Group 3

Anggun Nurul Hayati

Astuti Kartikasari Kusuma Putri

Nurul Laili

Samuel Setyo Nugroho Putro

Mathematics Education 7F 1
Net Premiums

Mathematics Education 7F
 Presentation Agenda

Premiums Net Annual Premium

01 04
What is premiums? Annual premium net lifetime joint insurance

Net Annual Insurance

Net Premiums
02 05 Premium
What is net premiums? Annual premium net joint insurance futures

Net Annual Dual Purpose

Net VS Gross
03 06 Premium
What is diffrence between net and gross premiums? Annual premium net insurance along with pure duties

Mathematics Education 7F 3
Premiums
 What is premiums?

The premium charged by an insurance

company for an insurance policy serves
two purposes. Firstly, it has to provide
the funds needed to meet the benefit
paying liabilities and secondly it has to
cover the expenses of running the
business.

If we ignore the expenses and derive a premium based on the benefits only, we call it the net or risk premium. If
the expenses are also included in the computation, we get the gross or office premium. The net premium is
uniquely determined by the mortality and the interest, factors that are beyond the control of an insurance
company. On the other hand, expenses can be changed more easily: staff can be laid off, office space reduced,
expenses reallocated to other insurance products, etc.

Mathematics Education 7F 5
Net Premiums
 What is net premiums?

The expected present value of a policy’s benefits less the expected present
value of future premiums. The net premium calculation does not take into
account future expenses associated with maintaining the policy.

Mathematics Education 7F 7
 Formula

In order to find the net (or risk) premium, we use the following equation:
𝑬𝒙𝒑𝒆𝒄𝒕𝒆𝒅 𝒑𝒓𝒆𝒔𝒆𝒏𝒕 𝒗𝒂𝒍𝒖𝒆 𝒐𝒇 𝒕𝒉𝒆 𝒏𝒆𝒕 𝒑𝒓𝒆𝒎𝒊𝒖𝒎𝒔
= 𝑬𝒙𝒑𝒆𝒄𝒕𝒆𝒅 𝒑𝒓𝒆𝒔𝒆𝒏𝒕 𝒗𝒂𝒍𝒖𝒆 𝒐𝒇 𝒕𝒉𝒆 𝒃𝒆𝒏𝒆𝒇𝒊𝒕𝒔. (𝟏)
The present values are usually determined at the time the insurance is
issued.
If we have a single premium, denoted by P, from (1), we obtain
𝑷 = 𝑬𝒙𝒑𝒆𝒄𝒕𝒆𝒅 𝒑𝒓𝒆𝒔𝒆𝒏𝒕 𝒗𝒂𝒍𝒖𝒆 𝒐𝒇 𝒕𝒉𝒆 𝒃𝒆𝒏𝒆𝒇𝒊𝒕𝒔. (𝟐)

8
Net VS Gross
 What is the difference between net and gross premium?

Gross premiums are the amounts an insurance company expects to

receive over the life of a policy term. This affects the amount the
policyholder will pay for coverage under the insurance contract. For
example, if a policyholder pays $1,000 for a six-month automobile
insurance policy, the gross premiums for that period are $1,000.
Net premiums refer to the income an
insurance company will receive for
assuming risk under an insurance
contract, minus expenses associated
with providing coverage under a
policy. Insurance companies
commonly purchase reinsurance,
which pays for claims above a certain
monetary amount. This helps protect
the insurance company from having
to pay for large, catastrophic losses.
The amount paid for reinsuring a
policy is deducted from gross
premiums.
Net Annual Premium
Annual Premium Net Lifetime Joint Insurance

Final layer 5th layer

𝑀𝑥 𝑀𝑥 𝐷𝑥
𝑃𝑥 = 𝑃𝑥 = ×
𝑁𝑥 𝐷𝑥 𝑁𝑥

4th layer 3rd layer

𝑀𝑥 Τ𝐷𝑥 𝐴𝑥
𝑃𝑥 = 𝑃𝑥 =
𝑁𝑥 Τ𝐷𝑥 𝑎ሷ 𝑥

2nd layer Grand layer

𝑃𝑥 𝑎ሷ 𝑥 = 𝐴𝑥 𝑃𝑥 is the annual net premium for

life insurance with a sum assured
Rp 1 for 𝑥 years old
Mathematics Education 7F 13
Net Annual Insurance
Premium
 Annual Premium Net Joint Insurance Futures

1 2

𝑃′𝑥:𝑛 is net annual premium for term life 𝐴′𝑥:𝑛 𝑀𝑥 −𝑀𝑥+𝑛

𝑃′𝑥:𝑛 = =
insurance 𝑛 year with sum assured Rp 1 for 𝑎ሷ 𝑥:𝑛 𝑁𝑥 −𝑁𝑥+𝑛

person aged 𝑥 year

3 4

If the payment is limited to m number (year) 𝑚𝑃′𝑥:𝑛 𝑎ሷ 𝑥:𝑚 = 𝐴′𝑥:𝑛

then the net annual net premium is: 𝐴′𝑥:𝑛 𝑀𝑥 −𝑀𝑥+𝑛
𝑚𝑃′𝑥:𝑛 = =
𝑎ሷ 𝑥:𝑚 𝑁𝑥 −𝑁𝑥+𝑚

where 𝑚 < 𝑛

Mathematics Education 7F 15
 Net Annual Dual
Purpose Premium
Annual Premium Net Insurance along with Pure Duties

1 2

𝑃𝑥:𝑛 is net annual premium for dual-year 𝑃𝑥:𝑛 𝑎ሷ 𝑥:𝑛 = 𝐴𝑥:𝑛

insurance 𝑛 year with sum assured Rp 1 for 𝐴𝑥:𝑛

𝑃𝑥:𝑛 =
𝑥 age 𝑥 𝑎ሷ 𝑥:𝑛
𝑀𝑥 − 𝑀𝑥+𝑛 + 𝐷𝑥+𝑛
𝑃𝑥:𝑛 =
𝑁𝑥 − 𝑁𝑥+𝑛
3 4

If the payment is limited to m number (year) 𝑚𝑃𝑥:𝑛 𝑎ሷ 𝑥:𝑚 = 𝐴𝑥:𝑛

then the net annual net premium is: 𝐴𝑥:𝑛 𝑀𝑥 −𝑀𝑥+𝑛 +𝐷𝑥+𝑛
𝑚𝑃𝑥:𝑛 = =
𝑎ሷ 𝑥:𝑚 𝑁𝑥 −𝑁𝑥+𝑚

where 𝑚 < 𝑛

Mathematics Education 7F 17
 Example

A 35-year-old man is seeking a joint life insurance program with his 30-year-old wife.
Premiums will be paid at the beginning of each year as long as the insured is still alive.
If the amount of compensation to be received by the heirs when the man or his wife
passes away is Rp 100,000,000.00, the net single premium and annual premium must
be paid using the Indonesian Mortality Table 1999 with the interest rate i = 2; 5% can be
calculated by the following steps.

Mathematics Education 7F 18
 Solution

The magnitude of annual The amount of annual premium The annual premium for Joint
premiums for joint lifetime for pure dual-use insurance insurance 30-year term is:
insurance is: with a term of 30 years is:

1 𝐷𝑥+𝑛:𝑦+𝑛
1 P =𝑅×
𝑀𝑥𝑦 𝑀𝑥𝑦 −𝑀𝑥+𝑛:𝑦+𝑛 𝑥𝑦: 𝑛‫ۀ‬ 𝑁𝑥𝑦 −𝑁𝑥+𝑛:𝑦+𝑛
𝑃𝑥𝑦 =𝑅× P =𝑅×
𝑁𝑥𝑦 𝑥𝑦: 𝑛‫ۀ‬ 𝑁𝑥𝑦 −𝑁𝑥+𝑛:𝑦+𝑛
1 𝐷35+30:30+30
1 P =𝑅×
𝑀35:30 𝑀35:30 −𝑀35+30:30+30 35: 30: 30‫ۀ‬ 𝑁35:30 −𝑁35+30:30+30
𝑃35:30 = 𝑅 × P =𝑅×
𝑁35:30 35: 30: 30‫ۀ‬ 𝑁35:30 −𝑁35+30:30+30
1 𝐷65:60
𝐴35:30 = 𝑅𝑝 100.000.000,00 × 1 P =𝑅×
35: 30: 30‫ۀ‬ 𝑁35:30 −𝑁65:30
P = 𝑅𝑝 100.000.000,00 ×
1810496759 35: 30: 30‫ۀ‬
98783002223 1810496759−1090260071 1
P = 𝑅𝑝 100.000.000,00 ×
98783002223−15002258457 35: 30: 30‫ۀ‬
𝐴35:30 = 𝑅𝑝 1.832.801,90 1442931862
1 98783002223−15002258457
P = 𝑅𝑝 859.668,5295
35: 30: 30‫ۀ‬
1
P = 𝑅𝑝 1.722.271,488
Mathematics Education 7F 35: 30: 30 ‫ۀ‬ 19
 “There are only two ways to live your life.
One is as though nothing is a miracle.
The other is as though everything is a miracle.”
 Thank you!
Any questions?

Actuarial Mathematics
Mathematics Education 7F
University of Muhammadiyah PROF. DR. HAMKA