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financing costs to units, several additional factors
influence how effectively an individual risk rating system
will meet its goals. These include variations in tax rates
and systems, the ability of units to purchase their own
insurance, and whether and how unit managers get the
benefits or penalties of the costs allocated to their units.

Q4. What must be allocated in individual risk
rating system?

Ans. After an overview of the individual risk rating system,
the second step is to design and understand what is to
be allocated. For traditional insurance, the answer often
is all costs.

These include losses, ALAE, ULAE, reinsurance
premium, risk control costs , overhead, taxes,
miscellaneous expenses, and profit associated with
insurance policies of the type being written.

Nontraditional risk financing mechanisms and individual
entities allocating risk financing costs back to units also
may want to allocate all costs associated with the risk

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