Certainly, the possibility of a fire loss would be far higher in the second house as opposed to the first house. What we are indeed suggesting here is that in the study of risk we are not simply to contend with the uncertainty as to causation of an event, we should also know the behavioral pattern or risk frequency and its severity as well. Extend the example of the house by another hypothesis which gives value to the houses. Now our imagination is a bit changed because we shall have to bring the severity of loss into our scenario.
Because it is the magnitude of the cost of a loss also which is of concern to insurers. As has been indicated in the extended example above, an insurer and risk bearer no doubt we are interested in loss event frequency, but at the same time, we are also interested in the severity cost of loss.
This is so because ultimately we shall have to pay a loss and our premium generation should be such that would enable us to pay all such claims insured.
If we now go through the extended example again can we possibly visualize that although the possibility frequency of fire in the house situated at the crowdy fire-prone locality is higher as opposed to the house situated at posh area but the severity of loss, should there be a fire engulfing the house of the posh area, will be much more in comparison to the house of the crowdy area simply because of the higher value involved?
Having said these, when we go for measuring a risk that is necessarily required from the viewpoint of both insurer and the insured we start realizing that a distinction between frequency and severity of risk assumes importance. Similarly, it helps the insurer to decide as to what premium would be reason enough to cover loss payment and other incidental expenses, such as, administrative cost, dividend, etc.
Related: 15 Types of Fire Insurance Policies. Let us recall our previous understanding of uncertainty and lack of knowledge about future causation of an event. The more and more an event occurs our knowledge about future causation of the same event increases and our uncertainty gradually diminishes giving way to certainty. When uncertainty turns into certainty our prediction about the future becomes stronger and stronger and our forecast for the future becomes more and more accurate.
Going back to the issue of frequency and severity, if a person finds from experience that in his trade or profession the frequency as to the causation of an event is quite high with low cost or severity he might consider retaining the risk of loss on his shoulder.
On the other hand, if it is found that the frequency as to the causation of an event is rather substantially low with high severity and cost he may transfer the risk to insurers. Clandestine thefts in private dwelling houses may be one example of high-frequency losses with low cost or severity. Such is the case with sex discrimination.
Although young men have more accidents than young women, the insurance companies cannot use sex as a factor in calculating premiums — thus, young women partially subsidize the premiums for young men.
Insurance companies have devised various methods for more accurately rating the risk profile of certain classes of people. Thus, factors used to determine premiums for automobile insurance include the number of points on a driver's record and the number of accidents caused by the driver in the past. Another controversial factor for underwriting is the use of insurance scores , which are based on credit scores , because there is a large correlation between people with low scores and the number of claims that they file.
This, too, is limited by law in some states. Many of the factors that are indicative of someone's risk are determined from the information provided by the applicant in the insurance application. Since many high risk people know that providing truthful information will increase their premiums, they provide false information to get a lower premium.
If the insurance company provides the coverage for a lower premium, then the company, because of adverse selection, will incur more losses than it expected. Adverse selection results from the tendency of some people with high risk profiles to provide false information to get standard premiums. To prevent adverse selection, insurance companies verify the information, especially if a claim is filed.
If material information known to the insured at the time of the application was false, then the insurance company does not have to pay the claim.
Various clauses in its contracts also provide specific conditions under which a claim will not be paid, such as the presence of pre-existing conditions for a health insurance applicant. For instance, if the claimant files a claim for a health condition that the claimant would have known about when he applied for the insurance, then the company will not have to pay the claim.
Update: Obamacare has made it illegal to base health insurance premiums on pre-existing conditions. Similarly, an insurance company will not pay if a claimant commits suicide shortly after buying life insurance. Generally, retained losses are small losses that can easily be paid by the individual or organization suffering the loss. However, for large organizations and companies, losses that would be catastrophic to individuals are small losses for the organization.
Hence, self-insurance is simply a form of retained risk. Additionally, some types of losses, such as illnesses and accidents that require healthcare, are fairly predictable among a large number of workers. In these cases, many large organizations decide to self-insure. Some have argued that because there is no transfer of risk to a third-party or a pooling of losses, self-insurance is a misnomer.
However, there is some pooling of losses. Many large businesses, for instance, self-insure for healthcare and workers' compensation. The employees accept lower pay in exchange for the payment of healthcare, if an illness or accident should strike them.
If you have a chronic or inherited health condition, for example, there's likely little you can do to change how that affects your risk class and insurance rates.
Obtaining life insurance quotes from multiple companies can help with comparing costs and selecting the most affordable policy. Life Insurance. Your Privacy Rights. To change or withdraw your consent choices for Investopedia. At any time, you can update your settings through the "EU Privacy" link at the bottom of any page.
These choices will be signaled globally to our partners and will not affect browsing data. We and our partners process data to: Actively scan device characteristics for identification. I Accept Show Purposes.
Your Money. Personal Finance. Your Practice. Popular Courses. What Is an Insurance Risk Class? Key Takeaways An insurance risk class is a way for insurers to underwrite policies based on one's belonging to a particular risk group. People in each risk group will generally share similar characteristics that help insurers better estimate the chances that the policyholder will file a claim.
Riskier risk groups will pay higher premiums—for example, people who are sick, older, or have a poor driving record. Tip Some insurance companies offer no exam policies that allow you to qualify without a health examination. Important Many life insurance companies view vaping in the same light as smoking for assessing risk and setting premium costs. Business Essentials. Actively scan device characteristics for identification.
Use precise geolocation data. Select personalised content. Create a personalised content profile. Measure ad performance. Select basic ads.
Create a personalised ads profile. Select personalised ads. Apply market research to generate audience insights. Measure content performance. Develop and improve products.
List of Partners vendors. Your Money. Personal Finance. Your Practice. Popular Courses. What Is Pure Risk?
Key Takeaways Pure risk cannot be controlled and has two outcomes: complete loss or no loss at all.
0コメント