Comprehensive Risk Assessment Tools for Property & Casualty Insurance
Property insurance protects against the risk of monetary loss of personal and business property, such as homes, cars and business assets. Casualty insurance protects against legal liability for injuries or property damage. Insurance companies use profiling, modeling, scoring and classification techniques to assess risk levels and determine the appropriate insurance premiums.
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Profiling
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Profiling risk factors is one way to assess the risk of an insurance portfolio. It involves identifying the segments that generate most of the insurance claims. If companies are able find a way to minimize exposures to these segments, they can reduce claims expenses and drive higher margins. For example, if an insurance provider determines that a high percentage of property damage claims are coming from a handful of neighborhoods in a city, it could raise insurance premiums or stop writing new insurance policies in that area. Car insurance providers compile risk profiles based on age, gender, driving history and other factors to determine premium levels for different cars and customers.
Modeling
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Modeling is an extension of the profiling tool. It uses historical claims data to predict risk levels of future insurance policies. Higher risk usually means higher insurance premiums. For example, an auto insurance provider might use historical data to assess higher premiums for a young driver with a sports car than a retiree with a minivan. Similarly, businesses located in certain neighborhoods might be high risk based on historical claims ratios, which is the ratio of claims to premiums. According to a white paper hosted on the website of software company Rosella Software, predictive assessments depend on large volumes of useful and relevant data.
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Scoring
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Insurance risk scoring is the rating of insurance policies based on their risk level. Decision trees and professional judgments are two ways to implement insurance scoring. Decision trees divide customer segments into smaller groups of low- and high-claim policies. This process continues until no further improvements in terms of separating out the riskier claim levels are possible. Judgment-based scoring uses manual or automated judgments to determine the scores for different insurance policies. However, high-risk applications or special situations work best with manual scoring. For example, local insurance agents might have more up-to-date and relevant information on the financial situations and insurance requirements of families and businesses in their neighborhoods than a central database at headquarters. Therefore, they would be in a better position to score the relative risks of insurance claims.
Classification
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Insurance classifications help reduce overall risk and enable insured individuals and businesses to pay premiums appropriate to their risk levels. Insurance companies should choose classification variables based on certain standards, such as homogeneity and definition. Homogeneity means that similar risks should be in the same class and dissimilar risks in different classes. These classes should be well defined, which means that each risk should be placed in the right category to avoid unequal application of the classification system.
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