How do insurance companies calculate insurance premiums?

First, insurance companies apply the law of large numbers. His philosophy, the smaller the risk and uncertainty when the number of insured increased. The greater the number of people who enter the life insurance program, the accuracy of estimates of insurance losses more easily done. In this condition, the insurer is able to anticipate an insurance claim in the future more accurately. The bigger the group the insured, the losses experienced by the group that will be easier to predict.


For example, an insurance company PT will face a big risk when it should close the insurance coverage for one person $ 100 million for one year. When the number of people insured reaches 500 people, the level of uncertainty will decrease even though the risk of death events remain. If the 500,000 insured in one group, the average death rate fluctuations will decrease. Thus, life insurance companies are able to anticipate more accurately the insurance claim.

Secondly, life insurance companies calculate premiums based on mortality statistics in the table. It speaks about the level of mortality or mortality at any age level. This statistics table is a record of mortality is observed in the previous time period. From the observation result, insurance companies make an average figure as a benchmark for making illustrations of probability levels of life expectancy at each age group.

PT insurance using mortality tables as the main element in calculating insurance premiums. In addition, the calculation is based on the amount of administrative costs, distribution costs and interest rate assumptions. The amount of non-mortality of these elements depend on each company's policy of insurance.


In general, the determination of premium rates every life insurance company based on four principles, namely

• insurance premiums will be calculated by considering the amount of an insured group. The principle of average and probability can only work if applied to large groups. The larger a group the insured, the premium calculation closer to the expected results
•  although it is unknown when and how each group member will die later on, past experience is good enough to use as a guide to estimate future
• life insurance companies pay claims life insurance policies issued from the collection of funds contributed by the policyholders
• each participant contributed to the accumulation of funds in accordance with its risk level. People aged more will pay a higher premium rate than those aged younger.

By knowing how to calculate the premium, we should realize that an active awareness for insurance since very early to determine the amount of premiums we pay. Financial risk management is a form of our responsibility to the family. How wise is the transfer of financial risk to insurance companies by purchasing life insurance products. This is to reduce the financial burden in the future due to the emergence of misfortune / calamity and uncertainty. Do not delay a decision for insurance because of the disaster can never be predicted. Immediately contact the insurer or insurance agent that you know.