As it was discussed previously, most insurance companies offer their clients at every policy
anniversary the opportunity of increasing the premium – and based on this also the sum
assured – by the extent of the inflation of the previous year (or by a given percentage of it).
(Previous year hereby means the last calendar year of which there is an official rate of
inflation available, thus in January of year x ’’previous year’’ can also be year x-2.)
However,
this is usually offered to clients only if the rate of inflation is above 10%. Clearly enough,
possibility of premium increase is offered only for clients holding insurances of regular
payment.
The extent of premium increase is given. But by how much is the sum assured increased?
There are basically two ways for this to be calculated. In both ways, the extra premium is
considered to be the annual premium of a new insurance. The difference lies in the tariffs
they use to calculate this new insurance. The two possible ways:
1. To use a normal tariff, as if the policyholder effected a new insurance;
2. To use a preferential tariff. Naturally, the upper limit of the allowance given is that
the insurance company provides the increased insurance for a net premium.
Let b Pt denote the annual premium that has to be paid at the beginning of insurance year t.
3. If k denotes the inflation rate in the ‘’previous’’ year, and if it is assumed that this is the rate
by which the insurance company lets premium increase, the new premium will be:
4. and St is the sum assured valid throughout the insurance year t.
If we do not have to use a different reserve formula in a certain part of the term due to
zillmerization, then the premium reserve of the end of year t (before premium payment) can
simply be calculated with the following formula:
5. Guaranteed Insurability Option (GIO) does not belong here due to its subject matter, but
because of its similar technical implementation it should be mentioned here. The
policyholder possessing such an option has the opportunity from time to time (e.g. every
three years) to increase his premium above the inflation premium increase. This does not
6. Insurance companies usually give their clients the greater part of the premium reserve’s
yield over the technical interest rate in the form of profit sharing. The extent of this share
varies – as well as the technical interest rate
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