Any factor that causes a greater
likelihood of loss should theoretically
be charged a higher rate. Thus, for rating purpose, the insurers try to see the insured risks as forming part of the some class of risks that share
similar characteristics . At the same
time, for rating purpose the insurers
have to try to distinguish the specific
risk from the class of risks to find out the degree of differential treatment the risk would attract
depending on its individual
characteristics. For instance for a
health insurance cover the insurers
charge older people a significantly
higher premiums than they charge younger people for term life insurance.
Old people are more likely to fall sick than
young people, so the risk of loss
the insured’s ill health is greater in any
given below period of time,
and therefore the risk premium
must be higher to cover the greater
risk. Older people are thus treated
differently than younger people. That is a particular old man proposing himself
for health insurance would be seen par
as part of the common class of
other old men and rated accordingly .
But if they insurer finds that the old
man enjoys excellent health has
healthy exercising habits, is a
non-smoker and non-drinker , and that both his parents had lived into their nineties, and the insurers would distinguish him as a
specific risk, and a would like
that ro reduce his rates substantially
from the common rates
applicable to other old men. In a motor
insurance, information, on the driver’s
experiences and claims free
record is significant. The insurance company use the information and claims free record is significant .
The
insurance company uses the information
to assess the likelihood that a driver will have been an accident and adjust
premiums accordingly. A driver who drives great distance at high speeds, for example
might be a charged a different
rate than a driver who drives
short distance at low speed . The
rate will be adjust justifiable by only
if there the insurer is sure that a high-speed long-distance driver incurs
greater risk to an insurance pool than the slow, around town driver. There fore in
treating the insured differently the insurers should be able to logically and
actuarially justify their reasons for doing so, so that the
discriminations is not unjust or un
lawful. RATING CONCERNS; We have seen
that the rate would depend on
various factors, Deciding
the factors and ascribing appropriate
weights to them is the
insured’s challenges. Depending on the type of the insurance
product line of business the insurance companies some times
use automated ratings
packages by encoding the ratings rules, thereby a reducing the amount the of manual
work in working out premiums. In
a marine cargo insurance, the rate would
depend on factors such as a nature of
cargo, scope of cover, packing, mode
of conveyance, distance and past claims experience.
An example of a Risk Based
Pricing Model (RBPM) in marine Cargo insurance is given
below:. EXAMPLE FACTORS AND
WEIGHTS-1: On a composite
matrix a range of a weight age
points can be ascribed to multiple
rating factors based on the loss propensity of a marine cargo consignments as given below. The total rate to be charged
for a marine cargo policy can be
distributed over the 14 factors mentioned above contributing
to 100 per cent of the premium.
Such mathematical rating models
helps companies in fixing
rates in the balanced manner, i,
e, the underwriter would be more
objective in his decisions if there is a rating from structure in place.
FACTORS AND WEIGHTS-2: In the motor context weight age
points can be ascribed to
multiple rating factors to rate a vehicle as given below . It is a
possible that many more rating factors could be added at the or
a few removed depending
on the conditions of a
particular market. The total rate to be
charged for a motor vehicle can be derived from the above weight ages proportionate to their
loss-making potential which can be spread over the above 14 factors mentioned contributing
to 100 percent of the premium.
Such rating factors and weight ages become the back done of a risk factored
rating system (RFRS) or Risk factor based Rating System, which
is used in countries like Japan.
RISK ASSESSMENT: We have seen that risks are a evaluated
before acceptance or
immediately after acceptance for finalizing intricacies
of the rate. Risk evaluation can involve
an inspector’s visit to
check the site a and seeing the physical
features of the risk. This can include
checking the constructing of the building its height
the processes done in it's a its proximity
to other risks, the geographical, location for chances the of flood or earthquake or cyclone
prone areas etc., The insurers may suggest risk improvement such as a installation of
fire proof doors, burglar alarms
and smoke detectors, or offer incentives
by the way of discounts for improving the risk. Ths insurer’s do mathematical modeling
based on risk perceptions .
Methods of identifying hazards, objectively assessing then and weighing their loss and potential on mathematical scales in all finding out the probability of an operating hazard with which hazards can operate on a given risk and are studied using
certain models called
hazards identifications study, (HAZID) and hazard and Operability studies.
(HAZOP), which enable the
insurers to evaluation risk potential accurately
and scientifically. The basis
HAZOP model given in indicates how the
mathematical weights work in the risk evaluation. As the likelihood increases the loss becomes more of a
certainty than a fortuitous event. As the severity goes up it becomes increasing
difficult for the insurer to
absorb the losses.
Risk management reduces
the Likelihood or
probability of a loss and reduce the severity
or intensity of a loss. Loss prevention
and loss minimization
activities are initiated at the instance of the insurers. They form
agencies to educate target on reducing losses by the various methods. Drivers of
tankers carrying hazardous
goods are trained by the on fire prevention, cargo handlers at ports are trained to handle cargo with
care, pedestrians are taught road discipline, and the general public is advised
on precautions to be taken while bursting crackers, during festival
seasons. The philosophy is that
if any loss is averted or any risk preserved
the insurer gains; beyond
this, of course, the preservation of the nation’s wealth is a very everyone’s responsibility.