Rate and Rating
We have already looked at pricing of short term insurance and in particular at that of car insurance. Please refer to the glossary entry named pricing. Rate is the term used to describe the cost of a unit of insurance that is used to calculate the insurance premium you will pay on your car insurance.
The rate is usually expressed as a rate percentage. The rate is also called the pricing factor. There are various rating factors used when calculating car insurance premiums. A rating basis refers to the value given to each rating factor but it could also mean a set of rating factors – the rating structure.
A rating agency is an independent company that will study the financial statements of an insurance company and then give an opinion of the financial strength of the insurance company to meet its obligations. Obligations, in this sense, refer to the ability to meet the claims from insured parties.
A rated policy is one where the insurance company may expect a higher-than-average potential of loss. A rated car insurance policy will carry a higher premium and also have special exclusions applied to it. An example – a person under twenty-five is seen as a higher risk and is asked an additional premium.