Page 153 - DCOM309_INSURANCE_LAWS_AND_PRACTICES

Insurance Laws and Practices

Notes which shows the mortality rate separately for each age. A life table is necessary to give a good
estimate of life expectancy.

8.5.4 Application of the Theory of Probabilities to the Mortality Table

The statement was made earlier in this unit that risk in life insurance is measured by the
application of the laws of probability to the mortality table. Now that these laws are understood
and the mortality table has been explained, a few simple illustrations may be used to show this
application. Suppose it is desired to insure a man aged 35 against death within one year, within
two years, or within five years. It is necessary to know the probability of death within one, two,
or five years from age 35. This probability, according to the laws heretofore explained, will be
determined according to the mortality table and will be a fraction of which the denominator
equals the number living at age 35 and the numerator will be the number who have died during
the one, two, or five years, respectively, following that age. According to the table, 81,822
persons are living at age 35, and 732 die before the end of the year. Hence the probability of
death in one year is 732/81822. During the two years following the stated age there are 732 + 737
deaths, or a total of 1,469. The probability of dying within two years is therefore 1469/
85822.Likewise the total number of deaths within five years is 732 + 737 + 743 + 749 + 756 or 3,716,
and the probability of dying within five years is thus 3716/81822.
Probabilities of survival can also be expressed by the table. The chance of living one year
following age 35 will be a fraction of which the denominator0 is 81,822 and the numerator will
be the number who has lived one year following the specified age. This is the number who are
living beginning age 36, or 81,090, and the probability of survival for one year is therefore
81090/81822. These illustrations furnish an opportunity for a proof of the law of certainty. The
chance of living one year following age 35 is 81090/81822 and the chance of dying within the
same period is 732/81822. The sum of these two fractions equals 81822/81822 or 1, which is
certainty, and certainty represents the sum of all separate probabilities in this case two, the
probability of death and the probability of survival. In like manner many more instructive
examples of the application of these laws to the mortality table could be made, but they need not
be carried further at this point, for the subject will be fully covered in the units on “Net Premiums”.

Self Assessment

Fill in the blanks:
11. Mortality rates are based on purely how many die of any reason in a …………………………

12. A mortality rate may be used to describe the chances of ……………………………………….
in the treatment of a disease.

8.6 Role of LIC

You will be surprised to know that insurance in India can be traced back to the Vedas. For
instance, Yougkshema, the name of Life Insurance Corporation of India’s corporate headquarters,
is derived from the Rig Veda. The term suggests that a form of ‘community insurance’ was
prevalent around 1000 BC and practised by the Aryans.
Bombay Mutual Assurance Society, the first Indian life assurance society, was formed in 1870.
Other companies like Oriental, Bharat and Empire of India were also set up in the 1870–90s.
The Insurance Act was passed in 1912, followed by a detailed and amended Insurance Act of 1938
that looked into investments, expenditure and management of these companies’ funds.

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