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How Do Insurers Determine Risk?

Insurance companies rely on many tools when calculating premiums for customers. They base premiums on the amount of risk they are taking on, which they determine by figuring out how probable it is that the policyholder will file a claim. Many factors play a role in how much a person will pay, with the premium being higher for those who will probably file a claim.

In addition, insurers look at things such as a person's credit score or behavior. They feel these policyholders will need a payout for actions they have taken than someone with a good credit score or low-risk behavior. However, the type of insurance being purchased also plays a role in calculating this level of risk and the accompanying premium.

Health Insurance

When writing a health insurance policy, underwriters consider many factors. They look at the person's age and gender. In addition, they want to know the individual's overall health condition, whether they smoke, if they have smoked in the past, and more. They also gather information about the person's family medical history, as certain conditions are passed from parents to children. They take all of this information and calculate a premium. Today, many underwriters use software to calculate the risk they take on and to determine a suitable premium.

Car Insurance

Underwriters consider a driver's likelihood of being in an accident when calculating the premium. However, they also take into account the person's credit score. The Federal Trade Commission reports a low credit score leads to more accident claims. In addition, the insurer considers who lives in the home and where the insured lives. Individuals who are married and live in the suburbs file fewer claims than those who are single and live in a big city. Age is another factor that plays a role in how much a person will pay for car insurance.

Life Insurance

Life expectancy is key to how much a person pays for life insurance. The underwriter considers the person's age and health when determining how much the insured should pay for coverage. Their occupation is factored into the equation along with their lifestyle. Those who work in dangerous jobs or have high-risk hobbies will pay more. A low credit score is linked to accident-prone behaviors, so underwriters look at an applicant's credit score. In addition, they look at the person's physical appearance, as a person with a normal height-to-weight ratio will pay less than someone with a higher ratio.

Home Insurance

The premium a person will pay for home insurance depends on the location of the home and the company they choose for their insurance. Each company uses different criteria when calculating premiums, but all insurers consider the potential risk. The region remains the main criteria insurers use, as weather-related claims tend to lead to higher payouts.

Nevertheless, they also look at labor and resources when determining the premium. For example, they look at whether the home is located near a fire station or a fire hydrant. If it isn't, there will probably be more damage to the home. Finally, they look at the condition of the home, as a home in poor shape will cost more to repair.

Insurance companies operate to make a profit, and the claims they pay out affect those profits. They use every tool available to keep claim payouts low, regardless of what type of insurance they sell. If they fail to make more than they pay out, they won't be in business long.

Underwriters use every tool available to them when calculating a customer's premium. The more information an underwriter has, the easier it becomes to determine a fair premium that protects the customer while allowing the insurer to make a profit. When this premium is found, both parties win.