Composite rate

Composite rate,

Definition of Composite rate:

  1. Average rate weighted to account for, or reflect, the different degree of importance of different component factors.

  2. When an insurance company underwrites a new policy, it agrees to indemnify the policyholder against a particular peril in exchange for a premium payment. Determining the amount of premium to charge the policyholder is a critical step in the underwriting process. Underestimating the severity or the frequency of possible claims can lead the insurer to undercharge the policyholder for coverage. Undercharging may cause the insurer to use capital reserves, which will make the policy unprofitable.

  3. A composite rate is an insurance premium based on the average risk profile of a group rather than the risk profile of an individual policyholder. A composite rate implies that all members of a particular group pay the same insurance premium for insurance against a specific peril.

Meaning of Composite rate & Composite rate Definition