Business Development Officer, T.D. McNeil Insurance Services, Fresno, California
Life insurance is a pooled risk plan. That means that a large number of people who cannot afford the loss of the death of a person contribute to a pool that reimburses when someone in the pool dies. These pools exist in some fraternal policies.
These pools become more sophisticated when they become incorporated and become legal reserve life insurance companies. These companies are regulated by the state insurance commissioner in the state where they are domiciled and the state insurance commissioner in the state where they are admitted. The purpose of this regulation is to assure the public that the admitted life insurance companies doing business in your state have adequate reserves to meet all of the promises that they have made.
The insurance company looks to actuarial science. Actuaries pour through death records for hundreds of years and millions of lives. The basic result is the Commissioner’s Standard Ordinary (CSO) tables. These take this huge amount of data and determine in a given year the average number of people (male, female) who will die in a given year. Insurance companies compare the CSO data with internal data and from that information develop their own probabilities. The actuaries then determine the amount of money that the company must collect in order to pay death claims at a given age for a given sex. This becomes the standard premium for that age (plus the cost of administration and acquiring the business and reduced by anticipated earnings on the reserves of the company.)
Because companies have access to more precise information they can carve out the differences for those who smoke or use tobacco products. This becomes the first differentiation in life insurance premiums. The companies also have data derived from smaller numbers that indicate the effect of certain diseases, occupations and habits of the population. This information is passed to the underwriters who determine if the proposed insured meets the definition of a “standard” risk, and if they do not, why not and to what degree do they vary from the standard risk.
The underwriter can lower the premium from the standard premium if the individual falls in a narrow band of height and weight. Often to receive this lower premium the underwriters will require blood and urine analysis to determine the overall health of the individual. Others are offered an increased premium if they have a condition that has proven to reduce life expectancy, or engage in an occupation that is considered hazardous.
When the underwriter completes underwriting the applicant is offered a policy. Basically it says that the company will provide so much coverage for such a period of time for a certain amount. The applicant becomes a policyholder when he or she makes the initial payment.
There are many other issues involved in determining the premium for a policy but the most important is how long the coverage is to last and at what amount of coverage. At that point the issue is largely mathematics and involves the company being able to meet its obligations, its promises.
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These pools become more sophisticated when they become incorporated and become legal reserve life insurance companies. These companies are regulated by the state insurance commissioner in the state where they are domiciled and the state insurance commissioner in the state where they are admitted. The purpose of this regulation is to assure the public that the admitted life insurance companies doing business in your state have adequate reserves to meet all of the promises that they have made.
The insurance company looks to actuarial science. Actuaries pour through death records for hundreds of years and millions of lives. The basic result is the Commissioner’s Standard Ordinary (CSO) tables. These take this huge amount of data and determine in a given year the average number of people (male, female) who will die in a given year. Insurance companies compare the CSO data with internal data and from that information develop their own probabilities. The actuaries then determine the amount of money that the company must collect in order to pay death claims at a given age for a given sex. This becomes the standard premium for that age (plus the cost of administration and acquiring the business and reduced by anticipated earnings on the reserves of the company.)
Because companies have access to more precise information they can carve out the differences for those who smoke or use tobacco products. This becomes the first differentiation in life insurance premiums. The companies also have data derived from smaller numbers that indicate the effect of certain diseases, occupations and habits of the population. This information is passed to the underwriters who determine if the proposed insured meets the definition of a “standard” risk, and if they do not, why not and to what degree do they vary from the standard risk.
The underwriter can lower the premium from the standard premium if the individual falls in a narrow band of height and weight. Often to receive this lower premium the underwriters will require blood and urine analysis to determine the overall health of the individual. Others are offered an increased premium if they have a condition that has proven to reduce life expectancy, or engage in an occupation that is considered hazardous.
When the underwriter completes underwriting the applicant is offered a policy. Basically it says that the company will provide so much coverage for such a period of time for a certain amount. The applicant becomes a policyholder when he or she makes the initial payment.
There are many other issues involved in determining the premium for a policy but the most important is how long the coverage is to last and at what amount of coverage. At that point the issue is largely mathematics and involves the company being able to meet its obligations, its promises.