#QUS: Insurance pricing.
Fundamental principle of insurance pricing is that if insurance are to sell coverage willingly, they must received premiums that –
1. Are sufficient to fund claim costs and administrative costs and
2. Provide an expected profit to compensate for the cost of obtaining the capital necessary to support the sell of coverage.
The premium level that is just sufficient to fund the insurer’s expected cost and provide insurance company owners with a fair return on their invested capital is known as the fair premium. The fair premium that would be charged in a perfect competitive insurance market its major determinants are summarized in figure below: -
1. Expected claim cost: - Claim cost must be paid by the insurer for a contract or group of contracts. This cost represents the largest component of the fair premium for most types of insurance. They are discuss below: -
a. Homogeneous buyers: - When a there is existed a large number or group of insurance buyers and each buyer has the same loss distribution then the buyers are said to be homogeneous. For example, among a group of buyer each buyers has a 0.15 probability of loss taka 1000 and 0.85 probability of having no loss. Here assume that is buyers each buyers loss is independent of the loss of other buyers. As we seen that a large number of homogeneous insurance can charge a premium equal to the expected claim cost and be able to cover to its claim costs. Thus a fundamental of insurance premiums is the expected claim cost. If the insurer charged less then the expected claim cost average claim cost would exceed average revenues. On the other hand competitor keeps the insurer from charging the more than the expected claim cost.
b. Heterogeneous buyers: - When there are existed two groups of consumers with different loss distribution then the groups are called heterogeneous buyers.
The following example can clearly shows the different loss distribution:
Group Probability of loss Probability of no loss Size of loss Expected loss
A 0.10 0.90 tk1000 tk100
B 0.20 0.80 tk1000 tk200
Here we have to know the risk classification the process by which insurers estimate the expected claim cost for different buyers and changed premiums that vary according to expected claim costs. Buyers in risk classes with higher expected claim costs are charged higher rates. Insurers have strong incentives to classify buyers based on all information that helps predict differences in claim costs across buyers provided that the information can be obtain at a sufficiently low cost.
2. Investment income:- Given the ability of insurers to earn investment income on premiums prior to the payment of claims the fair premium reflects the discounted value of expected claims costs .As a result the fair premium is inversely related to the level of interest rates and to the length of the claims.
3. Administrative costs: - The fair premium includes an expense loading to cover the insurer’s administrative costs including both underwriting expanses and loss adjustment expenses.
4. Fair profit loading: - The fair premium includes a profit loading to compensate investors for the disadvantages like double taxation of investment returns of investing in an insurance company other things being equal. The fair profit loading is higher for lines of insurance with more uncertainty concerning future claim costs because the insurer needs to hold more capital to achieve a given probability of insolvency.
@#. Name the method of insurance pricing.
Ans: The principle pricing method of insurance can be classified in three categories –
1. Individual rating: Under individual the insured is charged a unique premium based largely upon the judgment of the person setting the rate.
2. Class rating: Under class rating the insured are classified according to a few important and easy indentified characteristics and insured in each class are charged some rate. The method of rating is referred manual rating. Two approach of determining charged of class rate –
a) The loss – ratio approach b) The pure – premium approach
3. Modification approach: Under modification approach the rate maker distinguishes among insured in the same rating class on the bases of different expected losses. Four principle of modification rating method they are –
a) Schedule rating b) Experience rating
c) Retrospective rating d) Premium discount plan
#. Discuss about the theory of probability.
Ans: The theories of probability reveal (cÖKvk Kiv) the possibility of occur a certain event. In insurance the theory of probability reveal the chance of death of a person out of the group of person. There are three types of theory of probability –
1. Certain probability: The certain probability is expressed as one. It’s mean the 100% chance of damage in a certain event.
2. Simple probability: When the event is naturally exclusive or when only one event is present the probability will be known as simple probability.
3. Compound probability: When the events are mutually exclusive or when two or more event is present the probability will be known as compound probability.
@#. Discuss about the estimation of probability?
Ans: Estimation of probability is two types. They are:
1. Priori basis: In these cases the probability is estimated merely on the bases of knowledge.
2. Posteriori basis: In this fact the probability is calculated on the bases of experiment.
@#. Mortality table
Ans: The mortality table is to predict the future mortality. It is also described as the picture of a generation of individual passing through kind. Construction of mortality table is needed the number of death in a year dedicated from the number of living at the beginning of the year to get the number of living in the beginning of next year.
Formula:
The number of death during the year
The number of living beginning the next year
@#. Write the features of mortality table.
Ans: There are four features of mortality table –
1. Observation of generation: In preparation of mortality table person generations are selected and they are observed up to the death.
2. Start form a point: The mortality table starts from a point which depends on the requirement of the insurance and will continue up to point of all then has been death.
3. Yearly estimated: The mortality table record the yearly death as survival rate.
4. Mortality and survival rate: Mortality and survival rate of the generation who are selected at a particular age are considered each and every year.
@#. Show the different types of mortality table.
Ans: There are three types of mortality table. These are –
1. Aggregate mortality table: A table is constructed without distinguishing the select and ultimate tines this are called aggregate mortality table.
2. Select mortality table: The mortality table giving notes depend on both age and duration elapsed since entry are called select mortality table.
3. Ultimate mortality table: The mortality table in which the rates in the select period are omitted and only the ultimate rates are tabulated is called ultimate mortality table.
@#. Discuss about the calculation of premium method. Ans: There are two types of method of calculating the premium –
1. Net premium: The net premium is based on the mortality and interest rates.
2. Gross premium: The gross premium depends upon the mortality rate, the assumed interest rate, the expenses, and the bonus loading.
The two premiums are further subdivided into two parts.
a. Single premium: Single premium is paid in one lump sum and is exactly adequate.
b. Level premium: The level premium is paid periodically in installments. The level premium may be yearly, half – yearly, quarterly, and monthly.
@#.Show the types of net single premium calculation policy.
Ans: There are different types of calculation of net single premium policy –
1. Term insurance
2. Net single premium in whole life policy
3. Net single premium in endowment policy
4. Net single premium in ordinary endowment policy
5. Net single premium in double endowment policy
6. Net single premium for a joint life policy
7. Net single premium for last survival policy
@#. Show the distribution expenses over a period policy.
Ans: There are four categories of expenses over a period of policy –
1. The recurring expenses: The recurring expenses are those expenses which are including every year for the policy.
2. The initial expenses: The initial expenses are those which are include at the first before or at the time of insuring the contract.
3. The final expenses: The final expenses are those expenses which are including at the time of payment of the claim or of surrender value.
4. The general expenses: This expense are fixed and incurred for the business as a whole.
@#. What are the various forms of payment of surrender value?
Ans: the policy holder can get the surrender values in any of the following forms –
1. Cash surrender value: The policy holder can get the value of surrender in cash. When the policy holder gets the cash the contract comes to an end and the insurer has to further obligation to pay on that particular policy.
2. Reduced paid up insurance: In this case, the surrender value is not paid immediately, but the original amount of policy is reduced in certain proportion and the reduced amount is paid according to the term of policy.
3. Extended term insurance: The net cash value arisen at the time of surrender of a policy can be used for payment of a single premium for purchases of term insurance, where the some assured will be paid only when death of life assured occurs with in the term of the policy.
4. Automatic premium lone: Under this scheme, the surrender value is used for payment of future premium. Thus the policy will continue up to the period the surrender value is adequate enough to meet the amount of further premiums.
5. Purchase of annuity: The policy holder with the surrender value can purchase an annuity. Thus instead of taking surrender value in cash, the annuity is purchased from the available surrender value.
@#. Show the difference between actual total loss and constructive total loss.
Actual total loss Constructive
1. Actual total loss is related with the physical impossibility. 1. Constructive total loss is related with the commercial impossibility.
2. The subject matter of actual total loss is totally damage. 2. The subject matter is constructive total loss is not totally damage.
3. In actual total loss the insured is irretrievable deprived of the ownership goods. 3. In constructive total loss the insured is not irretrievable deprived of the ownership of goods.
4. In actual total loss the goods is totally been lost. 4. In constructive the good is not totally been lost.
5. In actual total loss there have no salvage value of goods. 5. In constructive total loss have salvage value of goods.
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