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Pricing of microinsurance products
21.4 Determining the premium
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Th e premium essentially includes three components – a risk premium equating
to expected claims; 2) operating expenses; and 3) a profi t margin – as illustrated
in Figure 21.2. 3 Th is section considers these three items, and other pricing considerations,
in more detail.
Figure 21.2 Determining the premium
Gross premium
21.4.1 Calculating the risk premium
Once assumptions have been set for the expected frequency and severity of
claims, the risk premium can be calculated, taking into consideration the items.
Th e risk premium represents the expected cost of claims over a specifi c period
and, in its simplest form, is calculated using the following formula, as illustrated
in Table 21.3.
Risk premium = expected claims severity x expected claims frequency.
Table 21.3 Sample risk premium calculations
Risk premium – Claims distribution (frequency and severity)
– Co-payments
– Cover limits
– Trends
– Risk profi le
Expenses – Administrative
– Distribtion
– Reinsurance
Profi t margin
Life product product Benefi ts (severity) 10 000
Expected death rate (frequency) 5%
Risk premium 10 000 x 5% = 50
Health product Treatment costs 2 levels: 5 000 or 10 000; 75% of
the time, the incurred cost is 5 000;
25% of the time 10 000
Frequency 4 per cent
Risk premium (5 000 x 75%) + (10 000 x 25%) x 4% = 250
3 In this chapter, the term “premium” is used to refer to gross premium; the “risk premium” is specifi -
cally referred to as such when applicable.