higher risk charges in the later years
Prem
ium
A
mou
nt
30
Level Premium creates Reserves
Age
Risk Factor
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Extra PremiumExtra premiums are charged for people with more than normal risk and may be charged due to any of the following reasons
Additional or supplementary benefits like accident benefit or premium waiver benefit
Underwriting Decisions because of risk perceived due to health,habits ,occupation etc
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Age Calculation
Age nearer to birthday considered
Age up to 5 months 29 days is taken as
lower age
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Age Calculation
0504
03 02
20022001
10 09 1980-
Days Months years
Solution = 24 Days,5 Months and 21 years
12 months30 Days
(12+2=14 months)
34-10=24
14-09=05
2001-1980=21
(30+04=34 months)
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Age Nearer Birthday
0 2 4 6 8 10 1221 years 22 years
Up to 5 months and 29 days age nearer b’day same as age last b’day
6 months and aboveAge nearer b’day is same
as age next b’day
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Age CalculationSolution = 24 Days,5 Months and 21 years
Age as on Last Birthday=21 years
Age as on next Birthday=22 years
Age nearer Birthday=21years
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Rebate for Mode of Payment
- 3 % for yearly mode
- 1.5 % for half yearly mode
0 % for quarterly mode
+ 5 % for monthly mode
SSS- No mode extra charged
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Rebate for Sum Assured
Per thousand Sum Assured
Rs 25,000 -Rs 49,999 - Rs 1
Rs 50,000 - - Rs 2
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Premium CalculationStep 1 : Determine tabular premium depending on the Table-Term (Consider Age)
Step 2 : Allow for modal rebate
Step 3 : Allow for adjustment for Large Sum Assured
Step 4 : Multiply be number of Units
Step 5 : Add if any
•Accident extra
•Health extra
•Occupational extra
•Other extras
Step 6 : Get Annual Premium
Step 7 : Divide by 2-Semiannual, 4-Quarterly, 12 - Annual
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Premium CalculationTabular Premium
36.55
Allow for Modal Rebate36.55-0.55=36.00
Allow for largeS.A Rebate
36-1=35
Multiply by SA(35/1000)*25000=875
Calculate rider premium(1/1000)*25000=25
Get the Annual Premium
900
Get the modal premiumHalf yearly Premium
(900/2) =450
Add Rider Premium875 +25=900
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Exercise: Premium Calculation
Tabular Premium 28.40
Sum assured 50,000
High SA rebate 1.50
Health Rider 3.0
Mode Quarterly
Solution ????
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SolutionTabular Premium: Rs 28.40Rebate for large SA: Rs 1.50Adj for mode: nilTP after all adj: Rs 26.90
Annual Premium: Rs (26.90Χ50)= Rs 1345
Rider Premium: Rs (3Χ50) = 150Total Annual Premium: Rs 1495
Quarterly Installment Premium: Rs 373.75
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Life Fund
Premium
Life Fund
There is a need to keep aside income from life insurance business aside as life fund as a reserve
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Why Life Fund?The principles of prudent life insurance management require that all the income from the life insurance business be kept aside in a life fund, embarked exclusively to meet the liabilities under life insurance policies.
The laws in India also stipulate this requirement
The life fund can be utilized only to pay the claims and expenses of running the business
The life fund represents the Reserves for life insurance policies
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Actuarial ValuationPremium is calculated taking into account likely experiences in respect of mortality, interest and expenses.
These are assumptions or expectations.
If the reality is better than expectation, then business is said to be properly funded.
If experience worse than expectation then premium would be inadequate and business could run into difficulties.
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What is Actuarial Valuation?Validity of assumptions needs to be checked periodically
This process is called actuarial valuation and they are done every year
Insurer estimates the liability:
Insurer estimates the premiums that are due as this will added to life fund
Liability – Life fund = Fund Required to be solvent
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Actuarial ValuationFund > = Surplus
POLICY RESERVE
Liabilities
DistributedTo ParticipatingPolicy Holders
Some amount isKept as reserve
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BonusDistribution of the valuation surplus to
policyholders is done through the declaration of Bonus
Participating policies only are entitled to Bonus
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Types of BonusBonus
Reversionary Terminal
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Reversionary BonusCan be simple or compound
Simple Bonus Compound BonusInterest paid only on the original loan amount
Interest paid on the original loan amount and on accrued interest
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Terminal BonusA one time bonus declared for policies which
have been in force for 15 years or more
This is also known as final additional bonus
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Interim Bonus
Are declared by actuaries to pay to policies which become claims between two valuations
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Key LearningsLife Premiums depend on mortality, expenses
and interest earnings assumption
A favorable experience in these will result in surplus
Surplus is distributed to policy holders after annual valuation
Valuation is done by Actuary
Age nearer b’day is used for premium calculation
Premium Calculation Method
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Thank You