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On “Extra Premium”

Published online by Cambridge University Press:  18 August 2016

James R. Macfadyen*
Affiliation:
Legal and General Life Assurance Society Faculty of Actuaries (Scotland)

Extract

A paper on Extra Premium may treat of the subject in one or other of two ways. It may be, on the one hand, an attempt to deduce tables of mortality for the various classes of under-average risks occurring in a Life Office's transactions. Or, on the other hand, this part of the subject may be ignored and the paper be simply an enquiry into the effects resulting from the various methods employed in charging extra—an analysis of the actuarial points raised in consequence of a Society admitting not merely minimum risk lives, but others not eligible on similar terms. In short, the subject of Extra Premium may be considered either in respect to the amount to be imposed or in regard to the manner and effect of its imposition. The first question must be determined mainly by actual mortality observations—the second does not require in the same degree for its examination the light of experience. It is this latter question which I have taken up in the following paper; but as both branches of the subject are intimately connected, it may be well to make a few general remarks on the former also.

Type
Research Article
Copyright
Copyright © Institute and Faculty of Actuaries 1873

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References

* Note.—I use the word “practically” because I have not seen and have not myself been able to arrive at a theoretical proof which is entirely satisfactory. The following shows that in any given case it is practically certain that the value of a policy by a higher rate of interest must always be less than the value by a lower.

Let V x|1 be the value of a policy opened at age x, the present age being (x + 1), when v is the present value of £1 discounted for one year, and let V′ x|1 be the corresponding value by the same table of mortality when r is the discounted value of £1 for one year, v being assumed greater than r. The question then is, which is greater—V x|1 or V′ x|1?