Factors for determining premium

Tapen Sinha
tapen@itam.mx
 Six important determinants of price

• Mortality rate
• Lapse rate
• Interest rate
• Cost of production by the company
• Average policy size
• Distribution and production volume
• Others are specific to the product
 What we assume about those determinants

• Company experience says something about

the particular product
• If the company has NO experience of it’s
own, what does it do?
• We can use the experience of other
companies
• But this can be dangerous….
 Assumptions
• Why do the assumptions vary
• Source of data
• Variation in general
• Variability between products
• Tendencies over time
 Mortality
• Why mortality varies
• Personal risk: sex, age, health history, diet,
stress, use of tobacco, drugs, family history,
education, income, mental or financial
condition
• Environment
 Mortality tables
• Aggregate
• Select: A person who recently bought a
policy
• Ultimate: A mortality table that excludes
data from policies that have been recently
underwritten.
logqx
 Mortality in OECD
• It is not linear
• Log scale
• Between 35 and 85, the growth is constant
• If we ignore the hump between 15 and 25, it
would be the same constant growth between
10 and 85
• Why does the mortality rise in 15 – 25
interval?
Mortality at birth e0
 General variation
• In relevant years, women have between 30 percent
or 50 percent lower mortality
• Another common approach:
• qx(woman)=qx-3(man)
• qx(woman)=qx-7(man)
• Smokers at certain ages have three times higher
mortality and for most ages two times higher
mortality
• Education and income also have an impact
 General variation
• Size of the policy bought depends on
income and education
• Therefore, mortality varies with income and
education
• Small policies often have double the
mortality of large policies
Tests done by doctors, nurses
Or by simple questionnaire