The Mathematics of Money

528 Chapter 13 Insurance and Risk Management

good credit ratings are less likely to have accidents than people who don’t). Even though

insurers may consider a wide variety of factors in determining rating classes, they do not

have complete freedom in what factors to consider for rating classes. State regulations and

federal antidiscrimination laws may prohibit certain types of rating classification (such as

basing rates on race or religion). Making matters more complex, one state may disallow

a rate classification that might be used in another state. For example, even though charg-

ing different auto insurance rates based on gender and marital status is common practice

in most states, in others doing so is illegal. (Montana is an often-cited example of a state

which has prohibited charging different auto insurance rates based on gender.)

Once the insurer has established its underwriting guidelines and rating classes, the

rates for a particular type of insurance will be set for each rating class. Sometimes this is

expressed as separate rates for each class, sometimes the company will set a basic rate and

then have adjustments made to this rate for certain classes.

However the rates are set, the insurer will set them in a rate book. The term rate book is

still in use even though today rate quotes are usually done with computer software. Differ-

ent insurers may set up their rate formulas in various ways. The following is a hypothetical

example intended to demonstrate mathematically how these may be set up.

AFFILIATED BENEVOLENT MUTUAL INSURANCE COMPANY OF OHIO

STANDARD PERSONAL AUTOMOTIVE LIABILITY COVERAGE

SEMIANNUAL RATES

Rating Region Workday Commute Basic Rate Long-Term Client Rate

A 5 miles $182.50 $172.50

5 20 miles $215.55 $203.55

20 miles $245.00 $230.00

B 5 miles $208.75 $198.75

5 20 miles $242.15 $230.15

20 miles $271.10 $256.10

C 5 miles $163.50 $153.75

5 10 miles $181.01 $169.01

10 20 miles $192.05 $180.05

20 miles $201.42 $186.42

In addition to a table setting basic rates, the rate book may include adjustments for different

underwriting classes.

AFFILIATED BENEVOLENT MUTUAL INSURANCE COMPANY OF OHIO STANDARD

PERSONAL AUTOMOTIVE LIABILITY COVERAGE—MULTIPLE OF BASIC PREMIUM

Category Male Female

Age 1619 (no driver training) 2.55 2.05

Age 1619 (driver training) 2.25 1.85

Age 2024 single 2.20 1.80

Age 2024 married 1.90 1.60

Age 2529 single 1.90 1.65

Age 2529 married 1.45 1.35

Age 30 64 0.95 0.85

Age 65 1.10 1.00

The values in this table are given as multiples of the basic premium. To determine the pre-

mium that would be charged to a given individual, you would need to look up the rate in

the first table based on region and commuting distance, and then multiply by the number in

the multiples table based on age and sex.