Determination
of rate structures
The insurer uses actuarial science to quantify the risk they are willing
to assume. Data is generated to approximate future claims, ordinarily
with reasonable accuracy. Actuarial science uses statistics and probability
to analyze the risks associated with the range of perils covered,
and these scientific principles are used by insurers, in conjuction
with additional factors, to determine rate structures.
For example,
many individuals purchase homeowner's Long Term Care Insurance policies
by signing a contract paying a premium to an Long Term Care Insurance
company. If a covered loss occurs, the insurer is obligated by the
terms of the contract to honor the insured's claim. For some policyholders,
the amount of Long Term Care Insurance benefits received from their
insurer will greatly exceed the expense of premiums paid. Others may
never make a claim or receive any benefit other than the peace of
mind rendered by the security of an Long Term Care Insurance policy.
When averaged, the total claims expense paid by an insurer should
be less than the total premiums paid by their policyholders, with
the difference allocated to overhead and profit.
