Which of the following best describes how rates are developed in property and casualty insurance when no established rating method exists?

• A. Based on the policyholder's credit score
• B. On the combination of loss costs, expenses, and a profit margin
• C. Randomly assigned by the underwriter
• D. Entirely on the property's value

Answer: (B)

When no established rating method exists, rates are developed to cover what the insurer expects to pay out in claims plus the costs of underwriting and administering the policy, plus a profit margin. This means the rate reflects the combination of loss costs (the expected cost of claims per exposure), expenses (commissions, overhead, and other underwriting costs), and a loading for profit. This approach ensures the rate is actuarially sound and can sustain the insurer’s operations over time.

This makes sense because rating isn’t simply tied to the property's value or determined at random. Credit scores, while used in some lines and jurisdictions for certain risk factors, aren’t the universal basis for P&C ratemaking. Randomly assigning rates would ignore actual risk and expected losses. And setting rates solely based on value would overlook how likely a loss is and the costs to handle claims, leading to unders or oversized pricing.