Estimating Pure Premium

To estimate pure premium in insurance products the basic equation is as follows:

• Present Value of Premium = Present Value of Benefits + Present Value of Expenses which include profit to shareholders.

Here is an example:
XYZ insurance company wants to issue a one year policy of temporary assurance contracts to persons aged 55. The insurance cover for each contract is $ 500/-. He issues 4000 contracts. The mortality rate is 1 death for 1000 such lives.
For 4000 lives:
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The Present Value of Benefits = 4(claims) * 500 = $2000
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The Present Value of Premium should be equal to the Present Value of Benefits i.e $ 2000
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Therefore the premium charge should be $0.50 per policy ($0.50 * 4000 = $2000)
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In the above example, the methodology to calculate the pure rate of premium has been given. As this is an oversimplified example, no expenses and no investment income has been included in the model. The premium will increase or decrease once we incorporate the  expenses and investment income in the basic equation for calculating the premium.