RESEARCH METHOD 6

Irina Kristela Sutarsa – 008201500011

Nathania Neysa – 008201500022
Reven Caroll Wijaya – 008201500026
Laura Alicia Tampubolon – 008201500060
Valencius Pangestu - 008201500130
What are the type of life insurance ?
There are many different types of life insurance products :
• Term life insurance (sometimes referred to as temporary life insurance) lasts a
predetermined number of years. If the policyholder dies during the life of the policy,
the insurance company makes a payment to the specified beneficiaries equal to the
face amount of the policy. If the policyholder does not die during the term of the
policy, no payments are made by the insurance company. The policyholder is required
to make regular monthly or annual premium payments to the insurance company for
the life of the policy or until the policyholder’s death (whichever is earlier).
• Whole life insurance (sometimes referred to as permanent life insurance) provides
protection over the whole life of the policyholder. The policyholder is required to make
regular monthly or annual payments until his or her death.
• Variable life (VL) insurance is a form of whole life insurance where the surplus
premiums discussed earlier are invested in a fund chosen by the policyholder. This
could be an equity fund, a bond fund, or a money market fund.
• The policyholder can usually switch from one fund to another at any time.
• Universal life (UL) insurance is also a form of whole life insurance. The surplus premiums are
invested by the insurance company in fixed income products such as bonds, mortgages, and
money market instruments. The policyholder can choose between two options. Under the first
option, a fixed benefit is paid on death; under the second option, the policyholder’s beneficiaries
receive more than the fixed benefit if the investment return is greater than the guaranteed
minimum. Needless to say, premiums are lower for the first option.
• Variable-universal life (VUL) insurance blends the features found in variable life insurance and
universal life insurance. The policyholder can choose between a number of alternatives for the
investment of surplus premiums. The insurance company guarantees a certain minimum death
benefit and interest on the investments can be applied toward premiums.
• Endowment life insurance lasts for a specified period and pays a lump sum either when the
policyholder dies or at the end of the period, whichever is first. The primary purpose of an
endowment policy is to build cash value that can be used as a way to set money aside for a
long-term goal, such as a college education.  There are some policy in endowment life insurance
such as with-profits endowment life insurance policy, unit-linked endowment, pure endowment
policy.
• Group life insurance covers many people under a single policy. It is often purchased by a
company for its employees. The policy may be contributory where the premium payments are
shared by the employer and employee or noncontributory where the employer pays the whole
of the cost.
Explain the cost of whole life
insurance compared with annual
premium.
70000

60000

50000

40000

30000

20000

10000

0
40 45 50 55 60 65 70 75 80
The graphic shows that the life insurance holders pay the
annual premium for 20000. In the year 0 until 60, the graphic
shows surplus because along that age, the life insurance
holders do not use the insurance yet. So, it is still considered as
a surplus for them. However, in the age of 60 above, the life
insurance holders will use the insurance. So that’s why, it is
called as cost per year. In other words, the cost per year is as
same as the cost that the life insurance will pay regarding to
the claims of the insurance holders.
What are a) longevity risk and b)
mortality risk ?
• Longevity Risk, is the risk that advances in medical sciences and lifestyle
changes will lead to people living longer. Increases in longevity adversely
affect the profitability of most life insurance contracts (because the final
payout is either delayed).
• Mortality Risk, is the risk that wars, epidemics such as AIDS, or pandemics
such as Spanish flu will lead to people living a shorter time than expected.
This adversely affects the payouts on most types of life insurance contracts
(because the insured amount has to be paid earlier than expected), but
should increase the profitability of annuity contracts (because the annuity
is not paid out for as long).
Use the mortality table to calculate the minimum
premium an insurance company should charge for a
$1 million two-year term life insurance policy issued to
a man aged 50. Assume that the premium is paid at
the beginning of each year and that the interest rate is
2%.
•First
  term – life insurance
Probability of death in 1st term = 0.005512
Expected Payouts =
Present Value = = 5403.92157
Second term – life insurance
Probability of death in 2nd term = = =
 Expected Payouts = ) =
Present Value = =
Total PV =
Suppose that the minimum premium is X, so
= =
So that, -> X = 11083.1407
So, the minimum premium payment is $11803.1407
Explain what is meant by “loss ratio” and “expense
ratio” for a propertycasualty insurance company. “If an
insurance company is profitable, it must be the case
that the loss ratio plus the expense ratio is less than
100%.” Discuss this statement.
The loss ratio is the ratio of payouts to premium in a year, Loss ratios are typically in
the 60% to 80% range. The expense ratio is the ratio of expense (example : sales
commissions, and expenses incurred in validating losses) to premium in a year,
expense ratios in the United States are typically in the 25% to 30% range and have
tended to decrease through time.
The statement is not true because investment income can be significant. Premiums
are received at the beginning of a year, and payouts on claims are made during the
year or after the end of the year. The insurance company is therefore able to earn
interest on the premiums during the time that elapses between receipt of premiums
and payouts. (Financial Institutions and Their Trading, 2015)
What is the difference between a defined
benefit and a defined contribution pension
plan?
Defined benefit plan: A plan which the firm is responsible for
providing fixed benefits to the employee and this benefit is a
future financial commitment for the firm. Employees will receive
a pre-defined pension that based on their years of employment
and final salary. Defined contribution plan: A plan which the
contribution of each employee are kept in separate account and
invested for the employee. When they reach the retirement
age, the accumulated amount is converted into annuity.
Use the mortality table to calculate the minimum premium an insurance
company should charge for a $5 million three-year term life insurance
contract issued to a woman aged 60. Assume that the premium is paid at
the beginning of each year and death always takes place halfway through a
year. The risk-free interest rate is 3% per annum.
1st year probability: 0.006961
•2  year probability: (1-0.006961) x 0.007624 = 0.00757093
nd

3rd year probability: (1-0.006961) x (1-0.007624) x 0.008322 = 0.00820107

 
1st E(p) = 5,000,000 x 0.006961 = 34,805
2nd E(p)= 5,000,000 x 0.00757093 = 37,854.65
3rd E(p)= 5,000,000 x 0.00820107 = 41,005.35
 
1st PV =
2nd PV =
3rd PV =
Total PV = 106,998.59
 
X+
 
= 106,998.59
X = 106,201.53
The minimum premium is $106,201.53
During a certain year, interest rates fall by 200 basis
points (2%) and equity prices are flat. Discuss the
effect of this on a defined benefit pension plan that is
60% invested in equities and 40% invested in bonds.

The value of a bond increases when interest rates fall. The value of the bond
portfolio should therefore increase. However, a lower discount rate will be
used in determining the value of the pension fund liabilities. This will
increase the value of the liabilities. The net effect on the pension plan is
likely to be negative. This is because the interest rate decrease affects 100%
of the liabilities and only 40% of the assets.