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In general, insurance pricing is managed by actuaries. The first aim is to determine an average premium (or rate) that could cover costs and ensure a profit for the company and then define tarifs customization to avoid adverse selection.
Average premium
Non life premium premium is usually split into three blocks:
1) Pure premium ( it consist in the expected cost of claims per policyholder in a specific period of time. It's usually based on the company own portfolio past experience)
2) Loadings (they are the average cost - excluding claims - per policyholder and concern, for example, sales commisions to brokers)
3) Expected profit (It's the target profit expected by company's managers. In general, It should be coherent with the cost of capital).
Depending on the split reported above, you can extract some metrics that are use to monitor portfolio performance:
a) Loss ratio: costs of claims (1) / premiums
b) Combined ratio: average costs ( 1) + 2) ) / Premiums
Quite intuetevely, Combined ratio should be always be smaller than 1 to ensure a profit.
Tariffs customization
After defining the average premium, actuaries have to define customization to consider adverse selection. Specifically, using cluster analsysis or statistical tool (as Generalized linear models) they define spefic coefficent for each porfolio subsample (for example, they can determine that smokers have to pay the double of the average premium for an health insurance policy)
in my humble opinion, the actuarial section is responsible for those metrics, but the main focus here is the company's trend whether it is a for-profit, cooperative or Islamic.
the metrics are considering the investment rate, treasure liquidity, market share, per claim calculations and loss rates.
also, market intelligence is a really important aspect that leaders of the market are keeping in mind.
regards,
B y the following :-
1/ mathematical calculation
2/ assessment and evaluation of the risk
3/ history of the business and loss records must be examined
4/ you may consider the insurance rates of the similar risks,
5/ for substantial risk which needs reinsurance you can ask the reinsurers a quotation and their experience to determine the adequate rates for the risk in question .
Best wishes.
