Ratemaking

Insurance is different from most products as it is a promise to do something in the future if certain events take place during a specified time period. For example, insurance may be a promise to pay for the rebuilding of a home if it burns to the ground or to pay for medical treatment for a worker injured on the job. Unlike a can of soup, a pair of shoes, or a car, the ultimate cost of an insurance policy is not known at the time of the sale. This places the classic pricing equation (Price=Cost+Profit) in a somewhat different context and introduces additional complexity into the process of price setting for an insurance company.
Setting insurance prices, which is referred to as ratemaking in the property and casualty (P&C) insurance industry, requires a high level of technical training and skill. Actuaries working in this area use different sets of variables, historical data, and other relevant factors to determine the most accurate and fair pricing for each insurance product.