The comparison of net premium to gross premium volume of life insurance

Abstract

Insurance companies have their own methods concerning the calculation of premiums’ costs. In the article, a net premium was counted with the use of commutation functions. The calculation is based on life tables. The death probability is inextricably connected with the age of an insured party. It is affected by other factors as well. People, who suffer from diseases, do extreme sports or have a risky job are more exposed to death. Theoretically, the calculated insurance premium takes all the causes of death into consideration. The mathematical comparison of the calculated net premium with the gross premiums proposed by insurance companies aims at making people aware of the fact how high is the price of risk and the costs of insurance. If people are offered premiums encompassing all the probable causes of death, not many of them can afford paying premiums because of too high price. While decreasing a premium, it is necessary to lower insurance risk. In this case, the reduction of the largest risk and market segmentation is unavoidable. People with incurable diseases are excluded from having an insurance. A company can offer a higher premium or insurance excluding death caused by a hobby to people, who are fond of extreme sports. On the basis of the above-mentioned conclusions, insurance companies cannot treat the insured parties in a homogeneous way, but they should be open to create individual offers adjusted to a customer. It makes them more competitive on the market.