Ans 3 (a)

Rate making, or insurance pricing, is the determination of rates charged by insurance

companies. The benefit of rate making is to ensure insurance companies are setting fair and
adequate premiums given the competitive nature. Rate making, or insurance pricing, is the
determination of rates charged by insurance companies. The benefit of rate making is to
ensure insurance companies are setting fair and adequate premiums given the competitive
nature. or insurance pricing, is the determination of rates charged by insurance companies. The
benefit of rate making is to ensure insurance companies are setting fair and adequate premiums
given the competitive nature.
The following are fundamental terms that are commonly used in rate making. A rate "is the price
per unit of insurance for each exposure unit, which is the unit of measurement used in insurance
pricing". The exposure unit is used to establish insurance premiums by examining parallel
groups
The pure premium "refers to that portion of that rate needed to pay losses and loss-adjustment
expenses". The loading "refers to the amount of the premium necessary to cover other expenses,
particularly sales expenses, and to allow for a profit". The gross rate "is the pure premium and
the loading per exposure unit". Finally, the gross premium is the premium paid by the insured
consisting of the gross rate multiplied by the number of exposure units.
Also,
Rate making has several objectives under regulatory requirements regulated by the states and
business objectives due to the goal of profitability: The goal of insurance regulation is to protect
the public and three regulatory objectives are placed to meet certain standards:
 The first regulatory requirement is that rates must be adequate; meaning the rates the
insurers charge should be able to cover expenses.
 The second regulatory requirement is that rates must not be excessive; meaning rates
should not be so high that policyholders are paying more than the actual value of their
protection.
 The third regulatory objective is the rates must not be unfairly discriminatory;
meaning exposures that are similar with respect to losses and expenses should not be
charged significantly different rates.
Life insurance actuaries determine the probability of death in any given year, and based on this
probability determine the expected value of the loss payment. These expected future payment are
discounted back to the start of the coverage period and summed to determine the net single
premium. The net single premium may be leveled to convert to installment premiums. A loading
for expenses is added to determine the gross premium. With determining life expectancy, age is
the most important factor, other significant factors are sex of the individual and smoking. Thus,
an actuary can reasonably estimate the average age of death for a group of 25-year-old males,
who don't smoke.
Hence at last but not the least, Rate making, or insurance pricing, is the determination of rates
charged by insurance companies. The benefit of rate making is to ensure insurance companies
are setting fair and adequate premiums given the competitive nature.