For example if the product is totally new in the market, and has no prior history before, how would an insurance price its premium to the consumers. What factors do they consider when doing this? How do they evaluate risks of the product. I am sure they have a formula in store that they might make use of. Can someome shed some light on this?
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from what i understand of the insurance world (which is very little) they set premium values comparable to similar products already in the market. from there if there is a loss on their investment, so to speak, they reevaluate the product value and stick it to us from that point on plus an adjustment to regain the said loss. one thing i can guarantee is that if they have over valued something we won’t start seeing any refunds!!
There is no single formula, but here are a few thoughts:
1. Is this new product more risky or less risky than some existing product for which the price is known?
2. Can we make a rough estimate of the frequency of claims, and can we assume the average amount of each claim will be some percent of the total policy limit?
3. What is the most that we think people will pay? What is a likely worst-case scenario of claims?
4. Is there some sort of theoretical mathematical model we can construct that might simulate potential claims activity?
5. Is there any outside, non-insurance data that might be useful?
yes they have a formula it differs from company to company.