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An Indirect Approach to Construct Insurance Service Price Index

Author

Listed:
  • Mamta Suri

    (Insurance Regulatory and Development Authority)

  • R. K. Sinha

    (Insurance Regulatory and Development Authority)

Abstract

We propose an indirect method to construct the price index for insurance sector, which does not require (or partially requires) the knowledge of prices of various products across time. It is important to appreciate that pricing of products is done actuarially with statistical adjustments by the insurance provider, which have underlying assumptions and several bases, such as, mortality rate, discounting rate (or interest rate), lapse rate etc. These bases do change over time, which leads to corresponding changes in the price of insurance products. Nevertheless, the mathematical framework remains the same. Accordingly, rather than tracking the prices of products as such, it is demonstrated to track the changes in these said bases over time, which could indirectly measure the change in prices of products without knowing them. The paper provides illustrations from hypothetical products and displays very interesting applications. In the end, it discusses the need to have close coordination between the government’s statistical office/regulator, the constructor of index, and the insurer, one of the users of index. This is because the knowledge of changes in the bases rests with the insurer, which would be required to construct the indices under the proposed approach.

Suggested Citation

  • Mamta Suri & R. K. Sinha, 2013. "An Indirect Approach to Construct Insurance Service Price Index," International Journal of Academic Research in Accounting, Finance and Management Sciences, Human Resource Management Academic Research Society, International Journal of Academic Research in Accounting, Finance and Management Sciences, vol. 3(1), pages 332-345, January.
    • Handle: RePEc:hur:ijaraf:v:3:y:2013:i:1:p:332-345
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    References listed on IDEAS

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    1. Kellner, S & Mathewson, G Frank, 1983. "Entry, Size Distribution, Scale, and Scope Economies in the Life Insurance Industry," The Journal of Business, University of Chicago Press, vol. 56(1), pages 25-44, January.
    2. Houston, David B & Simon, Richard M, 1970. "Economies of Scale in Financial Institutions: A Study in Life Insurance," Econometrica, Econometric Society, vol. 38(6), pages 856-864, November.
    3. Randall Geehan, 1977. "Returns to Scale in the Life Insurance Industry," Bell Journal of Economics, The RAND Corporation, vol. 8(2), pages 497-514, Autumn.
    4. Gardner, Lisa A. & Grace, Martin F., 1993. "X-Efficiency in the US life insurance industry," Journal of Banking & Finance, Elsevier, vol. 17(2-3), pages 497-510, April.
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