Range/Categories of Risks

Classifications, or categories, of property insurance risk are assessed by carriers using a number of actuarial details to accurately assess the premiums needed by each category of policies that will be pooled to cover the projected losses. Different types of property insurance policies have different ranges, or details, to determine the risk categories. An example is the classification of drivers that automobile insurers use when quoting or selling a policy. Drivers with bad driving records are assessed as being at “high risk” of having an accident. Drivers with no moving violations or speeding tickets are considered a “good risk” and typically enjoy a lower premium for a similar auto policy with like coverages. Similarly, a policy for a fast, small sports car will probably cost more than a policy for a 4-door family sedan (assuming the drivers are the same age with comparable driving records) because sports cars are typically involved in more accidents than sedans.

A warehouse in good repair and with working alarm systems will be considered a lower risk, and less costly to insure, than a building of like size and construction that is in disrepair and has no security. A home in an area prone to severe windstorms or earthquakes is in a higher, and more costly, risk category than a home in an area that never experiences windstorms or earthquakes. A business owner with a good credit history is a lower risk to insure than a proprietor who has declared bankruptcy in the past or who has a business with outstanding debts or a substandard credit rating.

Carriers spend a great deal of time and effort collecting data and assessing the correct risk categories and ranges in order to keep their policies affordable and the company financially stable while continuing to insure property and paying claims as required by their policies. Higher-risk policies will always require more money to be added into the pooled assets of the group than policies of lower risk. A purchaser who is considered a low risk for claim, and who is insuring an item or business also at a low risk, will be able to purchase higher limits of coverage or more optional coverages for the same premium amount as a purchaser of a similar policy who is at a higher risk for claim or insuring a higher-risk item.

Last Updated: 08/20/2013

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