How Insurers Assess Risk
When we request an insurance quote we are asked a lot of questions. For a car insurance quote we are asked for information about:
ourselves – for example, our age, where we live, details of any medical conditions
our driving experience - driving licence type, details of any driving convictions and claims
our motor insurance history – no claim discount entitlement
the car we want to insure – its’ make and model, age and value, details of any modifications to the car
any other drivers we want covered
what cover we require – Comprehensive cover? For what purposes the car will be used
The information we provide to the insurer in answering their questions is our presentation of the risk.
So once the insurer has a full presentation of the risk, what do they do with it?
The insurers’ risk assessment involves the following 3 considerations:
They will decide whether or not the risk is acceptable to them, i.e. whether or not they are prepared to offer a quote.
If the insurer is prepared to offer a quote, then they will decide upon the terms to apply to the cover. For example, where there are young drivers proposed the insurer may apply a higher than normal excess (i.e. the amount that the policyholder must pay in event of a claim).
The insurer will also decide on the annual premium.
Each insurer decides upon their own risk acceptance criteria. For example, they may accept only drivers aged 21 years or over who have held a full driving licence for at least 1 year.
When it comes to deciding upon premium, there are a number of risk factors that affect the calculation of premium. Driver experience is a prime example. The experience of the insurer, built up over a number of years, may lead them to conclude that older, more experienced drivers are a better risk than others. For example, if their experience tells them that drivers aged in their fifties have fewer claims and that the overall cost of their claims is less than those of drivers of aged in their twenties then, all other factors being equal, the annual premium quoted to drivers aged in their fifties will be lower.
A real world example: It is well known that young drivers (aged under 21 years) have difficulty sourcing affordable motor insurance. The premiums offered by insurers for young drivers reflect the risk; the experience of insurers is that young and inexperienced drivers are much more likely to be involved in an accident. When they are involved in an accident the cost of the claim also tends to be higher than average.
In the past ten years there has been a lot of work done in mapping locations that are prone both to flood and subsidence risk. This information is used now by many home insurers.
The variety of information being used by insurers for purposes of risk assessment is increasing. In line with this, the process of risk assessment by insurers is becoming ever more sophisticated.
About the author:Founder and Managing Director of Map Cover Ltd. Technical Motor & Property Insurance Underwriter turned Entrepreneur and Expert Witness.
Date:February 13th, 2019