What Is Insurance Risk Class?
An insurance risk class is a group of individuals or companies that have similar characteristics, which are used to determine the risk associated with underwriting a new policy and the premium that should be charged for coverage. Determining the insurance risk class is a primary component of an insurance company’s underwriting process.
Insurance Risk Class Explained
While no two individuals are exactly the same, many people exhibit similarities that allow them to be classified. Insurance companies need to know the likelihood that underwriting a new policy for a new client or business will be a profitable endeavor. After all, taking on a new policy for several hundred dollars a year won't be a good idea if the policyholder winds up creating thousands of dollars in claims.
In the case of auto insurance, an insurer may examine the age of the vehicle, the age of the driver, the driver’s history, the amount of coverage requested, and the area in which the vehicle is operated. These factors, when taken together, create a profile of a specific type of driver, which can be used by actuaries to determine how drivers in this particular profile act.
The insurance risk class allows insurance companies to determine the amount of coverage needed, as well as how much that coverage should cost.
Life Insurance Risk Classes
For life insurance, metrics like smoking status, height, weight, gender, family history, and age determine your risk class. Once you apply, the answers you provide to health and lifestyle questions will are taken into account by your agent, and an internal underwriting team will provide the most accurate risk class and quote possible.
"Substandard" is the broadest category and includes anyone who doesn’t fit into any other class. Some insurance companies will have categories exclusively for those who identify as smokers.
Sometimes called preferred elite, super preferred, or preferred select, this is the best classification you can get. You’re in excellent health, you have an ideal height/weight ratio, and nothing about you raises a red flag.
This class gets mostly the same deals as preferred plus members; outside of maybe high cholesterol or blood pressure, you’re in very good health.
Good health, but there might be a few issues, such as not being in the ideal height/weight range. Your family history is good, so you shouldn’t have any surprises in your future.
Not great height/weight ratio, you have an average life expectancy, and a medical test came back with a few notes. The main difference here is that your family history plays a role, and if yours had issues before the age of 60, you might pay more.
You’re placed in what’s called a table rating system, graded by either letters or numbers (typically either A-J or 1-10). Complicated health histories, like diabetes or heart disease, are a ticket into this class.
Your premium price will, on average, be the Standard price plus 25% for every step down the table:
A = Standard + 25%
B = Standard + 50%
C = Standard + 75%
D = Standard + 100%
E = Standard + 125%
F = Standard + 150%
G = Standard + 175%
H = Standard + 200%
I = Standard + 225%
J = Standard + 250%
Due to the added health risks, you’ll pay more as a smoker. You'll be indicated in the above classifications with the additional denotation of "smoker."