Pricing, or “ratemaking”, is the process used to determine what prices, or rates, are charged by an insurance company. The pricing is largely determined by information from underwriters, those who choose which risks or determine the acceptability of those risks, and actuaries, those who compile and analyze statistics and use that information to calculate insurance risks and premiums.1
- Underwriters and actuaries take data sets and combine them with other objective data that is statistically related to losses. From this information, a company generates a price they will charge.2
- Pricing is highly regulated by state laws and enforced by government insurance commissioners and state departments of insurance.
- Under various regulations, states mandate that rates must be adequate to ensure that the policyholder is fully protected, and that the insurance company is not unduly burdened.
- Insurance laws and rates vary by state, and guidelines exist to protect both companies and policyholders.
- Finally, rates cannot be excessive or unfairly discriminatory.
This information is a simplified explanation of a very complex equation of factors that determine what you pay for your coverage. For more information, contact your Merchants independent insurance agent.
*Originally published March 5, 2021
Sources:
- Merriam-Webster Dictionary
- NAMIC Issue Analysis, NAMIC Advocacy. “Why Your Insurance Costs What It Does: A Risk-Based Pricing Primer”.
