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

A private health insurer in India sets its premium rates by estimating the average claims cost per policy, adding an allowance for expenses, and then adding a fixed percentage as a profit margin. Which pricing approach is this?

This is cost-plus pricing. The insurer builds the premium from expected claims cost per policy plus an expense allowance, then adds a fixed percentage profit margin. The price is driven by internal costs rather than by rivals' prices, demand conditions or a market-entry strategy.

  1. ACost-plus (full-cost mark-up) pricingCorrect
  2. BPenetration pricing
  3. CPrice skimming
  4. DCompetitive parity pricing
  5. Price discrimination by segment

Explanation

Setting price by taking the estimated unit cost, including expenses, and adding a fixed percentage margin is cost-plus pricing. Penetration and skimming depend on market entry strategy, parity follows rivals, and discrimination charges different customers different prices for the same product.

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