Which factors are taken into consideration when an insurance company determines?

How The Cost Of Life Insurance Is Determined

The premium rate for a life insurance policy is based on two underlying concepts: mortality and interest. A third variable is the expense factor which is the amount the company adds to the cost of the policy to cover operating costs of selling insurance, investing the premiums, and paying claims.

Mortality

Life insurance is based on the sharing of the risk of death by a large group of people. The amount at risk must be known to predict the cost to each member of the group. Mortality tables are used to give the company a basic estimate of how much money it will need to pay for death claims each year. By using a mortality table a life insurer can determine the average life expectancy for each age group.

Interest

The second factor used in calculating the premium is interest earnings. Companies invest your premiums in bonds, stocks, mortgages, real estate, etc., and assume they will earn a certain rate of interest on these invested funds.

Expense

The third consideration is the expenses of operating the company. The company estimates such expenses as salaries, agents' compensation, rent, legal fees, postage, etc. The amount charged to cover each policy's share of expenses of operation is called the expense loading. This is a cost area that can vary from company to company based on its operations and efficiency.

In the insurance industry, each type of insurance deals with its own types of insurance risk. Insurance risk can be defined simply as the possibility of an insured suffering a financial loss that’s covered in a policy issued by an insurance company or other insurer. As an insurance company underwriter, your job is to assess risk as accurately as possible to determine whether a potential client is worth the risk of insuring and, if so, what your company should charge in premium in exchange for taking on the indemnification of that client’s risk.

Automobile Insurance Risks

With automobile insurance, risks extend from the profile of the driver to that of the vehicle, types of travel typically undertaken, and even the vehicle’s location. A vehicle residing in a high crime area, for example, presents a higher risk to you, the insurer, that will have to be taken into account during the underwriting process. The driver’s profile includes age, gender, marital status, occupation, and driving record. The vehicle profile includes age, make and model, replacement value, relative cost of repairs and parts, potential for theft, and may even include something as seemingly innocuous as the vehicle’s color.

Life Insurance Risks

With life insurance, the risk being underwritten is that the insured will perish prematurely before premium collected added to the profits from the investment of those funds will equal or surpass the payout amount upon the insured’s death. Risk factors that figure into the underwriting process start with the insured’s age. Statistical models show that the younger a life insurance applicant is the longer he or she will live before a claim is made on the policy. For this reason, younger individuals will typically be charged lower premiums. Other factors that figure into determining the relative risk of a life insurance applicant include:

• Gender – women typically live approximately five years longer than men so they pose less of a risk of dying early, translating to lower premium costs.
• Smoking – individuals who smoke pose a significantly higher insurance risk than non-smokers due to the number of health problems smoking can cause. In some cases, smokers may be charged significantly more premium than non-smokers for the same amount of life insurance coverage.
• Health – health issues such as high cholesterol, high blood pressure, diabetes, and heart problems are all risk factors in life insurance underwriting. Most carriers will require applicants to undergo a medical exam prior to writing a policy, although “no medical exam” policies are available. These will typically include significantly higher premium rates.
• Family medical history – serious medical conditions such as stroke or cancer that run in a life insurance applicant’s family and are known to have caused premature death among parents and/or siblings are risk factors that will be factored into the underwriting process.
• Lifestyle – lifestyle risks encompass a number of factors such as an applicant’s driving history, including a propensity to drive fast, to buy powerful cars or motorcycles, or the use of intoxicating substances before getting behind the wheel. Other lifestyle risks that will likely be taken into account include dangerous hobbies such as mountain climbing or speedboat racing and dangerous occupations like coal mining, logging, or commercial fishing.

Homeowners Insurance

Homeowners insurance is designed to provide financial protection from losses resulting from a large number of different risks in and around an insured’s property. Most U.S. homeowners are covered by a homeowners insurance policy to protect what may be their largest asset – their home. The most popular type of homeowners coverage is a standard policy called the HO3. An HO3 policy provides protection for losses involving the insured’s dwelling (Coverage A), other unattached structures (Coverage B), personal property (Coverage C), and more.

A standard HO3 home policy comes in two primary types – “named perils” or “open perils.” The word “perils” is another way of saying “risks.” Open perils policies cover all potential risks the insured’s home faces except those specifically excluded. Named perils policies specifically name the perils (risks) covered by the contract. There are typically 16 of these perils, including such things as:

• Fire or lightning
• Windstorm or hail
• Smoke
• Vandalism
• Theft
• Volcanic eruption
• Freezing, and more

Each of the perils covered by a home insurance policy represents risks that have the potential of causing financial loss to a homeowner. As an insurance underwriter, your job is to accurately gauge the amount of risk represented by a particular home. This will require consideration of a variety of factors such as the home’s age, structural soundness, and geographical location. Homes located in high crime areas will likely be more liable to theft or burglary while those in areas of frequent natural disasters will pose higher risks for these types of incidents. High risk means higher insurance rates. In some cases, high enough perceived risk can mean non-issuance of policy coverage.

Loss of Use Coverage

Other protection found in most homeowners insurance policies includes Loss of Use Coverage (Coverage D). If a policyholder’s residence is made uninhabitable because of the occurrence of an event covered by the policy, Coverage D provides some reimbursement for expenses over and above normal daily living costs. This might include the cost of lodging, eating out, laundry services, parking, etc.

Liability May Be the Most Dangerous Insurance Risk

Many insurance policies, including automobile insurance, home insurance, and business insurance, have built-in protection against losses from liability. In most states, liability coverage is the only type of coverage required of drivers. Liability coverage is what helps protect a third party injured or killed in an accident for which the insured is held legally responsible (or liable). It also pays towards losses for damaged or destroyed property that the insured is responsible for causing with his or her vehicle.

Liability is a huge risk from an insurer’s perspective since liability suits can cost individuals millions of dollars for serious injuries or deaths. Most homeowners insurance policies include protection against losses resulting from liable suits. Limits for this portion of the policy are typically $100,000, but experts agree that this amount should be increased to $300,000 “or as much as you can afford.” For individuals with a high net worth or an especially high risk of being sued, an umbrella policy of $1,000,000 or more is recommended. Homes with high-risk equipment such as swimming pools, trampolines, or tree houses should be covered by more than the typical amount of liability protection.

Insurance Risk Determines Insurance Coverage

As an insurance underwriter, you have numerous tools such as big data analytics and various algorithms to help determine the likelihood of one of your policyholders successfully submitting a claim against their policy. You use every means available to determine risk vs. reward in writing a policy. Insurance risk is the driving force behind every policy decision, and you must work to uncover all applicable risks a policyholder faces and to mitigate those that can be lessened.

For those writing P&C insurance, having a complete, high-quality residential or commercial inspection can help uncover hidden risks and help you, the underwriter, write more accurate policies. Contact Insurance Risk Services to partner with the best in the business.

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