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Canada (162,009)
MTHEL 131 (32)
Chapter 2

Chapter 2 Reading Notes

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Mathematics Electives
David Kohler

Chapter 2: Life And Health Insurance Pricing Fundamentals Principles of insurance Law of large numbers - states that the greater the number of similar exposures (ex. lives insured), the less observed loss will deviate from expected loss - risk and uncertainty decrease as number of exposure units increase - the insurer will be able to determine anticipated death claims with more accuracy Nature of perils insured - peril: cause of loss such as fore with respect to property, or accident with respect to health - if a life insurance policy is to protect the insured, an adequate fund must be accumulated (the claim is certain to occur) - long-term health insurance contracts charge higher premiums over time, as higher rates of claims develop as insureds grow older Gambling and insurance - gambling creates a risk where none existed - insurance transfers an existing exposure, and through pooling of similar loss exposures, reduces risk Pricing individual life and health insurance Objectives of pricing: 1) premium rates should be adequate 2) they should be equitable 3) they should not be excessive Rate adequacy - must be adequate in light of benefits promised - inadequacy can lead to financial problems, if not insolvency - total payments collected now and in the future (+investment earnings) should be sufficient to fund current and future benefits promised - block of policies: all policies issued by insurer under the same rates and values and on the same form Rate equity - premiums should correspond with expected losses and other costs that the insureds bring to the insurance pool (people at higher risk will be paying more) - equity is one of the goals of underwriting Rates not excessive - should not be excessive in relation to benefits provided Life and health insurance pricing elements Calculation of rates and values needs information regarding: 1) probability of insured event occurring 2) time value of money 3) benefits promised 4) loadings to cover expenses, taxes, profit, contingencies - pricing is based on losses of the group, not individual - mortality table: shows yearly probabilities of death - morbidity table: shows yearly probabilities or other information on loss of health - in long-term coverage, insurers lower premiums because they will earn interest on accumulated funds - premium computation takes into account the coverage period, level of coverage, and factors related to benefits promised, and payout pattern - life and disability insurance promise definite benefits - health insurance promises benefits to finance care, or medical expense based on the injury - net rate: rates calculated to recognize 1) probability of insured event 2) time value of money 3)benefits promised Make no allowance for insurer expenses - loadings: amount to cover expenses, taxes, contingencies, profit - gross rate: net rate + loadings = amount policy owners are charged Life insurance rate computation - yearly renewable term life insurance provides coverage for 1 year, but guarantees he policy owner the right to renew the policy even if the insured’s health becomes terrible - premiums rise each year Single premium plan - to pay for the entire policy with a single premium - the insurer will have access to these funds for a long time, so investment earnings constitute a major component from which benefits are paid - US law requires life insurance policies that involve significant prepayment to provide a partial refund to terminating policy holders - Canada does not mandate this, but firms do it as a matter of practice - Cash surrender value: the amount available upon termination Level-Premium plan - company can accept same premium each year, provided that (over time) it will be equivalent of the single premium - naturally, the fund will be smaller than
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