If a business enterprise is to be successful, the pricing strategies must be objective. In the same way, for an insurer, ratemaking must be as objective as possible if the overall success of the insurance mechanism is to be accomplished. However, insurers face several hurdles in achieving this. There is hardly any need to emphasize that the price of a product has the ultimate say in deciding whether it would eventually generate a profit for the producer. While there are several other factors that also go into deciding whether a firm is profitable in the long run, it is the price which clinches the issue. In pricing a tangible product, there are several inputs that are readily available for the firm and to that extent, pricing a tangible product is relatively simpler, subject to some factors like market forces, demand and supply forces, and the dividend strategies of the organization.

When it comes to insurance, ratemaking is not such an easy task. It has to necessarily depend upon several factors which are based on estimates-about the likelihood of an event happening in future taking a cue from what has happened in the past. Insurers undertake this task by an inductive reasoning. Although insurers have the advantage of access to information about past happenings and projections about the future, ratemaking is not at all an easy task. Especially, in a scenario, where any probable estimates of the likelihood of happening of the events, man-made as well as natural, are taking a beating, arriving at rates based on these estimates is nothing short of a Herculean task. For one thing, in a competitive scenario, the rates have got to be in tune with the market forces; for another, credibility of rates has to be kept at the top of the priorities. Once there is even a semblance of erosion of credibility, it could sound the death knell for the insurers. Hence, insurers have to draw a delicate balance between competition and credibility.