Answer to Question #158323 in Management for Prabhdeep

Question

1. Explain the concept, different types and various determinants of insurance 

pricing.

2. Briefly discuss Reinsurance and the covers available under reinsurance to a 

primary insurance company. Also discuss how reinsurance affects ratemąking of 

a primary insurance company.

3. Explain the role of agents and development staff in the marketing of life and general insurance products.

Answer 1

1.Explain the concept, different types and various determinants of insurance pricing.

concepts

Insurance is a contract, represented by a policy, in which an individual or entity receives financial protection or reimbursement against losses from an insurance company. The company pools clients' risks to make payments more affordable for the insured. The basic principle of insurance is that an entity will choose to spend small periodic amounts of money against a possibility of a huge unexpected loss.

types of premium

1.Based on premium paid

a)Level premium: make fixed payments till the end of policy

b)Flexible premium:holder can make changes to premium paid

2.Based on insurance purchased

a)Life insurance premium:cover against death of policyholder or any mishap to the family

b)Health insurance premium:provide cover for medical expenses, treatment and hospitalization

c)Car insurance premium:insurance coverage to car both third party and comprehensive

d)Travel insurance premium: covers health insurance and life when traveling

various determinants of insurance pricing

•Expected Claim Costs-•The premium that just covers expected claim costs is called the pure premium. Large number of homogeneous buyers, i.e. each has the same loss distribution.

•Administrative Costs-Fair Premium must cover administrative costs (expense loading), such as marketing, underwriting, loss adjustment, premium taxes, and underwriting income taxes

•Investment Income-Fair premium is reduced to reflect investment income on premiums. Fair Premium = Present Value of Expected Costs

•Fair Profit Loading/Risk load/capital loads-•Amount of capital needed to support the coverage

2. Briefly discuss Reinsurance and the covers available under reinsurance to a 

primary insurance company. Also discuss how reinsurance affects ratemąking of 

a primary insurance company.

Reinsurance is the practice in which insurers trasfer parts of their risk to other partiies after an agreement to reduce the possibility of paying a large commitment resulting from an insurance claim.

Ceding party is the party that diversifies its insurance portfolio.

Reinsurer is the party that accepts a portion of the potential obligation in exchange for a share of the insurance premium.

Types of Reinisurance

Facultative coverage protects an insurer for an individual or a specified risk or contract.The reinsurer holds all rights for accepting or denying a facultative reinsurance proposal.

A reinsurance treaty is for a set period rather than on a per-risk or contract basis. The reinsurer covers all or a portion of the risks that the insurer may incur.

Effects on rate making

Helps in improving solvency. By sharing their risk with reinsurers, primary insurers can benefit from a relief on capital by increasing its ability to withstand the financial burden when unusual and major events occur. The relief can enable the primary insurance company to ease their ratemaking for their specific policies.

3. Explain the role of agents and development staff in the marketing of life and general insurance products.

1. Agents and development staff bring innovative marketing practices to the insurance marketplace. This deepens and broadens insurance markets by increasing consumers’ awareness of the protections offered by insurance. Therefore, help sell insurance products and services to its customers.
2. Dissemination of information to consumers. Help give sound financial advisory services and customer support to the clients. They can explain what a consumer needs, and what the options are in terms of insurers, policies and prices.