Munich Personal RePEc Archive

How Much Do We Save If We Move From Commercial to Social Insurance?

Nizam, Ahmed Mehedi (2019): How Much Do We Save If We Move From Commercial to Social Insurance?

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Abstract

Commercial insurance system acts like a memoryless system in a way that the premiums paid by the policyholders in one accounting period will be of no avail to them during subsequent periods. Here, we argue that if the insurance scheme is implemented as a not-for-profit trust fund (social insurance) instead of a for-profit limited liability company (commercial insurance) then it will effectively and less expensively hedge against unforeseen losses. If the profit of the insurance company is retained instead of being distributed to the stockholders and there is no agency commission then after a certain number of years, all upcoming claims can be addressed from the interest income of the accumulated profit and the policyholders do not need to pay any premium afterwards. Here, we algebraically calculate the time period required to achieve such a perpetual insurance system as the policyholders after a certain period of time, do no longer need to pay any premium in order to get coverage from losses. In the next step, we empirically calculate the required time period to attain a perpetual zero premium insurance scheme for some 20 (twenty) general insurance companies incorporated in Bangladesh.

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