%%pdf-export%% [[Actuarial Notes Wiki|Wiki]] / [[Actuarial Methods]] / ==Insurance Pricing== > P&C Insurance: **Insurance Pricing**, or **Ratemaking**, is the ==process of establishing rates used in insurance== or other risk transfer mechanisms. > - [Statement of Principles Regarding Property and Casualty Insurance Ratemaking (PDF)](https://www.casact.org/sites/default/files/2021-05/Statement-Of-Principles-Ratemaking.pdf) (**Casualty Actuarial Society, 1988**) > Life Insurance: **Pricing** is ==the process of determining charges for, and benefits provided by, an insurance policy or annuity contract at issue==, including evaluating the product’s profitability and underlying risks. > - [Pricing of Life Insurance and Annuity Products (PDF)](https://www.actuarialstandardsboard.org/wp-content/uploads/2018/07/asop054_193.pdf?utm_source=chatgpt.com) (**Actuarial Standards Board, 2018**) | Insurance Pricing Method | Description | | ------------------------------------- | ---------------------------------------------------------------------------------------------------------------------------------------------- | | [[Rate Indication]] | Estimate the rate change needed to balance insurance costs and premiums for a future period. | | [[Risk Classification\|Segmentation]] | Predict the probability and severity of claims for homogenous risk groups. | | [[Actuarial Present Value]] | Estimate the expected value of the present value of a contingent cash flow stream. | | [[Trend Analysis]] | Estimate the value of premium, losses, and expenses trended to a future time period. | | [[Credibility Theory]] | Combine historical data with current observations to improve predictions. | | [[Experience Rating]] | Adjust premium based on the relative amount of loss that an insured party experiences - commonly used for [[Worker's Compensation]] Insurance. | ## Best Practices of Insurance Pricing The [[Actuarial Standards of Practice (ASOPs)]] publishes several standards that set best practice for insurance pricing. | Standard | Description | | ------------------------------------------------------------------------------------------------------------------------------------------------------------- | ------------------------------------------------------------------------------------------------------------------------ | | 📄 [ASOP 12 (PDF)]((https://www.casact.org/sites/default/files/2021-03/5_ASOP_12.pdf)) | [[Risk Classification]] | | 📄 [ASOP 13 (PDF)](https://www.casact.org/sites/default/files/2021-03/5_ASOP_13.pdf) | [[Trending]] Procedures in Property-Casualty Insurance | | 📄 [ASOP 30 (PDF)](https://www.actuarialstandardsboard.org/asops/treatment-profit-contingency-provisions-cost-capital-propertycasualty-insurance-ratemaking/) | Treatment of Profit and [[Contingency Provisions]] and the [[Cost of Capital]] in Property/Casualty Insurance Ratemaking | | 📄 [ASOP 39 (PDF)](https://www.actuarialstandardsboard.org/asops/treatment-catastrophe-losses-propertycasualty-insurance-ratemaking/) | Treatment of [[Catastrophe]] Losses in Property/Casualty Insurance Ratemaking | ### History of CAS Statement of Principles on P&C Ratemaking In 1988, the [[Casualty Actuarial Society (CAS)]] published a 📄 [Statement of Principles Regarding Property and Casualty Insurance Ratemaking](https://www.casact.org/sites/default/files/2021-05/Statement-Of-Principles-Ratemaking.pdf) which aims to identify and describe principles applicable to the determination and review of property and casualty insurance rates. In the document, four **ratemaking principles** are identified: 1. A rate is an estimate of the expected value of future costs. 2. A rate provides for all costs associated with the transfer of risks. 3. A rate provides for the costs associated with an individual [[risk transfer]] 4. A rate is reasonable and not excessive, inadequate, or unfairly discriminatory if it is an [[actuarially sound]] estimate of the expected value of all future costs associated with an individual risk transfer. This statement was rescinded by the Board of Directors of the CAS in December of 2020, and soon after reinstated May 2021, for reference for U.S.-regulated ratemaking. The reason for rescinding the standards was due to "considerable overlap between certain standards and the Principles"^[[CAS Statements of Principles](https://www.casact.org/publications-research/publications/cas-statements-principles)]