Why Pricing Matters

The Price Must Be Right

Insurance pricing is unlike pricing in most industries. When a supermarket sets the price of rice, they know exactly what it cost them. When an insurer sets a premium, they're pricing something whose true cost won't be known for months or years: because the claims haven't happened yet.

This fundamental uncertainty is what makes actuarial pricing both essential and difficult. Get it wrong in either direction and you're in trouble:

Price too low: You attract lots of business but can't pay claims. Your loss ratio spirals above 100%. Your reserves are inadequate. NIC starts asking questions. Eventually, insolvency.

Price too high: You lose business to competitors. Your agents can't sell. Your market share shrinks. Customers who do buy feel overcharged, which feeds the narrative that insurance is a rip-off.

The sweet spot is a premium that is adequate (covers expected claims + expenses + profit margin), competitive (customers are willing to pay it), and equitable (similar risks pay similar prices).

Components of an Insurance Premium

Every premium is built from these components:

Pure risk premium (loss cost): The expected cost of claims. If 5 out of every 100 motor policies result in a claim averaging GHS 15,000, the pure risk premium is GHS 750 per policy (5% × GHS 15,000).

Expense loading: The cost of running the business: staff salaries, office rent, technology, regulatory fees. Typically 25–35% of premium in Ghana.

Commission: What you pay agents and brokers to distribute the product. Typically 15–25% for motor, 20–30% for fire, 30–40% for life in Ghana.

Profit margin: The return shareholders expect for putting their capital at risk. Typically 5–10%.

Contingency loading: A cushion for adverse deviation: the recognition that actual claims might exceed expected claims. Especially important in Ghana where data is limited and volatility is high.

When you add these together, you get the gross premium: what the customer actually pays. Understanding this breakdown is critical for anyone in the industry, not just actuaries.