Calculation of Insurance Premium
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dikshitgupta
This article pertains to Life insurance. So if we look at the general view, premium calculation in life insurance has key consideration under four parameters. These are: Mortality, Expenses, Investment and Lapse. Each factor influences the premium in it’s own way. Consider mortality, an insurance company is liable to pay its holder a sum assured or a certain benefit in the event of contingency. Hence, this is assumed as a out flow of cash by insurance company and is often seen as liability. The premium collected from the insured is used for investment purposes, so that money does not loses its value as the time proceeds. The interest and the revenue that this investment generates is used for servicing of insurance contracts. While investments are an assets to the company, the interest payments in the form of dividends are considered to be revenues and appreciation in assets values are capitalized. Thus, they are assumed to be in flow to the company. Now, while managing the investment portfolio, the company is hedging your risk of dying. Although, the money is yours but they are putting into best use through their financial knowledge, hence they charge some fees, which are written off as expense. Apart from that, this expenses includes product designing and marketing, investment management, claim redressel costs, etc. These are non-core aid activities to the business and considered as an outflow for the enterprise. Last but not the least, Lapse influence the premium calculation in a totally different way. The chances of policy contract being terminated duw to unnatural circumstances reduces the premium – this is tricky, as high lapse rates means more profit to company by paying less of benefit. But due to this, company’ size of cohort reduces and an aware insurance policy analyst would not recommend it’s policies having lapse rates as the provisions are difficult to oblige. Hence, it’s certain that the company must try to make sure that the company premium amount is optimal.
Please let me know if you find any corrections or suggestions. Feel free to leave a comment below. Thanks for reading!
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