How Insurance Companies Assess Risk

Oct 01, 2021

Risk is all about how likely it is that something might happen to damage a person or property. Risk determination is based on many factors such as potential “acts of God”, human behavior, and the age of the people being covered. Most risk is, of course, based on uncertainty and it is a gamble on the part of the insurance company. However, it’s a gamble that is always in their favor due to the software they use to help evaluate risk based on a variety of information.


* Smokers versus non-smokers – Life insurance and health insurance companies generally give a discount to non-smokers because it’s a known scientific fact that smokers are more likely to get ill or die sooner. 

* Teenagers cost more – Car insurance companies charge teenagers a lot more for insurance coverage due to the fact that they are scientifically proven to be more likely to get into an accident than experienced drivers.

* The more stuff the more cost – Regardless of the type of insurance you get, the more the dollar amount you need to cover, the higher the fee is going to be because that is more risk for the insurance company. 

* Geography – Where you live will make a huge difference in the cost of your insurance, no matter what type. This is because a lot of risks is assessed on a local basis. How many tornados does your area have? Do you live in a flood zone? Do you live in an area with high traffic and a high rate of accidents? What about theft? Does your zip code happen to be in a high-crime area? All of these things will factor into your insurance costs.

* Your age – If you are older, life insurance is going to be more expensive. The reason is that everyone dies and you’re more likely to die the older you get. The cost of the insurance is based on a combination of the average lifespan of your sex in your zip code and other health factors.

* Your lifestyle – People in certain lifestyles pay more for insurance than others. For example, if you love skydiving, your life insurance will be a lot more expensive than if you don’t. If you like riding motorcycles, you’re going to pay more. 

Risk Assessment 

Insurance companies use data and statistics to compare things and assess risk. They do sometimes compare things that don’t always seem to go together but using a lot of complicated data they extrapolate a risk factor for you when determining the price of your insurance and whether they’ll even cover you or not. 

The insurance company inputs all the data they gather from you into their complicated computerized systems and outcomes your “risk assessment” which will determine whether or not they will cover you and at what price. These assessments are important for the insurance company to become and remain profitable. But they are also good to know so that you can manage your own risk in order to get better prices.