The second factor after death rate is interest factor for calculating net premium

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The second factor after death rate is interest factor for calculating net premium because the premium is obtained in advance and claim is paid subsequently. So, during this period the insurer can earn certain rate of interest.

Since the insurer can earn additional amount on the premium collected, its benefit should be given to the policy-holders.

The insurer, therefore, is required to assume a rate of return that may be earned taking into consideration various factors that would affect such earnings. Insurers are generally conservative in assuming such rate of return.

Since the premium is determined in advance the present value or pre sent net worth should be calculated so that this value at an assumed compound rate of interest must be adequate to pay the amount of claim.


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