Explain rate-making basics: what are rates, classes, and how experience rating can influence premiums.

Explain rate-making basics: what are rates, classes, and how experience rating can influence premiums.

• A. Rates are the cost per unit of exposure; classes group risks with similar characteristics; experience rating uses the insured's past loss experience to adjust premiums.
• B. Rates are determined randomly; classes are arbitrary groups; experience rating ignores past losses.
• C. Rates are fixed across all policies; classes have no impact on pricing; experience rating is a marketing term.
• D. Rates are always based on the insured's age and gender; classes are determined by policy length; experience rating uses future projections.

Answer: (A)

Pricing relies on aligning the price with expected risk. A rate is the price charged per unit of exposure that reflects the anticipated cost of claims, plus expenses and profit. A class is a group of risks that share similar exposure characteristics, so the insurer can apply a standardized rate to everyone in that class. Experience rating takes a specific insured’s past loss history and uses it to adjust the base rate for future premiums. If the insured has fewer or less costly losses than expected, their premium can be reduced; if losses are more or bigger than expected, the premium rises. For example, with a rate expressed per unit of payroll, a business with higher actual losses might see an higher adjustment, while a business with clean loss history benefits from a lower adjustment. The concept ties the price to both the broader risk pool (class rates) and the individual’s actual claims experience (experience rating), which is why this combination best describes rate-making fundamentals.

Pricing relies on aligning the price with expected risk. A rate is the price charged per unit of exposure that reflects the anticipated cost of claims, plus expenses and profit. A class is a group of risks that share similar exposure characteristics, so the insurer can apply a standardized rate to everyone in that class. Experience rating takes a specific insured’s past loss history and uses it to adjust the base rate for future premiums. If the insured has fewer or less costly losses than expected, their premium can be reduced; if losses are more or bigger than expected, the premium rises. For example, with a rate expressed per unit of payroll, a business with higher actual losses might see an higher adjustment, while a business with clean loss history benefits from a lower adjustment. The concept ties the price to both the broader risk pool (class rates) and the individual’s actual claims experience (experience rating), which is why this combination best describes rate-making fundamentals.