The level of risks involved in any particular insurance determines the premium that it would command. Insurance companies factor in the maximum quantifiable aspects while ascertaining the level of risk. Insurance plans that involve factors with a higher risk of claims command a higher premium rate.
Today evaluation of risk in insurance is far more accurate with the availability of a lot of relevant information at hand. In fact, insurance companies make sure that they collect as much information about the insured as is possible and this information is then used to determine the risk levels of the insurance policy.
Most insurance companies today use three main methods to analyze the risk level of a particular insurance plan.
Insurance Risk Factor Profiling
It has been observed that information acquired for a policy occasionally has a lot of variables, involving both numerical and categorical data with a lot of high sounding information. Therefore insurance risk factor profiling has been widely used by the industry for which the insurance companies had to collect a very large amount of information on the insured.
Insurance Predictive Modeling
Past claim history is the most important information in predictive modeling as past customer insurance records can easily help develop models for risk assessment. The insured’s past insurance history along with demographic, geographic, psychographic, financial and health information is taken into consideration in predictive modeling. There are two broad approaches for insurance risk assessment through predictive modeling techniques and they depend on the type of predicted information or variables at hand. If the type of predicted variables is categorical then the Classification Techniques are used, and if not, then the Value Prediction methods are used.
Insurance Scoring Methods
Insurance scoring methods essentially measure risk potential in an insured in terms of a claim. This means that the focus of this method is to quantify the factors in an insured’s profile that has the potential of leading up to a claim. Insurance scoring using numerical rating of insurance policies measures the level of risk of being claimed.
There are three main insurance scoring methods and they are:
- Segmentation and statistical probability insurance scoring
- Insurance scoring with Neural network
- Hybrid advanced insurance scoring techniques with rule-based modeling