The business model always try to collect more in premium and investment income than is paid out in losses, and to also offer a competitive price.
By following this rule consumers will accept. Insurers companies always follow two way to make money, Through underwriting, the process by which insurers select the risks to insure and decide how much in premiums to charge for accepting those risks By investing the premiums they collect from insured parties The most complicated aspect of the insurance business is the actuarial science of rate making of policies, which uses statistics and probability to approximate the rate of future claims based on a given risk.
The insurer will use discretion to reject or accept risks through the underwriting process. At a basic level they are looking the frequency and severity of insecure peril. Then an insurance company will collect historical loss data, bring the loss data to present value, and compare these prior losses to the premium collected in order to assess rate adequacy.
In this data also contain Loss ratios and expense loads. Rating for different risk characteristics involves at basic level comparing the losses with” loss relatives”—a policy with twice as many losses would therefore be charged twice as much. More complex Multivariate analyses are used when multiple Characteristics are involved and a uni-variate analysis could produce confounded results. Other statistics show the probability of future losses.
The amount of premium to the insurers underwriting profit on that policy system. The frequency and severity of insured perils and the expected average payout resulting from these perils. Measurement of ratio in underwriting is known as combined ratio.