Insider Information: How Insurance Companies Measure Risk

Scroll to:

Insurance companies use a methodology called risk assessment to calculate premium rates for policyholders. Using software that computes a predetermined algorithm, insurance underwriters gauge the risk that you may file a claim against your policy. These algorithms are based on key indicators about you and then measured against a data set to weigh the risk. Insurance underwriters carefully balance the insurance company’s profitability with your potential need to use the policy.

Resources such as Moody’s Risk Analysis contain detailed data sets that help insurers segment potential customer groups’ predictive behaviors. For example, third-party software vendors can pull verified data from this source to quickly calculate decisions about the creditworthiness and risk assessment of certain subsegments of their audience. Subsegments could be males under the age of 25, a family history of certain illnesses, or single women who fall into a particular income bracket.

Insurance underwriters seek to protect both policyholders and the companies that back these policies. Using verified research data helps underwriters evaluate an insurer’s potential exposure to claims that could result in expensive payouts. Economic forecasting, wage and industry trending and market stability assessments all are part of the data that is ultimately used to calculate your insurance premium.
If there are criteria present that tend to result in more payouts, your payment increases. For example, smoking is a high-risk behavior because it is known that smokers are likelier to need hospitalization. Health insurance companies may charge smokers more because there is a statistical likelihood that the policy owner will cost them money.