Manual rating

Category: Pricing & rating · Reviewed by Amy Price, Account Executive · Last reviewed

Manual rating

Manual rating is the application of pre-published rates to a defined exposure base to produce a premium. The rates are typically tabulated in a “manual” or rate sheet by class of business, geography and exposure category. It is the dominant approach for small commercial business where individual risk modelling is uneconomic.

Mechanics

For a commercial property risk:

Premium = Rate per £1,000 sum insured × Sum insured × Geography modifier × Trade modifier × Loss-experience modifier

For employers’ liability:

Premium = Rate per £1,000 wageroll × Wageroll × Trade modifier × Experience modifier

Origins

Manual rating evolved from 19th-century property tariffs (the Fire Offices Committee in the UK; the various US rating bureaux). Modern manuals are derived from GLM analyses applied to industry or in-house data.

Strengths and limitations

Strengths: transparency, speed, audit trail, ease of automation in eTrade platforms.

Limitations: every individual risk is approximated; no individual underwriter judgement; the rate book is only as good as the data behind it. Most insurers supplement manual rating with schedule rating (small judgemental adjustments) and experience rating (adjustments for credible loss history).

References

• IFoA. Practical Guide to GI Pricing.
• CAS (2010). Foundations of Casualty Actuarial Science.

Cross-references

• Insurance pricing
• Experience rating
• Schedule rating

Maintained by Matt Bartlett, Director, Apex Insurance Brokers Limited. FCA FRN 724952. Companies House 07014570.