Page 16 - Risk Management in current scenario

of 100,000 lives, insurance company expects that there will be 10 claims
within a year. For each claim, say the insurance company is to pay Rs.100,
000 to each claimant; all 100,000 lives have paid the premium of Rs.10.

This means that the insurance Company has collected Rs.1000,000
(100,000 lives * 10 Premium) from all lives and they pay claims equal to
1000,000 (10 deaths * 100,000 Sum assured). In this particular case, the
insurance company has collected exactly the same amount of money as
they have to pay. This is a breakeven situation assuming other elements
are nil.

What is the risk to the insurance company, the risk is if the actual claim
is more than 10, say 15, in this case, the insurance company will lose
Rs.500,000 ( extra 5 claims * 100,00 Sum assured paid). If the actual
claims if 8, then insurance company have made a profit of Rs.200, 000
(2 fewer claims *100,000 sums assured not paid). For insurance company
considering that claims are the only risk, achieving the target objective
of total deaths in a year as less than equal to 10 deaths. These 10 deaths
can be represented by Mean or expected value in statistics.

Let's compare this with a game of roulette, all the players in the game of
roulette pay the initial money to place the odd, if each player is placing
odd is paying Rs.100,000 for one round of the game and there are total
10 players, then the total collection made by the roulette owner as
RS.1000,000. The total prize money of winning the game that one winner
will take away Rs.1000, 000.

Calculation of Premium
As future is not known, we are not aware of how many deaths will take
place in a year and apart from only variable of deaths, there are other
variables that Insurance Company is to take care in real situation, for
example, how many lives will continue paying the premium in future,
referred as lapse rate, What will be expensed in the future, what will be
the economic situation resulting into the interest rate forecast, etc.

14 | Risk Management in Current Scenario