Ratemaking is a fundamental process in the insurance industry, particularly for casualty insurance. It involves determining the price of insurance policies, ensuring that premiums collected are sufficient to cover future claims, expenses, and provide a reasonable profit, while remaining competitive in the market. This section will explore the core purposes and objectives that drive the ratemaking process.

At its heart, ratemaking is about pricing. Insurers need to establish a price (premium) for each policy that accurately reflects the risk associated with insuring that policyholder. This price must be sufficient to cover the expected costs of claims, administrative expenses, and a margin for profit or surplus. The goal is to create a sustainable business model where the collective premiums of policyholders can pay for the losses incurred by a subset of those policyholders.

Beyond simply setting a price, ratemaking aims to achieve several critical objectives that ensure the financial health and ethical operation of an insurance company. These objectives are interconnected and often involve balancing competing interests.

The art of ratemaking lies in effectively balancing these often-competing objectives. An insurer that prices too low to be competitive might jeopardize its solvency. Conversely, a focus solely on adequacy without considering equity or competitiveness can lead to a loss of market share and an unbalanced risk pool. Actuaries constantly refine their models and strategies to achieve this delicate equilibrium, ensuring the long-term viability and ethical operation of the insurance business.