Insurance Premiums
Gross Annual Premium
A premium that includes loading costs.
Interest
The interest that insurers earn on their general account investments is an important factor in determining the premium rates it charges policyowners. The more interest the insurer can earn through its investments, the less premium it needs to charge. Actuaries add an *interest factor* to their premium calculations to recognize the company's investment earnings. The interest factor works as a credit; the higher the assumed rate, the lower the premium. This also means a higher premium must be charged if assumed interest rates decrease.
Flexible premium
the policyowner can change the premium payment amount at will, after the first payment, within a range set by the insurer. -Universal life insurance=extremely flexible life insurance policy which the policy owner can, within certain limits, increase premiums, reduce premiums, or pay no premiums. Similarly, the policyowner can increase the bemefit paid to death (subject to evidence of insurability) or can decrease it. The three factors central to the policy (morality. expenses, and interest) are separate elements.
Level premium payment
A premium payment plan in which the premium is set an remains fixed over the policy's term. Policies that use the level premium method include whole life insurance and variable life insurance. -Whole life insurance= Provides permanent insurance coverage for a person's lifetime. Provides guarantees for premiums, cash value, and death benefits. -Variable life insurance= Form of permanent whole life ins. in which premiums are placed in investment sub-accounts that the policyowner owns. The insurer guarantees a minimum death benefit, usually the face amount of the policy at issue. However, the cash values and the death benefit rise and fall on the basis of the sub-account's investment performance.
Expenses
An expense factor (sometimes called a load factor) is worked into the premium calculation. The load factor reflects the costs (other than mortality) that the insurer expects to incur on the policy. These operational costs include the insurer's expenses for rent, salaries, benefits, commissions, and field expenses. The insurer also accounts for a margin of profit it wants to earn on its operations. --Load= premium factor that represents the insurer's expenses (and the profit the company wants to derive) In determining its load factors, insurers are generally guided by three objectives: cover total operating costs provide a safety margin contribute to profits or surplus
Quiz
Question 1 Loading reflects the costs that the insurance company can expect to pay for its operations. These costs include all of the following, EXCEPT: employee benefits salaries and commissions *mortality costs the insurer's expenses for rent Loading reflects an insurance company's cost of operation, excluding mortality costs. Question 2 Actuaries calculate net single premiums based on which of the following? *mortality and interest assumptions mortality and assumed bond rates morbidity and interest assumptions mortality and dividend assumptions The net single premium for a traditional life insurance policy reflects two of the premium factors: mortality and interest. Question 3 What is the result of Alice paying her life insurance premiums more frequently than once a year? no effect higher annual premiums to account for the increased risk to the insurer lower annual premiums *higher annual premiums to account for lost interest and additional insurer costs Paying more frequently than once a year results in higher annual premiums to account for lost interest and additional insurer costs. Question 4 Which of the following statements generally guides insurance companies in determining "loading"? The resulting net premiums should help the company maintain or improve its competitive position. Total loading from all policies should meet industry averages. Expenses should be divided primarily among the company's most profitable plans and lowest mortality experience. *Total loading from all policies should cover total operating costs, provide a safety margin, and contribute to profits or surplus. Total loading from all policies should cover total operating costs, provide a safety margin, and contribute to profits or surplus. Question 1 Which one of the following statements best describes if and when a life insurance premium may change under the level premium concept? *Premiums are set and remain fixed over the full term of the premium-paying period. Premiums may vary each time they are due based on the insured's current insurability. Premiums may change if the risk to the insurer increases over time. Premiums are either fixed or flexible at the option of the insurer. The payment amount does not change even though the risk to the insurer increases over time. Question 2 Actuaries begin the process of calculating life insurance premium rates by using mortality tables, which help predict future experience but not with 100 percent certainty. How do actuaries compensate for this uncertainty when determining the gross premium charged to the policyowner? *They add an expense load, which includes a safety margin factor, to the net premium to produce the gross premium. They add a safety margin load to the mortality charge, increasing the net premium. They assume a higher rate of interest than actually expected, which provides a safety margin by increasing the gross premium. They assume there will be fewer deaths than their past mortality experience would predict, which provides a safety margin by increasing the gross premium. Actuaries add an expense factor (also called a load factor) to the net premium to produce the gross premium. Providing a safety margin to overcome mortality uncertainty is a key objective for the load. Question 3 An insurance company is developing a new product. Which one of the following is the actuaries' most important responsibility? *deciding the premium for the new product assuring that the new product will be appealing to average consumers deciding the classification of the new product creating a product with competitive features and benefits This would be done by another department in an insurance company. Question 4 Which of the following best describes the premium tax insurance companies must pay when they receive premiums? *Most companies pass this tax on to their policyowners in some way, either directly or indirectly. Companies absorb these expenses and do not pass them along to policyowners. It is imposed by the federal government. It is a federally mandated tax that is collected at the state level by all states. Most companies pass this tax on to their policyowners in some way, either directly or indirectly. Question 1 What is the actuary's first step in determining the premium to charge for a policy? *Calculate the net single premium. Calculate expenses and contingencies. Calculate the annual dividend schedule. Calculate the gross premium. Calculating expenses and contingencies comes later in the process. Question 2 Which one of the following do actuaries use to predict the likelihood of an individual dying at any certain age in the premium rate-making process? *mortality company experience morbidity industry-wide rating history Mortality is the element of premium rate-making that reflects the rate of death of prospective insureds. Question 3 An actuary is setting life insurance rates. What affect will it have on a policy if higher interest assumptions are used? Premiums will be higher. *Premiums will be lower. It will have no effect. The effect cannot be known. In making life insurance rates, higher assumed interest earnings reduce premiums. Question 4 The expense component of the pricing process is known as the loading. It reflects the costs, other than mortality costs, that the insurance company can expect to incur for all of its operations. All of the following are among the considerations that guide insurance companies in determining loading, EXCEPT: *Expenses should be weighted to older issue ages. Expenses should be apportioned equitably over the company's various plans. Total loading from all policies should cover total operating costs, provide a safety margin, and contribute to profits or surplus. The resulting gross premiums should permit the company to be competitive in the insurance market. Expenses should be apportioned equitably over the company's various plans and issue age.
Key points
-The greater the risk, the higher the premium. -Actuaries base life insurance premiums on three factors: mortality, interest, and expenses. -Policies issued since 2009 must be based on the 2001 CSO table. -The 2001 CSO rates reflect the mortality experience of the entire U.S. population for every age beginning at birth and concluding at age 120. -The more interest the insurer can earn through its investments, the less premium it needs to charge. -The load factor reflects the costs (other than mortality) that the insurer expects to incur on the policy. -For those policyowners who choose a premium mode other than annual, insurance companies add a modest cost to reflect lost earnings and increased administrative cost.
For test
3 basic componets of Premiums; -morality charge (biggest factor in premium), interest credit(more they can earn; less the premium), expense charge (overhead, lights, commission) -Diff. in actuaries and underwritters at assigning interest/premium rates --Actuaries= insurance mathmatician that calculates mortality charges, etc. --Underwriters= calculates premium rates to a risk using mortality charges that the actuaries have composed and implies other factors from application and other info.
Insurance Premiums
Cost of an insurance contract, paid monthly quarterly, semi-annually, or annually, more frequent payments more higher costs for policy owner. The premium is what the policyowner pays to maintain insurance protection. It reflects the risk that the insured represents to the insurer. The greater the risk, the higher the premium. Amount depends on; -Mortality (death rate for class of insureds) -interest earnings (investment growth insur. companies earn on collected premiums. Higher interest rates the premium will drop, good for policy owners. -loading (insurer's expenses. Are overhead cost, employee compensation loss and other expenses. - two ways to present premium --Net single premium (sum of two factors; mortality + interest.) --Gross annual premium (net annual premium over a yr + loading)
Net single premium
Theoretical Single premium amount, minus ("net of") the expenses charge, required to fund a fixed life insurance policy's face amount. Calculating the net single premium is the first step in calculating the premium actually paid by the policy owner (When an expenses charge is added, the result is the gross single premium.)
Maintenance Fee
Some variable life insurers charge a maintenance fee to cover the costs of managing the complex investment element of the contract. Separate account management is far more complicated than general account management, and this is generally reflected in the gross annual premium of variable insurance contracts. -MF= Charged by some variable life and health insurers that is added to initial premium. The fee pays the cost of acquiring the new business and offsets cost such as commission, administration, setup, and ongoing maintenance
Premium Tax
A premium tax is a tax levied on insurance companies when they receive premiums. It is imposed by only a few states. Most companies pass this tax on to their policyowners in some way, either directly or indirectly. -PT=A tax levied on insurance companies on the receipt of premiums.
Level vs. Flexible Premium Payments
Depending on the policy, a life insurance policyowner may have the choice of paying the premium on a fixed level basis or on a flexible basis. Under a level premium payment plan, the premium is fixed and remains level over the policy's term. The policyowner pays the same premium amount each time it is due for as long as the policy is in force. This payment amount does not change even though the risk to the insurer increases over time as the insured ages. Policies that use the level premium method include whole life insurance and variable life insurance. Under a flexible premium payment plan, the policyowner can change the premium payment amount at will, after the first payment, within a range set by the insurer. Depending on the policy, the policyowner can change the payment amount or frequency of payment. The policyowner can also choose to stop payments for a while and then restart them. Policies that use the flexible premium method include universal life insurance and variable universal life insurance.
Premium Factors
Insurance premiums are individually assigned to each policy as part of the underwriting process. While they are assigned by the insurer's underwriters, premium rates are developed by the company's actuaries (i.e., insurer mathematicians). Actuaries base life insurance premiums on three factors: mortality, interest, and expenses: -Mortality is the risk of death posed by the applicant. It is a charge. -Interest is the amount the insurer can expect to earn on invested premiums. It is a credit. -Expenses represent the insurer's costs of doing business. It is a charge. Taxes and fees may also be added to the net premium in addition to the expense charge to yield the gross premium charged to the policyowner
Premium Payment Modes
In calculating gross level premiums, actuaries make two key assumptions: -Premiums will be paid once each year (annually). -Premiums will be paid at the beginning of the policy year. In other words, insurers assume they will have the full premium for the full year to earn interest. There's just one catch: Many consumers prefer to spread their premiums out and pay them more frequently than once a year. To accommodate that preference, insurers offer policyowners the ability to use any of the following premium modes: -monthly -quarterly -semiannually -annually For those policyowners who do choose a premium mode other than annual, insurance companies add a modest cost to reflect -lost earnings on the portion of the premium not paid at the beginning of the coverage year; and -the increased administrative cost resulting from the need to send more frequent premium notices. For example, a policy that has an annual premium of $1,200 might charge the following rates for those who choose to pay more frequently than once a year: -a monthly premium of $108, for an annualized premium of $1,296 -a quarterly premium of $318, for an annualized premium of $1,272 -a semiannual premium of $624, for an annualized premium of $1,248 In each case, the total yearly premium paid in excess of $1,200 offsets the insurer's increased billing costs and lost interest.
Mortality
The mortality factor reflects the insured's risk of death. At its base, the mortality factor is drawn from mortality statistics compiled by the National Association of Insurance Commissioners (NAIC) into a set of rates called the Commissioners Standard Ordinary (CSO) table. -NAIC= an association of insurance commissioners in various states. Actively proposes model laws that standardize policies and promote fair trade practices in the insurance industry. -2001 CSO Table Life insurance companies today use the 2001 CSO table. In fact, policies issued since 2009 are required to base their mortality charges on the 2001 CSO table. Prior to that, the 1980 CSO table was the standard, and policies issued before 2009 may continue using that table as the basis of their mortality charges. The 2001 CSO rates reflect the mortality experience of the entire U.S. population for every age beginning at birth and concluding at age 120. (The 1980 CSO rates ended at age 100.) Through underwriting, insurers expect to realize much better mortality experience than the CSO table would predict, and this is reflected in rates that are lower than they would be if based solely on the CSO table. Insurers use the CSO mortality tables as a minimum standard in determining mortality rates. With their extensive experience underwriting life insurance, the largest life insurers base their premium rates on their past experience. An insurer must adjust the rates to ensure a margin of safety. With life insurance pricing, this means increasing the mortality rates by some factor. With annuity pricing, the mortality adjustment causes the insurer to decrease the mortality factor to recognize the chance that an annuitant might live (and thus receive payments) longer than expected. -Annuitant= the person an annuity owner chooses to receive the periodic annuity payments when the contract annuitizes.
Net vs. Gross Premium
The process of determining the premium that is actually charged involves several steps by the insurer's actuaries: 1. Calculate net single premium, using the factors of mortality and interest. This is the theoretical amount, excluding the load factor, which would be needed to fund the face amount for the duration of the policy with a single premium payment. 2. Calculate the net level premium by applying a factor to the net single premium that essentially spreads out the premium for the duration of the premium-paying period. 3. Calculate the gross premium that is actually charged for the policy by adding the expense load to the net single premium or net level premium. Applicants who are purchasing a single premium life insurance policy will pay a gross single premium, while those who will spread premiums out over a number of years will pay a gross level premium (also called a gross annual premium). --Single premium life insurance= Most extreme for mof limited pay life. The policy is paid with one premium at the time the policy is bought.
