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IAI Actuarial Core Principles · Business Economics · Pricing strategies in the financial services sector

A life insurer sets the premium for a new term plan by estimating expected claims, expenses and commission per policy, and then adding a fixed percentage margin for profit and contingencies. Which pricing approach is this?

This is cost-plus pricing. The insurer estimates expected claims, expenses and commission, then adds a percentage margin for profit and contingencies, so the price is derived from costs rather than from rivals' prices, demand conditions or entry strategy.

  1. ACost-plus (mark-up) pricingCorrect
  2. BPenetration pricing
  3. CPrice skimming
  4. DCompetitor-based price matching
  5. Loss-leader pricing

Explanation

The price is built up from estimated costs and a percentage margin is added. This is the defining feature of cost-plus pricing. The other approaches start from market entry goals, rivals' prices or cross-selling aims rather than cost build-up.

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