Per policy Expense

[Riya Arora]

Please help me understand the below paragraph in chapter 17, setting asumptions

In the solution to the previous question, we included per-policy expenses (those that do not vary by policy size) explicitly as such in the basis. Part of the basis is also the average benefit size assumed for the particular policy. The pricing process will usually lead to a premium rate, expressed per unit of benefit, such that for the average sum assured the correct per-policy expense loading will be made. This means that, whilst we might have thought of the expense loading as being per policy, it will vary in practice in proportion to the size of the policy actually taken out.

 

[Mark Willder]

Please help me understand the below paragraph in chapter 17, setting asumptions

In the solution to the previous question, we included per-policy expenses (those that do not vary by policy size) explicitly as such in the basis. Part of the basis is also the average benefit size assumed for the particular policy. The pricing process will usually lead to a premium rate, expressed per unit of benefit, such that for the average sum assured the correct per-policy expense loading will be made. This means that, whilst we might have thought of the expense loading as being per policy, it will vary in practice in proportion to the size of the policy actually taken out.

Hi Riya

A numerical example may help. In our pricing basis for a term assurance we may assume that the cost of life cover is 8 per 1,000 sum assured and the per policy expenses are 20. The average policy size is 10,000. We'll ignore other factors such as investment for simplicity.

So we calculate the premium for a policy with 10,000 sum assured as 10 x 8 + 20 = 100. So far we have allowed for expenses on a per policy basis.

But the paragraph says that the actual premium rate will be quoted as a rate per unit of benefit, eg in this case it would be 10 per 1,000 sum assured. So if the actual policy has sum assured of 15,000, then the premium will be 150 (ie the expense loading has varied in line with the size of the policy) and the premium will not be 15 x 8 + 20 = 140 (which is what it would have been with per policy expenses).

Best wishes

Mark