DETERMINATION OF OPTIMAL TERM LIFE INSURANCE PREMIUM BY MAXIMAZING EPV OF LIFE INSURANCE PROFIT AND CONSUMER UTILITY

• Main Author: Naufal Irham Ramdhani, Muhammad
• Format: Final Project
• Language: Indonesia
• Online Access: https://digilib.itb.ac.id/gdl/view/65430
• Institution: Institut Teknologi Bandung

Premium is the amount of money that needs to be paid by the policy holder for the transfer of risk from the policy holder to the insurance company. In its operational activities, premiums are one of the main sources of income for insurance companies. The greater the premium, the greater the income from the insurance company. In general, life insurance companies determine the amount of premium payments based on mortality risk and investment interest rates. The amount of the premium, of course, needs to be agreed by the policyholder. In determining the insurance product purchased, policyholder of course choose the insurance product that provides the highest satisfaction. However, once in achieving this satisfaction, policyholders have financial limitations and other expenses in the form of daily consumption needs. Therefore, in order for the premium to be approved by the policyholder, the insurance company also needs to take into account not only in terms of company profits, but also in terms of consumer satisfaction to determine the premium. This Final Project discusses the determination of premiums by calculating the satisfaction and limitations of consumers and company profits. In this Final Project, customer satisfaction is modeled with a certain utility function. The expectation from the utility function is seen as an objective function from the policyholder's point of view, while the objective function from the insurance company's perspective is the EPV (Expected Present Value) of the company's profits. The amount of premium paid is determined based on the premium that can maximize the two objective functions simultaneously with the limited wealth owned by the policyholder. The policyholder is assumed to have initial wealth as well as continuous income with expenses on consumption and premium payments. The optimal control method is used to find the optimal premium for the optimization problem. The properties of the premium obtained from the method is studied through numerical simulation. It is found that the optimal premium increases when the mortality risk, discount consumer utility function, and consumer risk aversion rate increase, but decrease more rapidly over time. Meanwhile, rising inflation causes the optimal premium to decrease, but decreases more slowly over time.