Ratemaking is the process of establishing rates. This function is carried out by actuaries.
Rate is the price of a unit of insurance for a period of one year.
Premium is the total cost of an insurance policy.
E.G. A piece of jewellery has a rate of 50 cents per $100 of coverage. $10,000 of coverage is required.
Rate (.50 / $100) X Amount of coverage ($10,000) = Premium $50
Premium Determination
The law of large numbers – the larger the sample the more reliable the outcome
The theory of probability – the likelihood of an event expressed as:
The number of actual occurrences / The number of possible occurrences
= the probability or the chance of an event happening
Other factors include; the size of the sample, the period in time over which a sample is taken and conditions in the past relative to future conditions.
