How is the net premium for insurance calculated?

The net premium for insurance is calculated primarily using mortality tables and interest rates. Mortality tables provide statistical data about the likelihood of death for different demographics, which is essential for assessing the risk associated with issuing life insurance. By analyzing this data, insurers can estimate the expected number of claims that will arise from the insured population.

Interest rates are also crucial in this calculation because they determine the present value of future policy benefits. When calculating net premiums, actuaries consider how invested premiums will grow over time and how that impacts the amount needed to cover future claims. Therefore, the combination of mortality data and interest rates allows insurers to arrive at a premium amount that accurately reflects the expected risk and the time value of money.

In contrast, relying solely on demographic information alone does not provide enough context for calculating premiums since it doesn't account for the mortality risk associated with those demographics or how time affects monetary value. The average income of the insured could influence the insurance policy types they might choose, but it doesn't directly contribute to establishing the net premium. Lastly, past claims filed can be indicative of trends but do not directly dictate the premium calculation as future risks must be projected, not merely assessed from historical data. Consequently, the method that uses mortality tables and interest rates is the most