Individual Risk Rating (Chapter 4)

Manual ratemaking determines what rates should be charged average members of groups of entities for specified coverage and entity characteristics. Individual risk rating supplements manual rates by modifying the group rates in whole or in part to reflect an individual entity’s experience. If all entities in all rating groups were truly homogeneous, differences in experience among entities would be fortuitous. While homogeneity is the goal of manual ratemaking, it is not usually possible to achieve. In addition, some entities are large enough that their experience is, to some extent, “credible.” Individual risk rating is appropriate when there is a combination of nonhomogeneous rating groups and entities with credible experience. This chapter discusses individual risk rating in general terms and provides examples from both traditional (insurance) and nontraditional risk financing mechanisms. The latter include risk retention groups, pools, and individual entities retaining risk. In this chapter it is assumed that the manual rates are properly determined, unless otherwise noted.