6/30/2016 FINSUMA-RATING (2016 + Rating * Rating refers to the pricing of insurance and the «aleulation of insurance premiums. Paid by the Insured asa result of multiplying 9 rete determined by actuaries by the number of ‘exposure units and then adjusting by various rating plans (a process called rata) Rate isthe price per unit of insurance and Exnosure Units the unit of measurement used in insurance prcing which varies by Ine of Insurance pricing is ferent from other pricing Schemes. In thatthe insurance company does ot know in advance what actual costs would be and the premium paid may be inadequate against ‘actual claims and expenses, Actuary ~ person who determines rates Premiums. The objectives are to calculate Bremiums that wil make the business profitable, {enable the company to effectively compete and be able to pay claims and expenses as they occur Rate making is regulated by the government ‘and certain statutory requirements and reg Ulatory requirements must be met, Classification: 42. Regulatory objectives ~ Goal of insurence ‘egulation is to protect the public. The fist regulatory requirement is that rates must be adequate which means that measures should bbe high enough to pay all losses and expenses, ‘The problem is that premium is paid upfront and may be inadequate to pay costs incurred during, ‘the policy period. itis only after the period of, Protection that an insurer determines actual ‘costs incurred, * 2, The second regulatory requirement is that Fates must not be excessive. That I, the rates should not be so high that policy holders are paying more then actual value of thelr protection. 3. The 3" requirement says that rates must not be unfair discriminatory. It means that the ‘exposures that are similar with respect to losses and expenses should not be charged signleanty ciffarentrates.s 2, Business objectives: All insurers should be guided in designing a Fating system which basically all of these ‘objectives: Simplicity responsiveness, stability and encouragement of loss control6/30/2016 Simplicity ~ Rating should be easy to Lnderstand so that producers can quote Premiums with minimum amount of time and ‘expenses. Small premiums do not justify a lerge amount of time and expense while commercial purchasers should understand hhow premiums are determined so that they can take active steps to reduce their insurance rates, Rates should be stable over short periods of time 50 that consumers satisfaction can be maintained. If they change rapidly the can become dissatisfied and loak to government for control of rates or enact a program, Rates should be responsive overtime to changing loss exposures end changing economic concitions. Rates should change when loss exposures increase. Rates should change when ‘economic conditions change. Rates should encourage loss control ectivties Such efforts ate designed to reduce frequency {and severity of losses which in turn can Insurance affordable, Basic rating definitions: Rate and exposure unit have been defined. Pure premium refers to that portion of the rate needed to pay losses and loss adjustment expenses, * Loading ~ refer to the amount that must be ‘added to the pure premium for other expenses, profits and a margin for contingencies. * The gross rate consists of the pure premium and a loading element. * Gross premium paid by the insured consists of the gross rate multiplied by the number of exposure units + Rate making methods: ‘There are 3 base rating making methods in property and casuat insurance “JUDGEMENT CLASS MERIT RATING. Writ rating an be Broken don further to Schedulingratingy expenence ating sd retrospactve rating Judgment rating ~ Each exposures incvidualy eralvted snd the rates deterred anette ‘egrent ofthe utderwter. Thiet use when the Seposures reso divorce hata cass rte connote be ‘clelated or wien crecine lass sates are so posse, * This used widely in acean marine insurance and some inland marine insurance. Because ocean vessel, ports cargoes and waters traveled are diverse, some ocean marine rates ere determined largely bythe judgment * Class raring ~ Most rates are class rating. Exposures with similar characteristics are placed in the same underwriting class and exch is ‘hanged the same rate. The rate charged reflects the average oss experience for a cass as ¢ whole6/30/2016 Class rating is based on the assumption that future losses willbe determined largely by the same st of factors, Class rating is simple to apply and premium {quotations can be quickly obtained. As such , it isideal for personal lines. * Clos rating s aso called manual rating. tls Widely used in homeowners Insurance, private Passenger auto insurance, workers compensation ‘and health insurance the roam method andes * Tore re2 boi metod foc daring the cls tes tod. * 1 Premium method ~ Can be determined by dng the gercanosn inca een ipeoes by the numberof epocure unt ene ses, clude loses paid ring the secountng pelos pay mount held eserves fo the fue poy of ses, itt hve sea secre cung the see ee sthered Iss teu ose tot see Sets he clu peviod uhethar oy not tey hove Loca sas Re endef the period Loe sapstmant sperses ag {sar incurred bythe company tsdusing et Sng the seme accountng prod. Thea esto ad ‘losing ior expensen, poi and martin Wr tottoce |+ Exvense loading is usually expressed as @ ercentage of the gross rate and i called EXPENSE RATIO. The final gross rate can be determined by dividing the pure prernium by ‘one minus the expense ratio, 2, Loss ratio method - Under the loss ratio ‘method, the actual los rata is compared with the expected loss ratio, and the rata is adjusted accordingly. The actual loss rato is the ratio of incurred losses and lose adjustment expenses to earned premiums. The expected loss ratio isthe percentage of ‘the premium that can be expected to be used to pay losses. For example, assume that aline of insurance has * Incurred losses and loss adjustment expenses ‘of $800,000 and earned premiums of $1 ‘ilion. The actual loss ratio is 80 percent. if the expected loss rato is 70 % the rate must be increased 14,3 %. This is shown : * Rate change = AcE divided where Ais the ‘actual loss ratio while E= Expected loss ratio 50.80- 0.70 divided by .70 500.143 Or 14.3 % ‘Merit Rating ~ Class rates { manual rates) are adjusted upward or downward based on individual loss experience. Merit rating is based on the assumption that the loss experience of a particular insured will differ from the loss experience of other insureds. Thus, they are modified upward or downward depending on individual loss experience . 3 types: