Hi all, I am trying to calculate the mean lifetime of whole of life policies. I am struggling to understand how to calculate this. The methodology in my mind is to take the PV of claims and divide them by annual premium. This gives the time it takes to recover the expected claim cost, and the reasoning is that this would be the average length of time for a policy to claim, but I am not convinced. Any input on this would be greatly appreciated. Thanks,
To calculate the DMT (discounted mean term) for claims, you calculate the average time by weighting the time periods by the discounted amount of each claim, for each time period. Discounting is applied to ensure that the claim amounts are agnostic to time value of money i.e. you weight over a consistent measure. The above in formula: Sum overall i ( t_i x Discounted CF_i) / Total Discounted CF Note, the DMT will differ on the cashflow being used for the weightings. So a DMT based on premiums could be different from that using claim outgo.
