Insurance pricing models can be broken down into three broad groups:
• Exposure rating
• Experience rating
• Credibility rating (a mix between exposure and experience)
Exposure Rating (or Book Rating)
Exposure Rating involves the application of a premium rate to an underlying measure of exposure. Exposure rating is common in all areas of general insurance pricing.
For the Personal Lines market, e.g. Motor and Household, rating is now very established via a multi-factor approach i.e. Generalised Linear Modelling. The Commercial Lines market is making an increasing use of these multi-factor models for SME business.
The London Market makes use of rates on exposure on almost all classes of business and makes extensive use of Increase Limit Factors (ILFs) in the pricing of excess of loss business.
EMB assists clients with many aspects of exposure rating:
• Setting a base rate – calculating the level of premium needed on the standard (base) risk.
• Calculating relativities – calculating how the rate on one risk within the portfolio should differ from the rate on the standard (base) risk. Often this is done using the market leading tool EMBlem (see EMBlem).
• Portfolio Reviews – assessing items such as the profitability of the current rating book as well as the impact of changing the rating book. To help with this EMB have developed Rate Assessor (see Rate Assessor)
• Geographical assessment of risk – assessing and categorising geographically distributed risks. To help with this EMB have developed Classifier (see Classifier)
• Increased Limit Factors – assisting clients in developing and reviewing their ILFs. Rating via ILFs is included within PrisEMB (see PrisEMB)
• Rating Engines – developing bespoke rating engines for clients that use a bespoke front-end to access the rating table and to save quotations.
• Component Pricing – developing bespoke rating engines that take a more flexible approach to rating by building up premiums based on separate allowances for risk premium, expenses and profit.
Experience Rating
Experience rating involves using an insured’s historic loss experience to determine the appropriate premium on the account. Commercial lines, e.g. Motor Fleet, EL/PL etc., and London market lines make use of experience rating to price large individual accounts and also to evaluate the aggregate rating of binders and lineslips.
EMB assists clients with many aspects of experience rating:
• Estimating Expected Losses – estimating the losses that would arise under the contract allowing for trend, development, changes in exposure and contract features.
• Analysis of Different Contract Structures – enabling clients to look at the impact of changing the contract structure
• Conversion of Loss Cost to Price – considering both the risk profile and the rating environment.
• Return on Capital – Assessing the capital required by contracts and establishing whether a contract meets the client’s return on capital targets.
• Data processing – Converting the client’s data into a format suitable for use in pricing.
• Data collection – Specifying the data that needs collection to allow individual account rating.
Credibility Rating
EMB can help clients develop a formula driven approach to weighting together the exposure rating premium with the experience rating premium to form a credibility weighted premium.
