Lesson 4: Calculation B – Premium & Claims
Calculate Premium Income
For policyholders and life assured, premiums and claims are the most important aspects of their insurance coverage. Premiums payable by policyholders are used to cover many costs associated to the insurance coverage, including:
If a life assured engages in a risky occupation or having unfavorable medical history (“substandard life”), the insurance / takaful company he purchases insurance policy from may impose extra premiums / loading in exchange of covering risks higher than the standard life. Apart from imposing higher premiums, underwriters of the Insurance / takaful company may impose exclusion clauses, such as excluding one of 36 critical illnesses covered.
Considerations in Calculating Premium Income
In term of premium payments, insurance products can be generally categorized as single premium products and regular premium products. Single premium products require only one premium payment at the beginning of the policy term (i.e. 1st policy month), whereas regular premium products require recurring premium payments throughout the premium paying term.
Insurance products with premium paying term < policy term are normally known as limited pay products. Limited pay features are usually found in endowment products such as 15 pay 20 years endowment, which policyholders only pay for 15 years of premiums and no premium is required for policy year 16 and above.
When calculating projected premium income, we assume premiums are paid at the beginning of month for the policy months which premiums are due, based on the premium mode or premium frequency selected in the model points:
- Annual – Due on the 1st policy month of each policy year. Premium
- Half-yearly – Due on the 1st & 7th policy month of each policy year.
- Quarterly – Due on the 1st , 4th, 7th & 10th policy month of each policy year.
- Monthly – Due every month.
For life insurance policies (non investment-linked) that opt for premium frequency other than annual model, total premiums paid during the policy year is normally larger than than those with annual mode, in order to cater for interest factors. Hence, we would need to input annualized premiums in the model point inputs (i.e. annualized premium = modal premium × premium frequency).
- Single premium products – Set premium term to 1 month. Only calculate premium income for t = 1 (appears in new business projection only).
- Regular premium products – Only calculate premium income when it is due, depending on the premium frequency. The following formula is used to check if premium payment is due, i.e. if premium payment is due on a particular policy month, the formula will return 0:
MOD((Policy Montht + 11) × PremFreq, 12)
Setup the following fields in new columns under “calc_Portfolio” worksheet: (1) annual premiums and (2) premium income. The first field is to cater for products with varying premium rates, such as medical products (which vary by attained age).
If you would like to setup separate calculations for per policy premium income (assuming the policy remains in force until maturity) and portfolio premium income (consider movement of policies), the per policy premium income can be setup on a separate worksheet “calc_PerPolicy”.