Question

Q1. Discuss methods of setting premium rates in insurance companies (Manual rating, merit rating, judgement rating)

Answer 1

Rate making or insurance pricing is the determination of rates charged by insurance companies. The three basic rate making methods are judgement rating, merit rating, manual rating. They are explained as follows:

• Judgement rating- It is that method of premium rate making for which evaluation is done individually for each exposure. The rate is determined largely by the underwriter's judgement based upon their subjective evaluation of that risk. These ratings rely heavily on the experience, perception and talent of the underwriter who makes the final evaluation.
• Manual rating- It is an insurance premium rate based on some unit of insurance. It is based on average claims data for a big number of groups. This data is then adjusted for specific groups based on the group characteristics.
• Merit rating- A merit rating plan is used in several cases of insurance but most commonly in personal auto. In this type of rating the insured's premium varies up or down depending upon the person's past record as a driver or operator of the vehicle. A high rating can translate to a high premium.