Which statement correctly describes class rating and merit rating in underwriting?

• A. Merit rating adjusts rates based on individual insured's characteristics and loss history.
• B. Class rating is based on broad risk groups; merit rating adjusts rates based on individual insured's characteristics and loss history.
• C. Both are identical in purpose and effect.
• D. Merit rating applies only to commercial accounts.

Answer: (B)

Understanding how premiums are set helps explain these two rating methods. Class rating assigns a rate to a broad group of risks that share similar characteristics—things like occupation, location, type of construction, and other general factors. The same rate applies to all insureds in that class, regardless of each individual's past claims.

Merit rating, on the other hand, personalizes the premium by adjusting the base rate for the individual insured based on their own loss history and other specific characteristics. If someone has a favorable loss history or safer circumstances, credits can lower the premium; if their history shows higher risk, the premium increases. This makes the premium reflect the insured’s actual risk more than the class rate does.

So the statement that class rating uses broad risk groups and merit rating adjusts rates based on the individual insured’s characteristics and loss history correctly captures how these two methods differ.