Premium Rating: Methods and Problems

Many factors need to be taken into account in setting the premium rate for an insurance contract. The more important ones, which are discussed in this chapter, are illustrated by the following breakdown of the office premium. risk premium: claim frequency claim size claims-handling expenses effect of a deductible effect of excess of loss reinsurance loading for contingencies adjustments for inflation adjustments for investment income expenses: proportional to premium per policy overheads profit loading market forces The principles involved are clearly demonstrated in the rating of the various personal lines of insurance (householders’ insurance, motor vehicle damage and so on), for which adequate statistics are usually available and claims are normally notified and settled with little delay. The same factors need to be considered and the same basic approach to rating adopted in respect of other classes of business, but, for many of these classes, other complications arise which cloud the basic rating routine. Long delays in notification and settlement of liability claims, for example, complicate the compilation of statistics on claim frequency and claim size and the estimation of the underlying distributions for the various liability classes.