Page 42 - Insurance Times June 2023

Under insurance parlance the premium is an amount paid 7) ACTUAL PREMIUM - Due to competition, the
periodically to the insurer by the insured for covering his risk. underwriter still wants to charge less premium. This is
In an insurance contract, the risk is transferred from the done with motive of increasing sales but this leads to
insured to the insurer. For taking this risk, the insurer charges underwriting losses,
an amount called the premium.
8) Insurance companies earn from two ways.
Underwriting Income
The premium is a function of a number of variables like age,
Investment Income
type of employment, medical conditions, etc. The actuaries
are entrusted with the responsibility of ascertaining the The underwriting income is nothing more than the
correct premium of an insured. The premium paying difference between premium received and the expenses
frequency can be different. It can be paid in monthly, and claim amount paid. The net difference which
quarterly, semiannually, annually or in a single premium. remains is underwriting income for company.

The company goes through a lot of decision making before On the other hand, every insurance company invest part the
reaching the final premium and in each step premium collected premium in different profitable businesses. It also
decreases. The steps are as follows : invests in share market, mutual funds and other financial
instruments. The profit or interest generated on these
1) BENCHMARK PREMIUM - This premium form the basis investments is the investment income for company.
for the calculation of actual premium. The benchmark
premium constitutes of mainly Functional aspects of actuary or Actuarial
profit margin for the company for covering the risk,
aspect:
expected claim cost and
An actuary is a professional statistician who calculates the
claim related expenses risks associated with insurance coverage and the likelihood
that claims will be filed or that benefits will have to be paid
2) UNDERWRITING ADJUSTMENTS - The next step involves
out. Using relevant statistical data, actuaries also compute
making underwriting adjustments in the benchmark
dividends and decide premium rates.
premium. These adjustments differ for different groups of
homogeneous policy holders depending upon many factors
An insurance policy offers coverage from certain risks. In case
of the policy. These arrangements are pre-decided
the event insured against occurs, the policyholder or a third
according to different policyholders needs that will be
party (e.g., health insurance) notifies the insurance company
shown in proposal forms. These adjustments are later fixed
and provides any relevant documentation, if applicable.
by underwriter based on the client.
Insurance claims comprise a variety of benefits, such as death
3) TECHNICAL PREMIUM - After doing the underwriting benefits in life insurance; medical expenses in health insurance
adjustments, the actuary calculates the technical and restoration expenses and replacements of damaged items
premium. This premium is calculated considering the past or cash value of damaged items in property insurance.
experiences of the claim.
Insurance companies hire actuaries, highly trained
4) PREMIUM ALIGNMENT - The next step is to align the
professionals in probability statistics and data analysis, to
premium with the sum assured in such a way that they
determine the likelihood of an event happening. Actuaries
remain parallel at all levels of sum assured. This step
study and train for at least 6-10 years to more accurately
helps the agents and insured to understand the different
predict outcomes.
premium rates.
5) TARGET PREMIUM - Due to fierce competition in the
Based on the probability of the event, the insurance company
insurance sector, the actuary lowers the premium by
will determine the likelihood of having to pay out on a certain
lowering the overall premium. The target premium is
type of claim (outcome). Looking at these results, the company
such that it constitutes mostly the claim cost.
determines how much money they will need to gather in
6) WALKAWAY PREMIUM - Due to the motive of sustaining order to pay out the claims that are made for that year. They
in market, the company still doesn't charge the target will collect this money through insurance premiums.
premium. So, a walkaway premium is decided by
lowering the target premium is leading some risk of If it is not likely to happen, the insurance premium for one
underwriting loss. coverage will be less expensive than a claim for something

38 June 2023 The Insurance Times