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sSQL = sSQL & "INNER JOIN FB_Articles AS Articles ON Categories.Category_ID = Articles.Article_Category_ID) "
sSQL = sSQL & "ON Users.User_ID = Articles.Article_User_ID WHERE Article_Status = 1 AND Article_Level = 0 "
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Level premium system
From the mortality tables it can be seen that the risk of death increases with age. If a level premium is charged through out the policy term then the premium collected during the early years will be higher than the risk presented to the fund, where as the premium collected in the later years will be lower than the risk presented to the fund. The extra premium in the early years offsetting the later years.
This extra premium is called reserves and needs to be maintained to match the future older life exposure. Each year from any given group claims are paid and the balance in the fund retained as reserve to cover the future risk.
As the group moves forward into older life as point will be reached where the premium collected in any one year does not match the cost of claims and amounts start to be removed from the reserve. This process continues and if the mortality tables used exactly match the factual outcome then when the last life dies their claim matches the balance of the fund.
Interest on premiums
The above section assumed that only premiums went into the fund, where as this is not the case. Monies in the fund will be invested and that will produce investment income and interest. Because the life insurance contracts run for many years, interest is earned over a long period of time.
This interest earned on the fund allows the life office to reduce the pure premium charge. The actuary will account for this when he does his premium calculations. The actuary will be conservative in the level of interest he assumes will be earned by the fund because the level premium will be charged over many years and interest and stock market do fluctuate. It is far better for the fund to be in surplus rather than to have a deficit.
The effect of interest on the pure premium depends on the length of the contract. Obviously there will be little effect for a one year contract whilst there would be much greater affect for a 25 year contract.
Premium loadings
Premium calculated direct from the mortality tables and interest factors will be a net premium to cover the life risk. Premium loadings would then need to be applied to arrive at the actual premium charge. Premium loadings cover the administrative and other costs over and above claim payments.
These would include,
- Salaries of life office employees,
- Commission to sellers of the policy and others in the distribution chain.
- Computer costs,
- Administration,
- Regulatory costs,
- Premises,
- Medical fees,
- Underwriting costs,
- Actuary costs.
There will also need to be a safety margin plus a profit margin.
The actuary will need to include all of these costs in the total actual premium calculation.
Expenses do not run evenly through the life of the insurance policy. Commission and underwriting costs are a major part of the expenses and these are incurred at the front end of the contract. Once the life policy is on the books the costs are lighter and renewal costs are negligible. The loaded premium must be charged evenly over the premium of the policy under a level premium system. It is therefore normal to add a policy charge at the front end to cover part of the initial handling fee.
next -
Frequency Loadings