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

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  • Nizam, Ahmed Mehedi

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.

Suggested Citation

  • Nizam, Ahmed Mehedi, 2019. "How Much Do We Save If We Move From Commercial to Social Insurance?," MPRA Paper 94293, University Library of Munich, Germany.
    • Handle: RePEc:pra:mprapa:94293
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    More about this item

    Keywords

    insurance; social insurance; commercial insurance; welfare;
    All these keywords.

    JEL classification:

    • G20 - Financial Economics - - Financial Institutions and Services - - - General
    • G22 - Financial Economics - - Financial Institutions and Services - - - Insurance; Insurance Companies; Actuarial Studies
    • H53 - Public Economics - - National Government Expenditures and Related Policies - - - Government Expenditures and Welfare Programs
    • H55 - Public Economics - - National Government Expenditures and Related Policies - - - Social Security and Public Pensions
    • I31 - Health, Education, and Welfare - - Welfare, Well-Being, and Poverty - - - General Welfare, Well-Being
    • I38 - Health, Education, and Welfare - - Welfare, Well-Being, and Poverty - - - Government Programs; Provision and Effects of Welfare Programs

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