Planning a Scheme
The actual operation of An Online life insurance company is extremely complex, involving all the aids of modern technology and especially, of course, the computer.
But the essential principle is simple
Let us assume that we were planning a scheme whereby 1,000 men all aged 45 would agree to pay into a common fund each year of their lives enough to pay out £211,000 to the dependants of any of them who died during any year.
From Table 1 on p. 3, it is possible to determine fairly precisely just how many of the 1,000 will die in any year.
In Year 1, on the basis of the mortality experience underlying that table, we could expect four to die, in Year 2 five and so .
So in Year 1, to provide the £24,000 necessary to meet the claims of the dependants of the unlucky four, each of the original 1,000 would have to pay £24. In Year 2 the remaining 996 would have to pay in £25.
02 each to meet the £25,000 needed to meet the death claims for that year.
But if we continue in this way, deriving the "premium" from the year's actual mortality, then by the time 15 years have passed there will be only 861 of the original 1,000 le.
And each of them will have to pay in over £221 to meet the outgoings of the sixteenth year. Since their income would quite probably be falling just as the contributions rose, such a scheme would be extremely unattractive.
What the founders of life insurance discovered, however, was that with a lot of mathematical calculation and a little guesswork, they could work out a premium rate which each of the 1,000 would agree to pay throughout their lives in return for the guarantee that all claims would be met when they fell due. (see http://www.forbes.com/fdc/welcome_mjx.shtml)
Here we show how it works. The annual premium is far higher than the payments required in the early years of the "pay-as-you-go" scheme,........ see: click here for Premium Rates
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