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AM4.12 - Chapter 4 Expenses and Gross Premium...

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Chapter 4 – Expenses and Gross Premium Introduction (section 4.1) So far in chapters 2 and 3, we have calculated NSP’s and NAP’s these were calculated by determining the apv of future benefits only in other words, we assumed that expenses, profits, taxes and risk charges were 0 What we are going to do in this chapter is take expenses into account in the calculation of our premiums
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When we do this, we will be calculating gross premiums Note 1. We will restrict our calculations to insurance policies only (we will not calculate gross premiums for life annuities) 2. We will continue to assume that profit, taxes and risk charges are 0 (you should read section 4.1 which talks about the four main types of expenses in an insurance policy)
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Three Methods To Take Account of Expenses 1. Constant expense per policy this will be handled by a flat amount per policy 2. Expenses that vary with the amount of the premium these will be handled by a percent of premium charge
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3. Expenses that vary with the size of the death benefit these will be handled by a policy fee per 100 of face amount We will illustrate how to calculate gross premiums for each of the 3 cases above separately Then we will finish by looking at the more common case of all 3 types of expenses being combined
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Fundamental Relationship To determine the gross premium of a policy, no matter how expenses are to be
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