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How Insurance Agency’s Evaluate Risks & Set Premium on Different Policies?

How insurers asses the risk of life, car, health, etc.? On what basis they set premium for every risk? A pervasive question strikes the mind of every individual or business across the globe.

Well, the decisions are based on various factors including your gender, age, income, geographical location, and even your hobbies. The higher the risk to your life, the higher your insurance premiums will be.

For example, if you have purchased a life insurance policy, but your occupation consists of substantial risks, or you are much engaged in risky sports you need to pay high premiums as compared to people who are in desk job working in a safe environment. Moreover, according to studies, even your credit score plays a vital role during risk assessment.

According to the insurance firms, individuals with poor credit score have a higher probability of payout for the consequences. Overall, it all depends on the insurance companies on which factor they pay extra attention while selling their policies.

Thus, below I attempted to give you a glimpse of how insurance companies asses the risk factor for the following insurance policies:

Life Insurance

In life insurance, many factors kick in as it is for your heirs after you die, your premiums are considerably subjective to your life expectancy. While gauging the elements, your life, health, lifestyle, and occupation will directly come into play. Even your credit score can influence your life expectancy as bad credit is usually allied to accident-prone activities.

Combined with various studies, on average women tend to live longer than men in the US. Therefore, considering all the factors, women pay low premiums than men. According to the World Health Organization, a woman is expected to live the age of 81.6, and a man is supposed to live the age of 79.3.

Your current standard of living can have a far-reaching impact on your life expectancy and so your life insurance premiums.  If you are a smoker, then your premiums can increase up to 15% to 20%, but in case, if you quit the practice, both the health and your pocket may benefit.

In the end, staying healthy is one of the best ways to get a reasonable life insurance premium.

Auto Insurance

While creating an auto-insurance policy, underwriters usually take into consideration your driving behavior, evaluate the chances of accidents and then fix your policy. A clean driving record will generally navigate you toward better amounts and “good driver discounts” down the road. And a good credit score is an added advantage.

In fact, according to the study by the Federal Trade Commission, despite several factors such as age, race, and income levels- people with bad credit score pay higher to the insurers. Moreover, your location, as well as the people with whom you stay, can affect your rates. For example, the researcher’s stats that people living in big cities are more prone to road accidents or theft or destruction than the people who live in less-populated areas.

Some studies also show that married people are less prone to accidents as they are worried about their family and never take risks on the road, whereas youngster who has less maturity level have more accidents than their older colleagues. Still, if you have a clean driving status, it will help you irrespective of your age or marital status.

Home Insurance

Underwriters consider numerous factors while assessing home insurance policy some of which includes the structure, stability, and age of your home. Its geographical location also plays a crucial role as it prescribes its prospect for multiple risks ranging from theft and larceny to natural disasters.

The probability of weather-related claims can considerably increase the number of your premiums. As per the report by Insurance Information Institute (III), homeowners frequently claim for wind or hail related policies. Furthermore, the costliest types of home insurance claims are associated with lightning, fire and debris elimination- making these particularly troublesome for home insurance companies.

Other influences such as the price of your house and its interiors, along with your home’s vicinity to hydrants, police stations, fire departments and more are used to decide the probability that you will claim for.

Cyber Insurance

Today, every business is in touch with technology to ease their work processes, which has ultimately fueled the growth of cyber-attacks. Thus, including cyber insurance to your cyber-security strategy is a viable decision. According to reports by Broker Marsh, the number of companies buying cyber insurance has increased by a third between the years 2011 and 2012.

However, assessing risk for cyber insurance is challenging for underwriters as there are no facts and figures to analyze the threat. It entirely depends upon estimations. The reason why it is challenging, insurers don’t have sufficient tools or resources to assess the risk of cyber-attacks. Moreover, insurers also lack the expertise for such evaluations. So it is essential for businesses to share all their data with their insurance partner to get the maximum coverage on data breaches or losses.

You May Read: Importance of Information Security in the Cloud


Besides these factors mentioned above, there are countless other data points that impact your insurance agency management & it’s procedures in making policy premiums including your past actions as well. 

Diana Krall

Diana Krall brings more than five years of experience in managing and analyzing the insurance business processes at Insurance Support World, a well-recognized specialized insurance outsourcing Services Company. With her writing skills, She has been thoroughly researching and sharing her viewpoints about the insurance industry trends, which are helpful in driving business growth.


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