Page 197 - Ebook health insurance IC27

Sashi Publications

Q10. Write a note on fundamentals of pricing.
Ans. Pricing is an exercise to determine the right level of premium so that the company

makes a desired level of profit after paying the claims and other expenses on a
portfolio of policies. So, an analysis needs to be done on the past data to estimate
the average claim payment per policy.

This data analysis should be done at the segment level (Age, Sum Insured,
Geographical Area, etc). These factors which affect the premium are called ' Rating
factors '. Ideally the premium rates can be set for all the rating factors, but actual
pricing usually varies due to market conditions and other practical issues.

The margin on the expected claim cost includes operating expenses, commissions,
contingency loading and profit. There may be other adjustments required on the
basis of type of the product. There might be other considerations like :
(i) Comparison with the competitors' products.
(ii) Smooth progression of premium with age, sum insured etc.
(iii) Cross-subsidy (one segment may have lower profit built-in compared to

others).
(iv) Comparison of other products of the same company.
(v) Premium guarantees etc.

Q11. Explain the concept of claim reserving.
Ans. Once a policy is sold by the insurance company, meeting the future claim payments

is the company's liability until the cover is expired. This liability needs to be carefully
calculated from time to time for internal management or statutory reporting. There
are various actuarial methods used for calculating the liabilities or reserving. The
claim department sets aside a reserve for a claim, the moment it is reported.

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