Insider Information: How Insurance Companies Measure Risk - Insurance Companies.com

Insurance companies use a methodology called risk assessment to calculate premium rates for policyholders. Using software that computes a predetermined algorithm, insurance underwriters gauge the risk that you may file a claim against your policy. These algorithms are based on key indicators about you and then measured against a data set to weigh risk. Insurance underwriters carefully balance the insurance company’s profitability with your potential need to use the policy.

Resources such as Moody’s Risk Analysis contain detailed data sets that help insurers segment potential customer groups’ predictive behaviors. For example, third-party software vendors can pull verified data from this source to quickly calculate decisions about the creditworthiness and risk assessment of certain subsegments of their audience. Subsegments could be males under the age of 25, a family history of certain illnesses or single women who fall into a particular income bracket.

Insurance underwriters seek to protect both policyholders and the companies that back these policies. Using verified research data helps underwriters evaluate an insurer’s potential exposure to claims that could result in expensive payouts. Economic forecasting, wage and industry trending and market stability assessments all are part of the data that is ultimately used to calculate your insurance premium.

If there are criteria present that tend to result in more payouts, your payment increases. For example, smoking is a high-risk behavior because it is known that smokers are likelier to need hospitalization. Health insurance companies may charge smokers more because there is a statistical likelihood that the policyowner will cost them money.

Auto Insurance

All drivers are required to carry auto insurance that covers potential costs related to an accident or theft. The costs may include repair or replacement of vehicles, or medical care that is related to injuries sustained in an accident. If law enforcement deems a driver at fault in an accident, that driver’s insurer picks up the tab. Auto insurance underwriters use a list of several criteria to determine whether you are likely to cause an accident.

Insurance companies vary, but there are common criteria that underwriters examine when calculating your premium.

• Credit history: Good credit indicates that you are responsible and can be trusted to pay your bills on time. Research has also shown that adults with lower credit scores tend to be poorer drivers, making bad credit a risky behavior. The Federal Trade Commission found that regardless of external factors like ethnicity or income level, drivers with lower credit scores mean policyholders who make more claims against insurers. This undisputable data plays a significant role in the price of your premium.

• Age: Younger drivers have been proven to be more accident-prone than experienced drivers. Consequently, it is a blanket rule that drivers are charged higher premiums until age 25. If you believe that you are a low-risk driver in spite of your age, it is up to you to demonstrate this in order to take advantage of discounts offered by insurers. Students with good grades, for example, are often offered a discount to offset the high premium. Discounts may also be offered to teens at age 21 if the driver has maintained a clean driving record.

• Address: City dwellers pay more for insurance because there are more people in cities, raising the likelihood of theft, accidents or vandalism. In fact, which city you call home may also affect your premium rates. The 2012 Allstate America’s Best Drivers Report examined the rates of auto insurance claims in 200 U.S. cities. If you live in Philadelphia, statistics say that you are likely to have an accident every 6.1 years. That number is 64.1% higher than the national average, and Philadelphia residents pay the premiums to prove it.

• Driving record: Your personal driving record strongly impacts your premium. If you have a history of speeding tickets, accidents or a DUI charge, the loss potential for your insurer is greater. The best indicator of future behavior is seen in the past; if you have a poor driving record you will pay high auto insurance premiums in addition to fines and fees. When you have maintained a good driving record long enough for your insurer to safely risk lowering your premium, you may be rewarded with “good-driver discount rates.”

• Marriage status: Married drivers are considered more likely to drive with loved ones in the passenger seat; fewer accidents are reported in this group, perhaps because of a reluctance to take needless risks when children and family members are in their cars. A study in New Zealand proved that never-married drivers are twice as likely to file a claim for collision, making single drivers a high-risk group regardless of their safety measures.

• Gender: Insurance premiums for men are skewed higher. While the practice may seem unfair, the Insurance Institute for Highway Safety conducts annual statistical analysis of various criteria among drivers. In 2010 men drove more miles on average than their female counterparts, automatically raising the likelihood of collision. Men were also shown to drive under the influence, speed or refuse to wear seat belts.

Men typically drive more miles than women and more often engage in risky driving practices including not using seat belts, driving while impaired by alcohol, and speeding. Crashes involving male drivers often are more severe than those involving female drivers.

• Prior coverage: Driving without insurance is considered irresponsible and so it results in higher premiums. Automobile insurance is required by every state. While you cannot be penalized for driving an uninsured vehicle after the fact, insurance underwriters correctly view this as illegal. Prior law-breaking is also a statistical indicator that poor decisions may be made again, such as reckless driving in this scenario. You must show proof of prior insurance to avoid being cast in this high-risk group.

Auto insurance companies weigh these factors and others including your occupation, military service or your education level to determine your premium payment. Your ethnicity, religion or income cannot be used against you. If you are judged a high risk, you may be denied insurance. Most states offer a high-risk alternative source of insurance; your driving mistakes will cost you dearly in these cases because you have demonstrated that you are likely to cause insurer payouts.

Life Insurance

A life insurance policy is insurance that pays out to your beneficiaries upon your death. A life insurance underwriter will examine your lifestyle to determine your life expectancy. High-risk criteria for life insurance policies include bad credit, which is statistically aligned with accident-prone behavior. Your family health history and personal health status also weigh heavily as future indicators of cost for the insurance company.

Age and gender also come into statistical play, along with dangerous hobbies like skydiving, mountain climbing or motorcycle riding. All can significantly increase your premiums. Military service members may have a war clause added to a life insurance policy in the event of death in combat. Military branches offer life insurance to soldiers who are unable to obtain private insurance.

Homeowners and Rental Insurance

Nearly 98% of U.S homeowners are covered by the basic homeowner’s insurance package required by mortgage companies. Unfortunately, few homeowners realize just how minimal these basic plans really are. Until recently, standard plans covered just about any “act of nature”. Insurance companies dropped this coverage because of the incidence of flood disasters rose dramatically over the last ten years. Now, you must purchase coverage for disasters such as floods, storms or earthquakes separately.

Homeowners are choosing not to pay more for additional coverage. Now that insurance companies have eliminated flood coverage, only 12% of homes in flood prone areas are actually covered. The percentage of homes covered against earthquakes in California is also just over 10%, according to the Insurance Information Institute.

You can buy plans that will cover home damages of up to $250,000 from the National Flood InsuranceProgram. Flooding can happen anywhere, but if you happen to live in a lower-risk area, you can protect your home for as little as $300-$400 each year. The cheapest earthquake coverage might run slightly higher, from $300-$500. Either way, insurance underwriters will determine your coverage cost  after evaluating the construction and stability of your home. Location in relation to fire stations, fire hydrants or sources of flooding is also factored into the equation.

Your credit history and your occupation, as well as the length of time you have held stable work, will also be judged as indicators of your responsibility. In areas prone to flooding, flood coverage is often mandatory. Rental insurance covers the contents of a rented dwelling and is generally priced based on the number of rooms in the home.