Rating variables are a crucial tool used by actuaries to price insurance policies fairly and affordably. Rating variables are basically the characteristics of individual policyholders that can help approximate the cost of their risks. For example, in auto insurance typical rating variables include the driver’s age, their accident history and their vehicle’s model year. These variables have been shown to correlate with how likely a person is to be involved in an accident and what their expected costs might be. They are therefore used to help price that person’s risk.
Insurance companies have been using rating variables to help set rates (and thereby price their policies) for decades. However, the use of some rating variables has recently generated discussion within the United States. This joint educative statement by the Casualty Actuarial Society and the Insurance Information Institute is designed to help legislators, policymakers, the media and the public to understand:
- How rating variables work;
- How they are regulated; and
- Why they are indispensable to keeping insurance prices fair and affordable.