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Natural premiums

Using the mortality rate the actuary can calculate the premium rate to be charged for any one age group for that year. This rate can then be applied to the sum insured.  

Given a large enough population insured, and by collecting premium in this way, enough money would be collected over the year to pay for those who die at that age range during the year.   The death rate for individuals is not known but the group statistics can be calculated.

As the age of the group increases so the mortality rate will increase and the natural premium will become higher.

When life insurance started natural premiums were charged. This was not totally successful for the insured’s as the premiums increased each year as they got older until they reached a point where the insured could not afford to buy the cover.

As premiums increased so those who had the best health saw the increased premiums as being too expensive and moved away first from the life cover. This left the life offices with a portfolio of those in lesser health and this resulted in some offices having adverse claims experiences leading to the financial exposure of their life funds.

The natural premium was therefore replaced by the level premium system.
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