Wednesday, 23 July 2014

Cash Flow Mehtod For Premium Calculations

Expected income and expected outgo of an insurer determines the premium using the cash flow method.

  • The net cash flow is determined by determining the expected income and the expected outgo for each policy year. 
  • These estimated are made based on assumptions that the premium rates are given at every age 'x', the life table is assumed so an insurer can calculate the expected premium amounts and the expected claim amounts.Further, the insurer assumes a predetermined set of commission rates, initial expenses, renewal expenses and also investment returns.
  • The present value of the net cash flow is determined at a discount rate which correlates to the rate of returns expected by shareholders. The rate at which the present value of the net cash flow is made to zero determines the expected rate of return on the policy.
  • Profit margins are determined using actuarial software.
  • Such exercises are done in the competitive market to determine whether the premium charged would be in the best interest of the insurer and the insured.

No comments:

Post a Comment