Insurance@8: Measurement of Risk

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Chapter:8Measurement of Risk & Mortality Table


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Risk are measured for xation of premium tobe charged by the insurer. There are two

method of calculation of premium; they areValue of serice

!ost of serice

They are explained below

Value of serice" The alue of sericedetermine the rate of premium according tothe utility of insurance to each proponent.Thealue of insurance if di#ers from one another& the premium rate is also ary. The alue ofserice principle can not be used in insurancebecause its utility to each indiidual can notbe determined.


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!ost of serice" $remium should be charged according tothe cost of insurer. The cost include all expenses of the

business plus small prot. !ost are two types as!ost of claim

!ost of administration.

The insurer must charge at least so much premium thatcan be used to pay the full amount of claim.

• !ost of administration include all types of managementexpenses. They are two types as

%ixed cost

Variable cost

%ixed cost is spread oer the policy life but the ariablecost do not inole much problem of allocation.themethod of distributing cost is called loading.ith thehelp of loading net premium is enhanced to chare axed amount reularly from the policy holder.


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!ost of claim" This claim arise at the death of theinsured & at the maturity of the contract. 'n annuity

contract the payment shall continue up to death(therefore the expectation of surial will be the basisof cost. 'n most cases the payment depends on thedeath. The death is certain but the time of death is

not certain. The forecasting of death is eryimportant in life insurance. The forecasting of deathcan be done on the basis of

)xperience of medical science

*n the basis of past experience.

'f the medical science of insurance su+cientlyadanced & its knowledge perfectly used then theinsurance company can pro,ected the time of deathof the applicant.


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Mortality TableMortality table is such data which record the past

mortality & is put in such form as can be used inestimating the course of future data. Mortality table

helps to predict future mortality.

-ctuarial tables used in the insurance industry to

predict the life expectancy and the death rates forarious types of people.

Mortality table is such data which records the pastmortality and is put in such form as can be used inestimating the course of future data. Thus the mortality

table is to predict future mortality.'t is also described as the picture of a generation of

indiiduals passing through time. - large number ofpersons are selected and sered for death and surial

rated till all of them is dead.

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- table that shows the rate of deaths occurring

in a dened population during a selected timeinteral( or surial from birth to any gienage. tatistics included in the mortality tableshow the probability a person/s death before

their next birthday( based on their age.

0eath1rate data help determine prices paid bypeople who hae recently purchased

life insurance.

- mortality table is also known as a 2life table(2an 2actuarial table2 or a 2morbidity table.2

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%eatures of Mortality Table

(i) Observation of Generation : In preparation of mortality table persons of a generation (i.e., persons of a single age) are selected and

they are observed up to death. No new entries or withdrawals are

assumed at any stage of the study.

(ii) Start from a point : The mortality table starts from a point,

which depends on the requirement of the insurer, and will continue

up to the point all of them has been dead.

(iii) Yearly Estimation : The mortality table records the yearly

death or survival rate. Each and every year is considered for

calculating the rates.


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(iv) Mortality and Survival Rates : The mortality

and survival rates of the generation who are selectedat a particular age are considered each and every year.

ny table giving mortality rates only is not mortality,

table unless mortality rate of a generation is calculated

every year. Each year!s number, living is the previousyear!s number of living minus previous year!s number

dying and, therefore, as persons go on dying year after

year the number of living goes on shrin"ing till it is

reduced to #ero and modality table ends there.


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!onstruction of mortality table The best method of construction of mortality

table will be to select a large number ofpeople at attained age. -ttained age meansage nearer to birth date. %or example persons

of 34 years 5 months to 67 years 8 month 64days will be treated as the age of 67 years.

The attained age will be selected at which thepolicy is to begin. The selected persons of the

attained age will be obsered & the number ofdeath will be recorded during a year till all thepersons selected are dead.The number of thedeath in a year is deducted from the number

of liing at the beginning of the year to get


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!riticism$reparation of such table is di+cult because

of large number of person of an attained ageis impracticable to get.

!onstant watch on them is impossible.

't will re9uire a long period to construct thetable.

- lot of money & time will be wasted to record

number of death eery time.Mortality table will be 9uite obsolete because

it had been constructed at least 377 yearsduring which a lot of change might hae

occurred.


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ource of Mortality 'nformation%or construction of mortality table number of liing

at the beginning of the year & the number of deathduring the year are re9uired.The source ofinformation to construct mortality table are

$opulation statisticsRecords of life insurers.

Population Statistics: the insurer gets the numberof liing at age from the census report & number ofdeath from the municipal & other death record.Thepopulation statics will reel how many person haedied at what age. The calculation of mortality tableon this basis is not easy & correct.


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Criticism: The population statistics is not ery much useful toinsurer. 't is applied when there are no experience in this eld.

The accuracy of population statistics is doubtful in absence of

age proof. There may be oer estimate & underestimates.ometime member of a certain section of the society areunaware of age.

't has been also noticed that some death are unrecorded. 't isdi+cult to know exactly how many death are unrecorded & itis also di+cult to know exactly how many death occurred at aparticular age.

!ensus report are aailable only after 37 years & there wouldnot be ery recent gure. - particular census gure may bebiased.

'nterpolation & extrapolation are inoled & correct gure aregenerally not known.

The population statistics gie the information of all typespeople but for mortality table standard &sub standard liesare re9uired seperately.


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Record of insurer" The record of the insurer gie acorrect because

0eath rates can be correctly recorded.:o death will be unrecorded( correct number of

persons liing & death for each age can be known.

!ollection of gure is done from the record of as

many insurers as possible in large number.eparate mortality table for standard ( substandard(

female & male lies can possible to prepare.

ub classication according to sex( marital status(

occupation( geographical area( social class may bemade & table are construct separately.

The counting of persons is done ery cautiously(withdrawal are excluded.

Insurance@8: Measurement of Risk

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