Pricing
objectives
I. Rate adequacy: To avoid financial problems and
insolvency, insurance company rates must be adequate in the light of benefits
promised under the company’s insurance products. Rate adequacy means that for a
given block of policies, total payments collected now and in the future by the
insurer plus the investment earnings attributable to any net retained funds are
sufficient to fund the current and future benefits promised plus cover-related
expenses.
II. Rate equity: Equity means charging premiums
commensurate with the expected losses and other costs that insured bring to the
insurance pool. The pursuit of equity is one of the goals of underwriting
(classification and selection of insured).
III. Rates not excessive: Rates should
not be excessive in relation to the benefits provided. This objective is
achieved by establishing a ceiling on the rates. Competition discourages
excessive pricing.