Under ratemaking principles, a rate is considered reasonable and not unfairly discriminatory if it is what?

• A. An actuarially sound estimate of the expected value of all future costs associated with an individual risk transfer.
• B. Always lower than last year's rate.
• C. Identical for all insureds regardless of risk.
• D. Set solely by a regulator.

Answer: (A)

Ratemaking aims to set a price that is an actuarially sound estimate of the expected future costs of insuring the particular risk. In other words, the rate should reflect the anticipated claim costs and expenses over the policy period for that risk, plus a reasonable margin for uncertainty, so the premium adequately covers future obligations without being unfairly discriminatory.

This is why the best description is that the rate is an actuarially sound estimate of the expected value of all future costs associated with the individual risk. The other ideas don’t fit: rates don’t have to be lower than last year, since costs and experience can change; rates shouldn’t be identical for all insureds if risk differs; and while regulators approve rates, they don’t typically set them solely without the insurer’s actuarial analysis guiding them.