Insurance companies specialize in risk management practices, which provide financial protection for individuals, families and businesses against unforeseen events. These practices are based on certain factors that vary depending on the type of insurance involved and the methods used to measure risk. These factors help insurance companies compile pricing structures that cover potential losses as well as provide for overhead expenses and profit generation.
Risk Factors
Risk factors have a significant bearing on how insurance companies determine eligibility requirements, coverage amounts, premium rates and provide a way for companies to categorize different degrees of risk. According to the Digital Federal Credit Union's reference pages, risk factors may relate to a person's age, sex and gender or a business' annual revenue or line of work, depending on the type of insurance under consideration. Related risk factors are placed in categories or sets that help to define the degree of risk involved with a particular set of circumstances, according to according to AMPM Insure, an insurance information reference site. In effect, risk categories provide a guideline for determining whether a person or business meets a company's eligibility requirements and assigns coverage amounts based on the level of risk involved.
Rating Factors
Rating factors have to do with probability measurements that identify how likely a person or business is to file a claim, according to Aetna Health Insurance. Using statistical, computer-based methods, companies can identify risk probabilities based on specific criteria related to a person's or business' circumstances and claims history. Rating factors also identify the amount of risk a company assumes, which can vary considerably between individuals and groups, according to Insure.com. In terms of group insurance coverage, companies can spread risk across a pool of participants, whereas the company assumes all of the risk when insuring one individual policyholder. In effect, the amount of risk a company assumes is directly related to the premium rate assigned to a policy.
Pricing Factors
Insurance pricing factors use risk analysis measurements to determine premium rate amounts for different coverage scenarios. Depending on the type of insurance, different pricing methods are used to assess the degree of risk based on the types of variables or conditions involved. Pricing methods used include schedule rating, retrospective rating and experience rating, according to ThisMatter, a finance-information resource site. Each method varies in terms of which variables carry more weight than others. Variables considered may include a company's claims history, when assigning rates for liability coverage, or a person's current condition, when considering rates for health or life insurance coverage. In cases where unpredictable risk factors exist, such as with theft or burglar insurance, insurers may adjust premium rates on a periodic basis based on the number of claims filed within a certain time period.
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