How do insurance companies assess risk?

January 18, 2017

There are various factors that contribute to how insurance companies calculate risks when offering coverage to an individual. For auto insurance companies, this list generally includes:

  • Demographic information (age, gender, marital status, etc.)
  • Age and experience
  • Driving history / record
  • Credit history
  • Prior coverage
  • Location of residence

These factors as well as a few others help insurance companies get a better idea of how likely it is for you to get into an accident, which in turn determines how risky you are to insure. The idea is that the more “safe” you are to an insurance company, the less likely you are going to get into an accident and have the insurance company pay to cover you. Because of this, drivers who take a safety course or include safety features in their car will benefit with lower rates.

So looking at these factors, how do you know if you are considered to be a risk to auto insurance companies? Some basic traits and behaviors such as reckless driving or multiple traffic violations are considered as risks and have the potential to increase you insurance premiums.

For life insurance, the general factors used to assess risk include:

  • Age and gender
  • Family history
  • Medical history
  • Extreme sports (skydiving, mountain climbing, etc.)

A more comprehensive list of factors can be found on our blog. A life insurance underwriter uses these factors to determine your lifestyle and life expectancy which allows them to know how much of a risk you are to insure. For example, someone who enjoys going skydiving and scubadiving on monthly basis poses more of a risk than someone who doesn’t partake in either activity at all since the activities increases the individual’s chance of death.

For homeowners and rental insurance the general factors used to assess risk include:

  • Credit history
  • Occupation and length of time you’ve held stable work
  • Number of rooms in a home (generally for renter’s insurance)
  • Location of residence
  • Past filed insurance claims
  • Whether or not a security system or alarm system is in place
  • Whether or not you own a pool

Nearly 98% of American homeowners are covered by the basic homeowner’s insurance required of them, but very few of them realize how minimal these plans are. Standard plans no longer cover any “act of nature” which means you need to purchase additional coverage for disasters such as floods, storms, or earthquakes separately. The likelihood of the home being affected by one of these natural disasters is one of the risk factors used to calculate insurance premiums, so if you are at moderately high risk and don’t have coverage, it will increase your insurance costs.

Besides taking into account how the location of your home affects the likelihood of natural disasters, insurance companies also take into consideration the crime rate of your neighborhood as well as claims you have previously filed. These factors help insurance companies determine how likely it is for you to file a claim, perhaps due to a break-in or damage to property from a flood.

The more safe and secure your home is, the less risk you pose to an insurance company. Because of this, having a security system or alarm in place can help lower your overall risk and reduce your insurance costs.

To understand more about how insurance companies assess risk and have any questions answered contact us at 415–386-2283 or [email protected] today.

Contributor: Smruthi Sriram