The purpose of rate making is to set the prices of insurance products in such a way that it provides sufficient income to pay for the projected claims based on both experience and exposures, as well as all expenses that the insurer has to incur in the selling and administration of the product.
In addition insurers would like to have a margin for adverse deviation and a reasonable return on the capital employed. There is also another requirement for ensuring proper rate making. The rates of insurers are subject to regulatory review from time to time by the insurance regulator.
The standard for the regulator is that the rate shall not be inadequate, excessive or unfairly discriminatory as between risks of like type and quality. There are several other subsidiary objectives that must be followed while developing a premium rating system, viz Stability, Responsiveness, Provision for Contingencies and Incentives.
Courtesy : General Insurance Underwriting Book published by Sashi Publications
