Base Rate
What Does Base Rate Mean?
The base rate is the price per unit of insurance for each unit of liability or similar property. These base rates, or “unit rates,” are determined through statistical analysis of past losses, trends, and specific variables within a group or class.
For example, the base rate for car insurance might be $300 for $100,000 in liability coverage. However, a driver with a poor driving record would be charged more, based on rating factors.
In property and casualty insurance, the exposure unit is typically equal to $100 of property value. For liability and life insurance, units are measured in $1,000 increments. The insurance premium is calculated by multiplying the base or unit rate by the number of units of protection requested.
Insuranceopedia Explains Base Rate
In insurance, the actual cost or base rate selling price is not known until the policy period has ended. Therefore, rate-making, or insurance pricing, involves the statistical analysis of what rates, or premiums, should be charged based on the perceived risk.
When setting base rates and premiums, insurance companies must consider various factors. As for-profit businesses, the premiums charged must cover losses and expenses while generating a profit to remain operational.
Additionally, companies need to ensure their base rates and premiums are competitive, aiming to offer the lowest premiums with the best coverage possible.
While actuaries determine the base rates based on statistical factors, underwriters evaluate additional variables specific to each insurance applicant. This underwriting process is how individual premiums are determined.
