Rating Factors 定價因素
The premium must be enough to pay the benefits promised under the policy and the insurer's operating costs. When setting the basic premium, an actuary mainly considers three factors: mortality, interest and expenses. In Hong Kong, an insurer carrying on long term business must appoint an appointed actuary under the Insurance Ordinance (Cap. 41).
Mortality reflects the likelihood of a life insured dying at a given age. It is usually based on a mortality table and is affected by factors such as age, sex, health, smoking habits and occupation. For life cover, higher mortality means a higher premium. Annuities work the other way round: the longer the person lives, the longer the insurer must pay, so the cost increases. In Hong Kong, an insurer may set different life insurance or annuity terms by sex where this is based on actuarial or other data on which it is reasonable to rely, and is reasonable in the circumstances. This is not discrimination prohibited by the Sex Discrimination Ordinance (Cap. 480).
Interest is the return the insurer expects to earn by investing premiums. Premiums are generally received before claims are paid, and the investment period can last for decades, so compounding has a significant effect. All else being equal, a higher assumed investment return means a lower premium, and a lower assumed return means a higher one.
Expenses include commission, underwriting, policy issue, administration and claims handling costs, with first-year costs usually being higher. A premium calculated from mortality and interest alone is the net premium. Adding loadings for expenses, contingencies and profit gives the gross premium, also called the office premium, which is the amount the policyholder actually pays.
Pricing Systems 定價制度
Under the natural premium system, each year's premium reflects only the mortality cost at the life insured's age for that year. The premium therefore rises with age, particularly steeply in later life. It is low for young people, but because nothing is paid in advance for future costs, it does not generally build up a significant reserve or cash value.
The main weakness of the natural premium system is that premiums may become unaffordable in old age. Healthy lives are more likely to give up their cover, while those in poorer health tend to keep it, which creates anti-selection. Mortality in the remaining group rises, pushing premiums up further.
Under the level premium system, the premium stays the same throughout the payment period. This does not mean the mortality cost is the same each year: in the early years the premium exceeds that year's mortality cost, and in later years it falls below it. Actuarially, the level premiums over the payment period are equivalent to the corresponding natural premiums, although their totals are not necessarily the same.
The excess collected in the early years goes into the policy reserve and is invested. These funds and their returns are used to meet the shortfall in later years, and this is the basis for cash values under traditional whole life and endowment policies. A level premium makes it easier for policyholders to budget and keep their cover long term, but it is higher than the natural premium in the early years. If the policy is surrendered very early, the amount returned may be little or nothing because first-year costs are higher.
Practice
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