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📐 '''Rating basis''' describes the foundational methodology or set of factors an [[Definition:Insurance carrier | insurer]] uses to calculate [[Definition:Premium | premiums]] for a particular class of business, defining how risk characteristics are translated into a rate structure. In practice, it answers the question: on what unit of exposure, and using which variables, is this risk being priced? For example, [[Definition:Workers' compensation insurance | workers' compensation]] may be rated on payroll per $100, [[Definition:Commercial property insurance | commercial property]] on insured value per $1,000, [[Definition:Professional liability insurance | professional liability]] on revenue or headcount, and [[Definition:Motor insurance | motor insurance]] on driver age, vehicle type, and territory. The choice of rating basis fundamentally shapes how risk is segmented and how equitably premium is distributed across an insurer's book.

⚙️ Selecting an appropriate rating basis requires the exposure measure to correlate meaningfully with expected [[Definition:Loss | loss]] frequency and severity. [[Definition:Qualified actuary | Actuaries]] test multiple candidate bases during [[Definition:Rate-setting | rate-setting]] to identify which variables best explain loss variation. A [[Definition:Marine insurance | marine cargo]] policy might use the sum insured per shipment, while a [[Definition:Cyber insurance | cyber]] policy could rate on annual revenue, number of records held, or a combination of both. In [[Definition:Reinsurance | reinsurance]], the rating basis for [[Definition:Treaty reinsurance | treaty]] pricing often centers on the ceding insurer's subject premium, expected loss ratios, and historical [[Definition:Loss development | loss development]] patterns rather than individual policyholder characteristics. Regulatory expectations also matter: some jurisdictions restrict the use of certain rating factors — for instance, the European Court of Justice's 2011 ruling prohibiting gender as a rating factor in the EU altered the rating basis for life and motor products across all member states.

🔎 An insurer's competitiveness hinges in part on whether its rating basis captures risk distinctions that peers overlook. Carriers that adopt more refined rating bases — incorporating [[Definition:Telematics | telematics]] driving data, [[Definition:Internet of Things (IoT) | IoT]] sensor output from commercial properties, or advanced [[Definition:Predictive analytics | predictive models]] — can offer sharper prices to lower-risk segments while avoiding [[Definition:Adverse selection | adverse selection]]. However, a more granular basis also introduces complexity in data collection, system architecture, and regulatory approval. In [[Definition:Lloyd's | Lloyd's]] and other subscription markets, differing rating bases among co-insurers on the same risk can create misalignment in how each participant views adequacy. Ultimately, the rating basis is not just a technical actuarial choice — it reflects strategic decisions about which risks an insurer wants to attract, how transparent pricing should be to [[Definition:Broker | brokers]] and policyholders, and how the book of business will perform through varying [[Definition:Underwriting cycle | market cycles]].

'''Related concepts:'''
{{Div col|colwidth=20em}}
* [[Definition:Rate-setting]]
* [[Definition:Exposure base]]
* [[Definition:Actuarial pricing]]
* [[Definition:Underwriting]]
* [[Definition:Predictive analytics]]
* [[Definition:Risk classification]]
{{Div col end}}

Definition:Rating basis - Revision history

PlumBot: Bot: Creating new article from JSON