Ratemaking and Pricing

Pure premium method, loss ratio method, experience rating, and classification.

Key Concepts

• •Pure premium method: expected losses per exposure plus expenses and profit
• •Loss ratio method: adjusting current rates based on actual-to-expected loss ratios
• •Loss development: using development triangles to estimate ultimate losses
• •Trending: adjusting historical data for frequency and severity trends
• •Expense loading: fixed and variable expenses in the premium calculation
• •Classification rating: risk variables, relativity factors, and class plans
• •Experience rating: adjusting premiums based on individual risk experience
• •Schedule rating: subjective premium modifications based on risk characteristics
• •Retrospective rating: premium adjustment after the policy period
• •Regulatory considerations: rate filings, prior approval, and use-and-file

Study Tips

• 1.Understand the full ratemaking pipeline from data collection to final rate indication.
• 2.Practice loss development triangle calculations until they are second nature.
• 3.Know the difference between prospective and retrospective experience rating.
• 4.Work through problems that combine trending, development, and expense loading.
• 5.Understand regulatory constraints and how they affect the ratemaking process.

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