CM1B-19: Gross premiums Page 1

With-profits gross premium

Use the question spreadsheet to answer the following question. Use the mortality functions on
the ‘Life Table’ tab where appropriate.

A with-profits endowment assurance with a 20-year term is to be issued to a life aged exactly 42.
The basic sum assured will be 56,000, and the company expects to declare simple reversionary
bonuses of 2% of the sum assured each year. Bonuses will vest at the end of each year, and the
sum assured plus all declared bonuses will be paid out at the end of the term or immediately on
earlier death. The contract will be subject to level annual premiums payable at the start of each
year.

The insurance company uses the following basis for the calculation of its premiums:

Mortality: AM92 Select

Interest: 3% pa effective
Expenses Initial: 400
Regular: Payable at the start of each year except the first, beginning at the
level of 40 at the start of year 2 and inflating at the rate of
1.5% pa thereafter.
Claim: The current rates are 200 on death and 300 on maturity. These
amounts are assumed to inflate at the rate of 1.5% pa from the
policy inception date.
Commission Initial: 25% of the first annual premium
Renewal: 1% of each subsequent annual premium (ie paid at the start of
each year except the first).

Calculate the gross annual premium for the contract.

Hint: make the premium an input variable in your spreadsheet.

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