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📐 '''Rating structure''' is the organized framework of factors, relativities, base rates, and rules that an [[Definition:Insurance carrier | insurer]] uses to translate risk characteristics into a [[Definition:Premium | premium]] for a specific policy. It serves as the blueprint that connects [[Definition:Actuarial science | actuarial]] analysis to the price a [[Definition:Policyholder | policyholder]] ultimately sees, encompassing everything from the selection of rating variables (such as age, location, or industry class) to the mathematical relationships between those variables and expected [[Definition:Loss cost | loss costs]].

🔧 A typical rating structure begins with a base rate — a starting premium for a reference risk profile — and then applies a series of multiplicative or additive factors that adjust the price up or down based on how a specific risk deviates from that reference. In commercial lines, [[Definition:Experience rating | experience rating]] modifiers may adjust premiums based on an insured's own [[Definition:Claims history | claims history]], while [[Definition:Schedule rating | schedule rating]] allows [[Definition:Underwriting | underwriters]] discretion to apply credits or debits for qualitative factors like management quality or loss control programs. The granularity of these structures varies significantly across markets. In the United States, [[Definition:Rate filing | rate filings]] submitted to state regulators often detail every factor and relativity, whereas in London market and [[Definition:Lloyd's of London | Lloyd's]] specialty business, rating structures tend to be more judgment-driven and less formulaic. Under [[Definition:Solvency II | Solvency II]] in Europe and similar risk-based frameworks, the adequacy of the rating structure feeds directly into the insurer's [[Definition:Technical provisions | technical provisions]] and capital calculations. Across Asia, markets like Japan and South Korea have gradually liberalized pricing, moving from tariff-based systems with government-prescribed rates toward more competitive structures that give carriers room to differentiate.

📈 Getting the rating structure right is one of the most consequential decisions an insurer makes. A structure that is too coarse — with too few rating variables or overly broad classifications — will produce [[Definition:Adverse selection | adverse selection]], attracting risks that are underpriced while losing those that are overpriced to more sophisticated competitors. Conversely, an excessively complex structure can be difficult for [[Definition:Broker | brokers]] and [[Definition:Agent | agents]] to explain, may run afoul of regulatory transparency expectations, and risks overfitting to historical data that may not predict future losses accurately. The evolution toward [[Definition:Pricing algorithm | algorithmic pricing]] has expanded the dimensionality of rating structures enormously, but the foundational logic remains the same: segment risks into groups that are homogeneous enough to price fairly and accurately, while remaining commercially viable and regulatorily compliant.

'''Related concepts:'''
{{Div col|colwidth=20em}}
* [[Definition:Pricing algorithm]]
* [[Definition:Experience rating]]
* [[Definition:Schedule rating]]
* [[Definition:Base rate]]
* [[Definition:Rate filing]]
* [[Definition:Actuarial science]]
{{Div col end}}

Definition:Rating structure - Revision history

PlumBot: Bot: Creating new article from JSON