Non-life insurance ratemaking techniques: A literature review of the classic methods

Abstract

The primary role of insurance is to protect and guarantee individuals' financial safety and security against the financial consequences of random incidents. It involves aggregating a large number of individual risks, among which there will be a certain amount of insurance claims and accumulated losses to the insurance company during a specific timeframe. Furthermore, one of the insurers' main concerns is establishing a tariff structure that distributes these claims and losses among policyholders most equitably and reasonably. This task of determining the pure premium belongs predominantly to actuaries who evaluate the probability of the risk occurrence, determine the risk factors in order to establish commensurate tariffs for each class so that everyone and each pay premium that, in one way or the other, reflects their riskiness. This article provides an overview of the fundamental concepts of ratemaking and reviews the classical statistical techniques used by insurance companies to discriminate tariffs. The article follows the customary actuarial distinction between the two main pricing techniques, namely the a priori and the a posteriori ratemaking techniques.