A.2 Policy Purchasing Process

Question 1

What are Underwriting Guidelines?

Answer 1

Criteria used by each insurer in their decision of offering coverage to a potential insured. Examples:

• Decisions to accept, decline, or refer risks
• Company or tier placement
• Schedule rating

Question 2

How Premium is Computed

Answer 2

In a step-by-step manner using a rating algorithm, which specifies the order of the steps, the calculation performed at each step, and any rounding logic. Generally, the first step is to find the appropriate base rate, which is a starting dollar amount for the premium calculation. The next steps
in the rating algorithm modify the base rate based on the information obtained about the customer and what is being covered using multiplicative or additive rating variables. For each step in the algorithm, the insurer’s rules dictate how to
determine the appropriate rates for each rating variable for that particular customer.

Question 3

What are rating manuals?

Answer 3

Documentation of an insurer’s rates, rules, and rating
algorithm.
They can be used for:
-Internal documentation
-Rate & rule change filings with insurance departments
-Provided to agents to rate policies

Question 4

Linear Interpolation Formula between 2 Rates in
Coverage Table

Answer 4

Question 5

What is the purpose of a minimum premium?

Answer 5

To ensure that the insurer is collecting enough premium to cover expected policy costs.