Actuarial Outpost > SoA Net Vs. Gross Premiums
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#1
09-09-2003, 02:09 PM
 Gordo Member Join Date: Sep 2001 Location: The green room Posts: 94

What is the difference between net and gross premium. Quoting the Life Insurance Book (pg. 327):

"Including an initial or acquisition expense in the reserve calculation results in lower reserves,..., because the net premium is calculated to cover death benefits and the initial expense."

My question is:
If you include acquisition expenses in net premiums, what would be considered gross premiums?

I always thought the difference between net and gross premiums is the acquisition expense.
#2
09-09-2003, 02:16 PM
 Gandalf Site Supporter Site Supporter SOA Join Date: Nov 2001 Location: Middle Earth Posts: 30,796

Gross premium is what you charge. It includes amounts for expenses (including, but not only, acquisition expenses) and profit.

Net premium is what you use for calculating reserves in a formula like present value of future benefits - present value of future net premiums.

Modified reserves might use Net Premium = (PV [at issue] of benefits + Acq expense) / That same annuity.

Second formula gives a larger value for net premium, hence smaller reserves (since PV of net premiums is a deduction in the reserve calculation).
#3
09-09-2003, 02:20 PM
 chucky almindinger jr. Member Join Date: Nov 2001 Posts: 76

I had the same question. But I believe the only difference between net and gross premiums is the portion included for profit (which is different that what was assumed for course 3)
#4
09-09-2003, 03:05 PM
 Gandalf Site Supporter Site Supporter SOA Join Date: Nov 2001 Location: Middle Earth Posts: 30,796

Quote:
 Originally Posted by chucky almindinger jr. I had the same question. But I believe the only difference between net and gross premiums is the portion included for profit (which is different that what was assumed for course 3)
I don't have the texts for course 3 or course 5, but am quite sure that what I said is the standard meaning in practice. It also seems to be consistent with the original quote "Including an initial or acquisition expense in the reserve calculation results in lower reserves,..., because the net premium is calculated to cover death benefits and the initial expense."

That certainly seems consistent with it being possible to calculate the net premiums to cover death benefits only, leading to higher reserves, or to cover death benefits and acquisition expenses, leading to lower reserves.