Life Insurance: How is life insurance premium determined? A big reveal of the three formulas of actuaries; Read this news in detail to know

• Who and how determines your life insurance premium?
• Understand premium formula from actuaries
• How is AI being used in determining premiums?

Life Insurance News: One of the most important questions that you may have when buying a life insurance policy is, “How much will my premium be and who decides it?” Determining your life insurance premium is a very complex and scientific process, led by an actuary. These experts act as the insurance company’s ‘risk managers’ and ensure that your policy remains safe despite market fluctuations.

We spoke to Bhavna Verma, Chief Actuary, India First Life, to find out how actuaries determine your insurance premium. It revealed three major stages of determining insurance premium.

1. Policy formulation and future risk planning

A life insurance policy is designed keeping in mind the entire life of a person. Therefore, the knowledge and statistical techniques of actuaries are very important in designing these policies, determining their value and accounting for future liabilities. While designing any long term plan or fixing its premium, these experts make assumptions based on the following financial factors. It considers the probability of the policy holder dying or filing a claim in the future. Also, how much profit the company will make from future investments, which will be used to pay the claim. This is also studied.

Similarly,

• Company expenses: Expected cost to the company to run the policy.
• Consumer behavior: Will the customer pay the premium on time, or close the policy early
• Actuarial Control Cycle: To estimate all these they use the method ‘Actuarial Control Cycle’.

Premium rates are determined by tracking available historical data, keeping a close eye on experience and changing conditions. Thorough tests are also carried out to ascertain the consequences of any difference between the estimated premium and risk calculations.

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2. A touch of digitization in premium

In the current era of digitization and huge data pool, actuaries are now innovating in premium determination. With modern techniques such as machine learning and predictive models using technology, actuaries can now better predict risk. So this directly benefits in premium determination. This helps in determining the premium more appropriately as per the risk profile of each individual. E.g. Wellness Incentives: Some plans offer ‘Wellness Incentives’. Those who maintain a good lifestyle (Good Health) have to pay lower premiums or get other benefits. Also, beyond fixing premiums, these experts use data science to identify fraud and create models that predict whether consumers will pay premiums next year.

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3. Protection of interest of policyholders

Even after premiums are fixed, actuaries continue to work to fulfill long-term promises made by insurance companies to customers. They recommend ‘Asset-Liability Management’ for each policy category, which keeps financial risk under control. Also, since life insurance is inherently a risk business, actuaries are responsible for making appropriate financial provisions to ensure that policyholders’ interests are always protected. They comply with new accounting standards such as risk-based capital structure and IFRS17. This ensures that the company will have capital available for claims even in extreme situations like epidemics.

In short, your life insurance premium is determined by an actuary after a thorough study of available data, statistical techniques, future financial projections, company costs, and most importantly, your age-specific mortality rate. It is these experts who play a crucial role in the strategic decisions and financial development of insurance companies, thereby protecting your policy even in the face of market fluctuations.