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Life Insurance Company charges premium in return of the benefits it offers through its products. Generally the term of the contract i.e. policy is 10 years or more. Company charges premium either as upfront one time lump-sum called as single premium or regularly over the life of the contract called as regular premium. Then there are also limited premium policies where client pays premium for a shorter period but contract I of long term nature. Due to such nature several important terms need to be understood to properly categorize and compare any life insurance company.
We have already explained single, limited and regular payment terms. The other important terms are:
First Year Premium (FYP): This is the premium collected from new policies sold in the given period from regular or limited premium paying policies. Single premium policies are not considered for this calculation. The premium amount belonging to first year of policy is reported as FYP.
Renewal Premium (RP): This is the premium received from limited or regular premium paying policies sold in previous years. Hence the premium amount collected after the completion of first policy year is reported as renewal premium as it is the amount paid for renewal of the contract as per the terms.
New Business Premium (NBP): New business premium collected from all the new policies sold in that year (or given period) is called as NBP. All the policies are considered. Hence
NBP = FYP + SP
Annual premium equivalent (APE): This is one of the most commonly used terms. In insurance new business is not entirely comparable across companies since NBP comprises of single as well as regular premium. Single premium policies tend to have larger ticket size but entire premium is collected upfront. Whereas in regular premium policies premium is smaller but collected over a longer term. Thus business garnered through these two policies is not directly comparable. It has to be brought on the common ground before comparison.
Traditionally a 10 – 20 year term is very common in insurance and hence single premium is multiplied with 10% to arrive at equivalent regular premium. Another possible reason could also be the profitability. Generally NBAP margin of a single premium policy is around 2-3% whereas it is 20 -30% for a regular premium policy. (It can change drastically however this is the mode / median). Hence a weight of 10% brings single and regular premium policies on the common ground.
APE = FYP + 10%*SP
Total Premium (TP): As the name suggests it is the premium collected from any source during the given period.
TP = NBP + RP = FYP + SP+ RP
Assets under management (AUM): Insurance Company invests the premium and carries on its books for the life of the policy. All this accumulated amount is called as AUM and is one of the most important measure of company’s health and growth. Total AUM can be broadly classified as follows:
· Shareholder AUM: This is the fund value lying in shareholders account. Shareholders have to maintain a certain solvency margin. Shareholder infuses money into the business from time to time. A part of the money gets used in funding the expense overrun and new business strain. Rest of the money resides in shareholder account. This mount is called a shareholder AUM.
· Policyholder AUM: As the name suggests, this is the fund set aside to meet the benefits promised to policyholders (liabilities). Actuarial department calculates the mount to be set aside by the insurance companies to meet the benefits promised, based on the future expected cash flows. This mount is calculated on a conservative basis and is called as reserves. The accumulated reserve is effectively the policyholder AUM. (There could be differences as reserve is prospective calculation whereas AUM is retrospective aggregation but conceptually it is similar). Policyholder AUM can further be classified as:
o Assets held to cover linked liabilities: It is the AUM from unit linked policies. This amount is the aggregate fund value in all the ULIP funds.
o Policyholder investments: This amount refers to the fund garnered under non-linked policies.
Policyholder AUM and its growth is very important in overall growth of the company. If the premature exits (surrender etc) is very high or if the underwriting is not efficient then company cannot manage to grow its AUM base.
The terms mentioned above are a pre-cursor to the next few articles.
Then there are several other technical terms like FFA, solvency margin, NBAP/VoNB margin, Embedded value, PVIF, expense over-run, reversionary bonus, participating, non-participating etc. We will discuss most of these terms in due course of time when the need arises.
Understanding Some Basic Terms
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