Rating Principles
Please refer back to the glossary entries on Rating and Pricing as these entries contain further background information on Rating Principles. We have learnt that rating is the term used when calculating an insurance premium on short term insurance, for example car insurance.
Rating is also known by the name of ratemaking. We have also learnt that an insurance rate is the basic price asked on any given unit of exposure. As an example, in car insurance different rates will be calculated for the risks of fire, theft, accidental damage and third party claims. Depending on what type of car insurance you choose, each rating for the number of exposure units will be added together to arrive at the car insurance premium you will be asked to pay.
The principles an insurance company use in rating include the following:
- Being reasonable: to ensure that the average insured person can afford the premiums.
- Adequate reserves: The insurance company must maintain adequate reserves to ensure that it remains a profitable organization.
- Simplicity: The system used must be inexpensive and workable so that both employees of the insurance company and the insured persons can understand the system.
Stability: The pricing structure should remain stable. If there are huge upward movements of insurance price it will cause a public uproar and damage the image of the insurance industry as a whole.