Md. Enamul Hoque, ABIA, FIPM, MAS SEVP and Head of Actuarial Dept.

National Life Insurance

Premium Calculation: Factors of Premium calculation- Mortality, interest, Management

expenses.
Factors affecting family history for underwriting: Effect of build, Moral hazard and its
application in underwriting.
Need of Mortality factors in life insurance management. The numerical rating method of
life insurance underwriting.
Mortality Table

As the best indication of what is likely to happen in the future is often a knowledge of what has
happened in the past, mortality tables are usually based, directly or indirectly, on the mortality
which has actually been experienced by a suitable group of persons. Before we study the
functions comprised in the mortality table we shall explain some prerequisite elements in the life
which will help us to understand the table better.

a. The Mortality table: The mortality table is a table giving the probabilities of death and
survival and other information such as number of deaths survivors etc. at successive ages. The
mortality table is used to calculate the values of the monetary functions involving these
probabilities. The calculation of life insurance premiums and valuation of policy liabilities and
other actuarial work depends, among other things, on rate of mortality , rate of interest and
expenses. Therefore, when calculating the premium rates it is necessary to make certain
assumptions regarding the above factors expected to be experienced in the years to come. In
case of mortality, in practice, the insurers depend upon experience of the past as a basis of
estimating future experience. More generally, the past experiences of death and survival of a
group of people are used as a basis to arrive at probabilities of death and survival. A mortality
table contains several columns like 𝑙𝑥 , 𝑑𝑥 , 𝑝𝑥 , 𝐿𝑥 , 𝑇𝑥 , 𝑒𝑥 𝑎𝑛𝑑 𝑒𝑥̇ for successive ages.

Columns of Mortality table:

a. 𝒍𝒙 – If a large group of people born at the same time has been under observation and that the
numbers surviving to each birthday have been recorded, and if no lives have been added to the
group and none have left it, except by death, the numbers recorded at successive ages will form
𝑙𝑥 column of the mortality table. By convention, mortality tables start with age 0, though it is
not necessary that all mortality tables should start with age 0. 𝑙0 represents the number of
persons of age 0. 𝑙𝑥 isthe number of persons who reach age x, out of the 1𝑙0 persons who were
born x years ago. Thus 𝑙𝑥 persons are those who have survived one year out of 𝑙𝑥−1 persons, or
who have survived two years out of 𝑙𝑥−2persons.

b. 𝒅𝒙 - The column 𝑑𝑥 represents the number of persons dying between age ‘x’ and age ‘x+1’. As
we know that 𝑙𝑥+1 is the number of persons who survive to age ‘x+1’ out of 𝑙𝑥 persons, i.e. the
number of persons who were of age ‘x’ one year ago.
Therefore, 𝑑𝑥 = 𝑙𝑥 − 𝑙𝑥+1 = 𝑙𝑥 ∗ 𝑞𝑥

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 Md. Enamul Hoque, ABIA, FIPM, MAS SEVP and Head of Actuarial Dept.
National Life Insurance

c. 𝒒𝒙 – The column 𝑞𝑥 is the probability that a person ages ‘x’ dies within one year i.e. before
reaching age ‘x+1’. The column gives the probability of survival for successive values of ‘x’
𝑞𝑥 is also called rate of mortality. Thus
𝑑𝑥 𝑙𝑥 − 𝑙𝑥+1
𝑞𝑥 = = = 1 − 𝑝𝑥
𝑙𝑥 𝑙𝑥

𝑁𝑜. 𝑜𝑓 𝑝𝑒𝑟𝑠𝑜𝑛𝑠 𝑙𝑖𝑣𝑖𝑛𝑔 𝑎𝑡 𝑎𝑔𝑒 𝑥 − 𝑁𝑜. 𝑜𝑓 𝑝𝑒𝑟𝑠𝑜𝑛𝑠 𝑙𝑖𝑣𝑖𝑛𝑔 𝑎𝑡 𝑎𝑔𝑒 𝑥 + 1

=
𝑁𝑜. 𝑜𝑓 𝑝𝑒𝑟𝑠𝑜𝑛𝑠 𝑙𝑖𝑣𝑖𝑛𝑔 𝑎𝑡 𝑎𝑔𝑒 𝑥

d. 𝒑𝒙 – The columns 𝑝𝑥 is the probability that a person aged ‘x’ survives to age ‘x+1’. The
column 𝑝𝑥 thus gives the probability of death for successive values of ‘x’. Hence,

𝑙𝑥+1 𝑙𝑥 −𝑑𝑥 𝑑𝑥
𝑝𝑥 = = =1− = 1 − 𝑞𝑥 Or, 𝑞𝑥 = 1 − 𝑝𝑥
𝑙𝑥 𝑙𝑥 𝑙𝑥

A (49 -52) Ultimate

Sample

I 3.5%
V=1/(1+i) 0.9661836

AGE Lx dx qx Cx= Vx+1 dx Mx Dx=Vx lx Nx

20 988954 1098 0.001110 533.156851 90038.63977 497014.5417 12034858.68
21 987856 1097 0.001110 514.658242 89505.48292 479674.1298 11537844.13
22 986759 1095 0.001109 496.347769 88990.82468 462938.6073 11058170.01
23 985664 1104 0.001120 483.504676 88494.47691 446787.3307 10595231.4
24 984560 1103 0.001120 466.731129 88010.97224 431195.0757 10148444.07
25 983457 1101 0.001119 450.130276 87544.24111 416146.8686 9717248.991

Plan analysis
Actuarial Basis and Formula for Ordinary Endowment Insurance Plan - with profit (proposed)
are as follows:

Benefits:

The policyholder will receive full sum assured together with accrued bonuses on maturity at
the end of the term.
The nominee of the policyholder will receive full sum assured on death of the policy holder
within the term of the policy together with bonuses accrued up to the date of his / her death.

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 Md. Enamul Hoque, ABIA, FIPM, MAS SEVP and Head of Actuarial Dept.
National Life Insurance

Formula:

Actuarial Formula in terms of Commutation function:

𝑀𝑥− 𝑀𝑥+𝑛 +𝐷𝑥+𝑛 N Nx −Nx+n
𝐴x: n = 𝐷𝑥
ä x = Dx ä x⋮n┐= Dx
x

The formula for annual premium for Tk. 1000/- sum assured where 1st year expenses is Tk 70 per
thousand and renewal expenses are Tk 5 per thousand and 7.5% on premium from 1st year is
given as follows:

Basis: Mortality: A49-52 ultimate; Rate of Interest: 3% p.a.

Expenses: Initial expenses are Tk. 70/- per thousand sum assured,
renewal expenses are 7.5% of annual premium (including first year) and Tk. 5/- per thousand
(including first year).

Let P be the annual premium

Therefore,

𝑃 ∗ 𝑎̈ 𝑥:𝑛 = 1000 ∗ 𝐴𝑥:𝑛 + 70 + 5 ∗ 𝑎̈ 𝑥:𝑛 + 0.075 ∗ 𝑃 ∗ 𝑎̈ 𝑥:𝑛

=> 0.925 ∗ 𝑃 ∗ 𝑎̈ 𝑥:𝑛 = 1000 ∗ 𝐴𝑥:𝑛 + 70 + 5 ∗ 𝑎̈ 𝑥:𝑛

𝑁𝑥 − 𝑁𝑥+𝑛 𝑀𝑥 − 𝑀𝑥+𝑛 + 𝐷𝑥+𝑛 𝑁𝑥 − 𝑁𝑥+𝑛

=> 0.925 ∗ 𝑃 ∗ ( ) = 1000 ∗ ( ) + 70 + 5 ∗ ( )
𝐷𝑥 𝐷𝑥 𝐷𝑥

=> 0.925 ∗ 𝑃 ∗ (𝑁𝑥 − 𝑁𝑥+𝑛 ) = 1000 (𝑀𝑥 − 𝑀𝑥+𝑛 + 𝐷𝑥+𝑛 ) + 70 ∗ 𝐷𝑥 + 5 ∗ (𝑁𝑥 − 𝑁𝑥+𝑛 )

1000 ∗ (𝑀𝑥 − 𝑀𝑥+𝑛 + 𝐷𝑥+𝑛 ) + 70 ∗ 𝐷𝑥 + 5 ∗ (𝑁𝑥 − 𝑁𝑥+𝑛 )

∴ 𝑃remium = 𝑃 =
0.925 ∗ (𝑁𝑥 − 𝑁𝑥+𝑛 )

Where, P is the annual premium for Tk 1,000/- (Taka One Thousand) sum assured; Dx, Nx and
Mx are commutation functions.

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Md. Enamul Hoque, ABIA, FIPM, MAS SEVP and Head of Actuarial Dept.
National Life Insurance

Premium and Mortality

Underwriting a involves measuring risk exposure and determining the premium that needs to be charged
to insure that risk.....Each insurance company has its own set of underwriting guidelines to help the
underwriter determine whether or not the company should accept the risk.
Risk assessment involves looking at how a number of individuals factors may affect mortality and making
a determination of the total effect of these individual effects. Underwriters are not actuaries or doctors and
would have acquired their skilled working in the office of an insurer. Underwriting is a matter of
experience.
Primary Factors in Premium Calculations

There are three primary factors used as the basis for determining premium costs in life insurance.
1.Mortality 2.Interest 3.Expenses

The gross premium is the premium required to meet all the costs under an insurance contract, and is the
premium that the policyholder pays. When we talk of “the premium” for a contract, we mean the gross
premium. It is also sometimes referred to as the office premium.
The gross premium for a contract, given suitable mortality, interest and expense assumptions would be
found from the equation of expected present value:
Equation of value
The expected present value of the gross premium income = The expected present value of the outgo on
benefits + the expected present value of the outgo on expenses
Tabular Premium
Tabular Premium = Net Premium + Investment Returns +Management Expenses
Tabular Premium or Ordinary Premium or Office Premium or gross premium.
Level premium
A form of insurance under which the premium does not change throughout the term of the policy.
Generally, the majority of life insurance policies are paid in this manner.
Natural premium
The amount required to meet the mortality cost of life insurance for each particular year and
increasing from year to year for any given unit of protection

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Md. Enamul Hoque, ABIA, FIPM, MAS SEVP and Head of Actuarial Dept.
National Life Insurance

FACTORS AFFECTING LIFE RISK

Age of the insured
The more the age higher is the risk and vice versa. However, the case of infant or children is different.
In Bangladesh usually persons above the age of 45 is not considered for a whole life policy
Build
Physical structure is important to assess the risk of a person. Usually Bulky the structure of the body
higher is the risk. A fatless slim body on the other hand has less exposure to risk.
Physical condition
Overall physical condition is yet another important factor that affect life risk. sound physic is
comparatively less risky to a sick. If the person is sick or physically weak then he or she is more risky for
a policy.
Personal history
Personal history consists of four factors,
a) Past Health b) Past habit c) History of occupation d) Insurance history
Family history
Family history of the insured is to be considered In particular health, desease and death history of the
forefathers or relatives be investigated for policies of big amounts.
If the death of the forefathers are because of heart disease, the policy holder is riskier to one whose
forefathers got normal death.
Occupation
The job of mine worker is riskier to the job of a College teacher. The life of a truck driver or helper is
riskier to the life of a clerk.
Residence
Overall environment and physical infrastructure or accommodation of a residence has great influence on a
policyholder’s life and death.
A well ventilated and spacious residence is good for health and hence reduces the risk of life and health.
Inhabitants of pro-cyclone or earthquake are vulnerable for insurance policy.
The standard of housing encompasses not only all aspects of the physical quality of housing (eg state of
repair, type of construction, heating, sanitation) but also the way in which the housing is used (eg
overcrowding and shared cooking). These factors have an important influence on morbidity, particularly
that related to infectious diseases (eg from tuberculosis and cholera to colds and coughs) and thus on
mortality in the longer term. The effect of poor housing is often confounded with the general effects of
poverty.
Present habits
Good habits like morning walk reduces risk while a bat habit like smoking or drinking alcohol or taking
drugs increases the risk of a life.
Morality
High moral character reduces risk of the policyholder and vice versa.
Race
For example, White people are vulnerable to some diseases while Blacks are vulnerable to some other
diseases.
Sex
Whether male or female will bear more risk depends on the mortality rate of that country.
Economic status
High economic status reduces the risk related to illness and vice versa.
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Md. Enamul Hoque, ABIA, FIPM, MAS SEVP and Head of Actuarial Dept.
National Life Insurance

Climate and geographical location

Climate and geographical location are closely linked. Levels and patterns of rainfall and temperature lead
to an environment that is amicable to certain kinds of diseases, eg those associated with tropical regions.
Effects can also be observed within these broad categories, eg the differences between rural and urban
areas in a geographical region. Some effects may be accentuated or mitigated depending upon the
development of an area, eg industry leading to better roads and communications.
Education
Education influences the awareness of the components of a healthy lifestyle which reduces morbidity and
lowers mortality rates. It encompasses both formal education and more general awareness resulting from
public health and associated campaigns.

What is the moral hazard in life insurance and its application in insurance
underwriting?
Moral hazard is a concept in insurance that refers to the idea that individuals may change their
behavior in a way that increases the likelihood of a loss when they are insured. In other words,
when people have insurance coverage, they might take on more risk or be less cautious because
they know they have protection against potential losses. This can lead to adverse outcomes for
insurance companies because it increases the frequency and severity of claims.
In the context of life insurance, moral hazard can manifest in several ways:
1. Riskier Behavior:
Insured individuals might engage in riskier activities or lifestyles because they believe their
beneficiaries will receive a payout in case of their death. For example, a policyholder might take
up a dangerous hobby or neglect their health.
2. Neglect of Health:
Some individuals might not take adequate care of their health when they have life insurance,
assuming that their beneficiaries will receive a payout regardless of their lifestyle choices.
3. Insurance Fraud:
In extreme cases, policyholders might engage in insurance fraud, such as faking their own death
or intentionally causing their death to collect the insurance proceeds. This is illegal and can lead
to criminal charges.
4. Underreporting Health Issues:
During the underwriting process, applicants might be tempted to withhold or downplay pre-
existing health conditions to secure lower premiums. This can lead to inaccurate underwriting
and potential adverse selection for the insurer.

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Md. Enamul Hoque, ABIA, FIPM, MAS SEVP and Head of Actuarial Dept.
National Life Insurance

To mitigate moral hazard in life insurance underwriting, insurance companies

take several steps:
1. Underwriting Process:
Insurers carefully assess applicants' medical histories, lifestyles, and other relevant factors to
determine their eligibility and premium rates. This thorough evaluation helps identify and price
risks accurately.
2. Policy Exclusions and Limitations:
Insurance policies often include exclusions or limitations related to specific risky activities or
pre-existing conditions. For instance, a policy might exclude coverage for deaths resulting from
extreme sports or suicide within the first two years of coverage.
3. Period of Contestability:
Most life insurance policies have a period of contestability, typically the first two years, during
which the insurer can investigate and contest claims if they suspect fraud or misrepresentation.
4. Monitoring and Surveillance:
In some cases, insurers may employ post-claim investigations or surveillance to detect fraudulent
activities.
5. Pricing:
Premiums are typically priced based on the assessed risk. Individuals engaging in riskier
behavior or with significant pre-existing health issues may face higher premiums or, in some
cases, denial of coverage.
It's important to note that while moral hazard is a concern, most people purchase life insurance
with the intention of providing financial protection for their loved ones. Insurance companies
balance the need to provide coverage with the need to mitigate fraudulent claims and adverse
selection through careful underwriting and risk assessment processes.
Mortality factors in life insurance
Mortality factors are critical considerations in the underwriting and pricing of life insurance
policies. These factors help insurance companies assess the risk associated with insuring an
individual and determine the appropriate premium rates. Mortality factors are based on various
aspects of an individual's life and health that impact their life expectancy and, consequently, the
likelihood of a claim being made on the policy. Here are some key mortality factors in life
insurance:
Age:
Age is one of the most significant mortality factors. As individuals age, the risk of mortality
increases. Therefore, younger policyholders typically pay lower premiums than older ones for
the same coverage.
Gender:
Statistically, women tend to have longer life expectancies than men. Consequently, gender is a
key factor in determining premium rates, with women often paying lower premiums for life
insurance.
Health and Medical History:

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Md. Enamul Hoque, ABIA, FIPM, MAS SEVP and Head of Actuarial Dept.
National Life Insurance

The overall health of an applicant is a crucial factor. Insurance companies assess an applicant's
medical history, current health status, and the presence of pre-existing conditions. Poor health or
certain medical conditions can result in higher premiums or even denial of coverage.
Lifestyle and Habits:
Lifestyle choices and habits, such as smoking, excessive alcohol consumption, and engagement
in risky activities (e.g., extreme sports), can significantly impact mortality risk and,
subsequently, premium rates.
Family Medical History:
A family history of certain medical conditions, such as heart disease or cancer, may influence
underwriting decisions and premium rates.
Occupation and Work Hazards:
Some occupations carry higher risks due to exposure to dangerous environments or activities.
Individuals working in high-risk jobs may face higher premium rates.
Hobbies and Activities:
Engaging in risky hobbies or activities, such as skydiving or rock climbing, can affect mortality
risk and may lead to higher premiums or policy exclusions.
Travel and Residence:
Travel to high-risk areas or residing in regions with higher mortality rates (e.g., regions with high
prevalence of diseases) can influence underwriting decisions and pricing.
Weight and Body Mass Index (BMI):
Obesity and high BMI are associated with various health risks. Applicants with unhealthy weight
levels may face higher premiums.
Blood Pressure and Cholesterol Levels:
Elevated blood pressure and cholesterol levels are risk factors for cardiovascular diseases.
Insurance companies often consider these factors during underwriting.
Mental Health:
History of mental health issues, particularly severe conditions, may impact underwriting
decisions and premium rates.
Medications and Treatment:
The use of certain medications or undergoing specific medical treatments can be a factor in
underwriting and pricing.
Driving Record:
A history of reckless driving, DUI convictions, or multiple accidents may influence underwriting
decisions for policies that include accidental death benefits.
Financial Underwriting:
In some cases, insurance companies assess an applicant's financial status to determine the
amount of coverage they are eligible for, as excessive coverage relative to income may be seen
as a risk factor. These mortality factors are used collectively to assess an applicant's risk profile
and determine the appropriate premium rates or eligibility for coverage. Insurance companies
aim to strike a balance between providing affordable coverage and managing risk to maintain the
financial stability of the insurance pool.
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Md. Enamul Hoque, ABIA, FIPM, MAS SEVP and Head of Actuarial Dept.
National Life Insurance

The numerical rating method of life insurance underwriting

The numerical rating method is a life insurance underwriting approach that involves assigning
numerical values to various risk factors associated with an applicant's health, lifestyle, and other
relevant factors. These numerical values are then used to calculate a total score or rating, which
helps underwriters assess the applicant's risk and determine the appropriate premium rates or
eligibility for coverage. The numerical rating method is a systematic way to quantify risk and
make underwriting decisions. Here's how it typically works:
Risk Factors Identification:
identify a set of risk factors that are relevant to the insurance application. These factors may
include age, gender, medical history, lifestyle choices, occupation, and more.
Assigning Numerical Values:
Each risk factor is assigned a numerical value or weight that reflects its impact on mortality risk.
These values are typically determined based on actuarial tables and statistical analysis of
historical data.
Gathering Applicant Information:
The applicant provides information and answers questions related to the identified risk factors.
This information may be obtained through medical examinations, interviews, questionnaires, and
medical records.
Calculating the Numerical Rating:
For each risk factor, the underwriter assesses the applicant's status and assigns the corresponding
numerical value. The values are then summed to calculate a total numerical rating for the
applicant.
Risk Classification:
Based on the total numerical rating, the applicant is classified into risk categories or rating
classes. These classes typically range from preferred or low risk to standard or moderate risk to
substandard or high risk. Each rating class corresponds to specific premium rates.
Determining Premium Rates:
Premium rates are determined based on the applicant's risk classification. Lower-risk applicants
typically receive lower premium rates, while higher-risk applicants may pay higher premiums or
face coverage limitations.
Underwriting Decision:
The underwriter uses the numerical rating, along with other relevant information, to make an
underwriting decision. The numerical rating method provides a structured and quantitative
approach to life insurance underwriting, allowing insurers to assess risk consistently and fairly
across a diverse pool of applicants. It helps insurers manage risk effectively while ensuring that
applicants are priced fairly based on their individual risk profiles. It's important to note that the
specific numerical values assigned to risk factors and the rating classes may vary between
insurance companies and may be updated periodically to reflect changes in mortality risk
assessment. Additionally, the numerical rating method is just one of many underwriting
approaches used by insurers, and some policies may involve more complex underwriting
processes, especially for larger coverage amounts or specialized insurance products.
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