Actuarial Principles & Premium Setting
Actuarial Principles & Premium Setting
PREMIUM SETTING
MEANING- ACTUARIAL PRINCIPLES
• According to this principle, you must have an insurable interest in the life
that is insured. That is, you will suffer financially if the insured dies. You
cannot buy a life insurance policy for a person on whom you have no
insurable interest.
3. PRINCIPLE OF PROXIMATE CAUSE
• While calculating the claim for a loss, the proximate cause, i.e., the cause
which is the closest and the main reason for a loss should be considered.
• Though it is a vital factor in all types of insurance, this principle is not used
in Life insurance.
4. PRINCIPLE OF SUBROGATION
• This principle comes into play when a loss has occurred due to some other
person/party and not the insured. In such a case, the insurance company has a
legal right to reach that party for recovery.
5. PRINCIPLE OF INDEMNITY
• The principle of indemnity states that the insurance will only cover you for
the loss that has happened. The insurer will thoroughly inspect and calculate
the losses. The main motive of this principle is to put you in the same
position financially as you were before the loss. This principle, however,
does not apply to life insurance and critical health policies
6. PRINCIPLE OF CONTRIBUTION
• You must take all the necessary steps to limit the loss when it happens. You
must take all the necessary precautions to prevent the loss even after
purchasing the insurance. This is the principle of loss minimization.
RELEVANCE OF ACTUARIAL PRINCIPLES
• Risk Assessment: Insurers assess the risk profile of the insured, including
factors such as age, gender, health status, occupation, lifestyle, and location.
The higher the risk of a claim, the higher the premium is likely to be.
• Type and Amount of Coverage: The type and amount of coverage provided
by the policy also influence the premium. Policies with broader coverage or
higher limits typically have higher premiums.
• Insurance Company's Expenses: Insurers factor in their own expenses,
including administrative costs, sales and marketing expenses, and profit
margins, when setting premiums.