Further considerations when rating

Question 1

• The premium actually charged will differ from the office premium (6)

Answer 1

o To meet business objectives, eg to increase market share
o To maintain market share in highly competitive markets or in certain market conditions (such as the ‘soft phase’ of the insurance cycle)
o If it is difficult to establish the technical premium
o If insurers can charge certain loyal customers more (inertia pricing)
o If the market does not accept different premiums (eg between new business and renewal premiums)
o Where no-claim discounts apply

Question 2

practical considerations affecting premium rates (6)

Answer 2

o Capital availability
o Reinsurance capacity
o Sales and quote systems
o Regulations
o Relationships with sellers
o The method of sale

Question 3

o Requirements of rating factors (9):

Answer 3

 Define the risk clearly, this means that the rating factor should be correlated with the expected claims
 Do not correlate too closely with other rating factors, we should choose each additional rating factor to remove as much of the residual heterogeneity as possible
 Are practical to obtain and record, , we would not ask policyholders for their claims history over their entire lifetime
 Are objective, this avoids disputes between the insurer and policyholder over the truth of the information provided
 Are verifiable and preferably factual, this helps to prevent fraudulent behaviour
 Are acceptable to the policyholder, otherwise the insurer may lose potential customers or renewals
 Are non-manipulable
 Are acceptable to the market
 Are allowed by the regulator