How is insurance pricing calculated? This is a common question asked by every consumer buying insurance. In order to understand the topic better we will look at the two basic ways of calculating insurance pricing for property and liability.
1. Class or Manual Pricing: This applies to a "class" or group of consumers with a similar exposure. For example: You will group the electricians together with other electricians. Once a group of consumers are identified, the insurance company will us two calculation methods:
a) Pure Premium Method - The total claims compared to the number of consumers in that group.
b) Loss Ratio Method - Pricing adjusted to reflect claims that have occurred.
2. Individual or Merit Pricing: Focused on the clams experience of individual consumer. This type of pricing can be complex and uses several methods for calculation:
Experience Pricing - Uses a claims made calculation to determine the pricing based on the last 3-5 years.
Judgement Pricing - Prices each company individually based on a variety of factors.
Schedule Pricing - Setting a base for a group of consumers, then adjusting the price based on individual differences of each consumer.
Retrospective Pricing- Adjusts the pricing after the policy year to accommodate fluctuations.
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The Base Team
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