Question

Discuss methods of setting premium rates in insurance companies (Manual rating, merit rating, judgement rating)

Answer 1

Insurance Pricing: Inusrance pricing means determing the premium rates charged by the insurance companies

Methods of setting insurance premium rates

1) Manual Rating

Manual Rating is also known as Class Rating..Manual Rating means that exposures with similar characteristics are placed in the same underwriting class, and each is charged the same rate.Manual rating is used when the factors causing losses can either be easily quantified or there are reliable statistics that can predict future losses. The class is defined through statistical studies as a group with specific characteristics that reliably predict the insured losses of that group. This method of determing premium rate is simple to apply and premium quotations can be easily obtained under this method. Class rating method is widely used in workers compensation, life and health insurance etc.

2) Merit Rating

A merit rating is based on a class rating, but the premium is adjusted upward or downward according to the individual customer, depending on the actual losses of that customer.Merit ratings are used to vary the premium from what the class rating would yield based on individual factors or actual losses experienced by the customer.  Merit rating is based on the assumption that the loss experience of a particular insured will differ substantially from the loss experience of other insureds.

3) Judgement Rating

Judgment ratings are used when the factors that determine potential losses are varied and cannot easily be quantified.and hence each exposure is individually evaluated. Because of the complexity of these factors, there are no statistics that can reliably assess the probability and quantity of future losses. Hence, the rates are determined by the underwriter's judgement.This rating method is used in determining rates for ocean marine insurance.