KEY WORDS
Current sum assured Value reserving techniques
Current premium reserve Yield
Premium increase options Investment profit sharing
1. Inflation causes many problems, both for the client and the insurance company. The main
problem for the client is that inflation deteriorates the insurance benefit undertaken by the
insurance company. For the company, the most important problem is that the profit loading
calculated gradually becomes inadequate. Problems of fairness also arise. Namely, above
we counted with the technical interest rates. As it was pointed out, this is always a relatively
low interest rate (generally it is between 2-4%148), guaranteed by the insurance company as
the yield of the premium reserve.
2. In times of inflation, however, real yields are significantly higher than the yield that would
correspond to the technical interest rate. Who should have this surplus? Considering
fairness, the greater part is coming to the client, since it is his money that carried interest.
Thus, in times of inflation, the question of ’’profit-sharing’’ arises emphatically. These are the
reasons that make it inevitable to apply techniques of handling (not ceasing, eliminating)
inflation.
At first sight we may say that in case of life insurances there are two (parallel) techniques
to be applied:
1. Premium increase and/or
2. Profit sharing.
3. In times of inflation, usually every insurance company offers premium increase to its
clients. This is not an obligation for the client but an opportunity offered by the insurance
company, which has nothing to do with any rises in prices. Premium increase means that the
insurance company makes it possible to recalculate the client’s insurance – which is
deteriorating because of inflation – without exposing him to a new process of underwriting.
Premium increase could only be called a rise in prices, if the insurance company increased
the premium without increasing the insurance benefit it provides, or, if it calculated the price
of the increased insurance benefit on the basis of rates less favourable for the client. Thus,
in case of life insurances, a rise in the prices means that the insurance company changes its
rates, so it provides the same unit of insurance benefit for higher prices.
4. Premium increase
is a different case. This is important to note, because many people who have a life insurance
are confused about this difference. It is widely believed, that if an insurance company
increases premium by a larger extent than the rate of inflation of the previous year (due to
technical reasons that will be discussed later), it deceives its client. In fact,
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