Price Mix of Insurance Sector


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Price Mix of Insurance Sector

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In the insurance business, the pricing decisions are concerned with the premium charged against the policies, interest charged for defaulting the payment of premiums & credit facilities, commission charged for underwriting & consultancy services

 

Premium:

Premiums are the periodic payments usually monthly or quarterly that the policy holder pays to the insurance company to purchase and keep a policy in force.

For example in case of life insurance according to the policy it may be the amount payable during the endowment term of the policy or until the death of the life assured whichever is earlier.

The basis on which the insurance company decides the amount of premium to be paid by each person is determined mainly by 3 factors:

  • Mortality Tables:

All insurance companies refer to different mortality tables. These tables differ from country to country. The mortality table indicates the probability of a person dying in a particular age group. For e.g. in an age group of 25-30 years, the probability might be just two, but this probability would increase for a higher age group of 45-50 years.

Life Insurance Company (LIC) with its long-standing presence has a mortality table, which is grossly outdated. Some other insurance companies have got their own tables but they are more or less in line with that of LIC.

  • Expected Surplus:

The premiums collected by the insurer are invested in capital markets. There is a fixed investment pattern for the insurer. Out of the surplus earned on the premiums invested, 95% is distributed to the policyholders and the insurance company retains the balance 5%.

  • Expenses:

An insurance company has to incur expenses in the form of commission to agents, office expense, advertising expense, salaries to employees. These expenses are to be managed by the company in the 5% surplus earning which they earn as mentioned above.

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We, at BMS.co.in, believe in sharing knowledge and giving quality information to our BMS students. We are here to provide and update you with every details required by you BMSites! If you want to join us, please mail to contact@bms.co.in.

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