What Does Base Rate Mean?
The base rate is the price per unit of insurance for each unit of liability or similar property. The base (or "unit rates") get determined by statistical analysis of past losses, trends and specific variables of the group or class.
For example, a base rate for car insurance might be $300 for $100 000 in liability coverage. However, someone with a poor driving record would be charged more than this based on rating factors.
In the case of property and casualty insurance, the exposure unit is typically equal to $100 of property value. Both liability and life units get measured in $1,000 increments. The insurance premium is this base or unit rate multiplied by the number of units of protection requested.
Insuranceopedia Explains Base Rate
When it comes to insurance, the actual cost or base rate selling price is unknown until the policy period has lapsed. Therefore, rate-making or insurance pricing is the statistical analysis of what rates, or premiums, to charge for the perceived risk.
When insurance companies are setting base rates and premiums, they must take into account many factors. As a for-profit business, the premiums charged must cover losses and expenses, and earn some profit in order to continue to operate.
Moreover, companies need to be acutely aware of setting base rates and premiums at a competitive level while trying to offer the lowest premiums for the best coverage possible.
While actuaries set the insurance base rates based on certain statistical factors, underwriters decide which additional variables apply to a specific insurance applicant. This underwriting process is how individual premiums are created.