Legal Definitions - manual-rating insurance

Manual-rating insurance refers to an insurance pricing method where premiums are determined by applying pre-established rates and rules found in a standardized guide, often called a "rate manual." Instead of individually negotiating each policy's price or conducting a highly customized risk assessment for every applicant, insurers classify risks into categories and apply the corresponding rates published in the manual. This approach ensures consistency and efficiency in pricing for common types of insurance policies, as the rates are based on broad statistical data for similar risks.

• Example 1: Standard Auto Insurance

  Imagine a 40-year-old driver with a clean driving record seeking to insure their family sedan. The insurance company will consult its rate manual, which contains pre-defined rates for drivers of that age, with a similar driving history, driving that specific type of vehicle, and residing in a particular geographic area. The premium is then calculated by applying these standard, pre-set rates from the manual, rather than creating a unique, custom rate for this individual driver from scratch.

• Example 2: Homeowners Insurance for a Typical Residence

  A homeowner in a suburban neighborhood is looking for insurance for their newly built, standard-construction house. The insurer will use a rate manual that provides standard premiums based on factors such as the home's construction materials (e.g., brick, wood frame), its age, its location (e.g., proximity to a fire station, historical claims data for the area), and the desired coverage limits. The final premium is determined by looking up these pre-set rates in the manual that correspond to the specific characteristics of the home and its location.

• Example 3: General Liability for a Small Retail Store

  Consider a new independent bookstore opening in a town. When the owner seeks general liability insurance, the insurer will likely use a rate manual. This manual categorizes businesses by their industry code (e.g., "retail store - books") and applies a standard rate per $1,000 of sales revenue or per square foot of the premises. This manual-based approach simplifies the pricing for relatively common and predictable business risks, avoiding the need for an extensive, unique underwriting process for every small business.