Insurance Rate is a factor which is used to calculate the amount of premium. The premium is a charge for a particular insurance coverage amount. Insurance Rate is the cost of an insurance unit. Generally, it is per $1,000. The State Insurance Offices control the rates.
For same kinds of risk, the basis of the rates is historical loss experience. The Rate Regulation is the procedure in which the Rate Changes of the Insurance Companies are supervised by the states. This is done through two models: Open Competition Model and Prior Approval Model.
Open Competition States are those states where no prior approval is required by the Insurance Companies for setting up new rates. However, the commissioner of the state has the right to prohibit them if he finds them unreasonable and inadequate or discriminatory.
On the other hand, Prior Approval States are those states where the Insurance Companies has to register the proposed rate changes with the State Regulating Agencies and receive approval before going into effect.
The basis of the business of Insurance is the spread of risk. The higher the spread of risk, there is more chance that the estimation of loss will be perfect. Now it is possible for an Insurance Company to make a more correct estimation on the probable loss of 100,000 houses than on 10 houses. Previously, Insurance Companies had to utilize rates and standardized forms, which were formulated by Rating Agencies. Nowadays, large Insurance Companies apply their statistical loss data for formulation of rates. However, small Insurance Companies or Insurance Companies who are concentrating on special business lines have broad loss data, which is insufficient for making them actuarially dependable. They rely on consolidated industry data gathered by organizations like the Insurance Services Office (ISO). It offers information to facilitate formulation of rates, for example future loss estimates and expenses for loss adjustment such as legal defense costs.
The Major Credit Rating Agencies in the U.S. who performs Insurance Credit Ratings are the following:
A.M. Best Co
Duff & Phelps Inc.
Moody’s Investor Services
Standard & Poor’s Corp
Weiss Ratings, Inc.
While doing the credit ratings, they consider the following factors:
Earnings of the Company
The ability, experience, and integrity of Management
A High Financial Rating may not be equal to a High Consumer Satisfaction Rating.