Rate Making
Process of calculating a premium so that it is adequate-sufficient to pay losses according to expected frequency and severity, thereby safeguarding against the insurance company becoming insolvent; reasonable-the insurance company should not be able to earn an excessive profit; and not unfairly discriminatory or inequitable. Theoretically, it can be said that each insurance applicant should pay a unique premium to reflect a different expectation of loss, but this would be impractical. Instead, classifications are established for applicants to be grouped according to similar expectation of loss. Statistical studies of a large number of nearly homogeneous exposures in each underwriting classification enable the projection of losses after adjustments for future inflation and statistical irregularities. The adjusted statistics are used to calculate the pure cost of protection, or pure premium, to which the insurance company adds on loads for agent commissions, premium taxes, administrative expenses, contingency reserves, other acquisition costs, and profit margin. The result is the gross premium to be charged to the insured.
Popular Insurance Terms
Present value computation of the accrued or projected benefits of a retirement plan. This computation is known as the actuarial valuation because it is based on probability (retirement ...
Principle of surplus distribution as the result of excess funds above the amount required to establish legal reserves. These excess funds are generated from three sources: mortality ...
Reinsurance broker for a primary company (the re-insured). This broker is paid commissions by the reinsurance company, just as an agent is paid commissions by an insurance company for ...
Provision by an employer for the economic and social welfare of employees. Generally include: pension plans for retirement; group life insurance for death; group health insurance for ...
Stipulations of the rights and obligations of an insured and an insurer under a policy. ...
Individual or other entity who owns an insurance policy. Synonymous with policyowner. ...
Failure to exercise proper care. Many property insurance policies exclude losses that result from negligence. Neglect is also the basis for many liability suits. If an injury can be ...
Coverage underwritten on members of a natural group, such as employees of a particular business, union, association, or employer group. Each employee is entitled to benefits for hospital ...
Total earned premiums minus total expenses and losses paid of the insurance company. ...
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