Is The Premium Quoted By An Actuary Same As Charged By The Customers?

First of all, a ‘Benchmark Premium’ is decided. It is the basic premium amount which is required to be charged. Then, the underwriting adjustments are made. This involves an investigation into family diseases, life history, age, gender, medical history, habits which can affect the probability of a life making a claim such as smoking, etc.

After the information is gathered and analyzed, the actuary tries to predict how likely the insurance applicant will make a claim on their policy. The higher the probability of a claim, the higher the premiums usually are.  After analyzing and considering all the possible factors a ‘Technical Premium’ is decided.

“Sum Assured is the amount which company promises to pay when the customer makes a claim”

Then the technical premium is aligned with the required Sum Assured for the claim. Usually, Life Insurance companies give customers the freedom to choose a plan amongst different plans with different Sum Assured schemes. So, higher the sum assured, higher the will be the premium charged.

Afterwards, the premium is aligned with the expenses such as reinsurance cost, fixed or variable expenses incurred in running the policy, agent commission, etc. All these factors are also considered while pricing a policy.

After considering mortality tables, interest rates, sum assured, expenses, a final ‘Target Premium’ is quoted by the actuary.

But the underwriter does not agree with the premium as the premium quoted by the actuary may result in loosing sales due to competition in the market.

So, a dispute occurs among the actuaries and the underwriters. That’s when CEO comes into picture and the premium is reduced to ‘Walkaway Premium’.

If the underwriter agrees then it is the ‘Actual Premium’ charged by the customers otherwise it is further reduced to ‘Actual Premium’ charged by the customers.                                                                                                                                                      In both the cases, the actual premium charged is very “low” than the premium quoted by the actuary.

How Does Company Earns?

Companies usually earns through underwriting income, insurance business, investment income.

1)  Underwriting Income

“The difference between premiums collected on insurance policies by the insurer and expenses incurred and claim paid out is known as underwriting income”

Huge claims and disproportionate expenses may result in an underwriting loss, rather than income, for the insurer. The level of underwriting income is an accurate measure of the efficiency of an insurer’s underwriting activities.

2)  Insurance Business

It refers to the sales of insurance policies. Keeping the premium competitive may result in increase of sales tremendously so it covers up the adjustments made to premium.

  3)  Investment Income

It comes from the capital gains, dividends and other investment related to purchase and sales of securities. Insurer invests in a wide array of assets such as stocks, bonds, real estate, etc.

          Calculation of Net Investment Income:

Net Investment Income = Capital Gains + Dividends + Interest Income –                                                                     Administrative Fees

Almost all the insurance companies make profit through the Investment Income.