risk behaviors examples | risk segmentation | Determine the ranking factors

 

CLASSIFICATION OR SEGMENTATION OF RISKS;     

risk-behaviors-examples

     

                                                                     For a risk to be insurable, the entity must insurer can predict its behavior, for which it is necessary that there is experience about its occurrence and that this experience is projected into the future. Therefore, it is necessary to study the risk behavior in a large number of cases and extrapolate them by converting the observation frequencies into probabilities.

      Not all risks of the same class have the same probability occur, but that possibility maybe different depending on certain factors or characteristics.

                                                     Thus, for example, the probability of fire depends, among other factors, on the type of materials of the construction, or the probability of becoming ill depends, among others, on the age and sex of the people.

        Insurance entities must classify the risks or rather the people or objects exposed to risk, taking into account the factors that influence the behavior or probability of the occurrence of the risk being different, and order them according to those factors, according to that greater or lesser probability.

           Classifying or segmenting risks is thus establishing classes of risks taking into account its nature and the possibility of its occurrence? This requires:

      > Determine the ranking factors.  

      > Statistically check that, indeed, the probability risk     occurrence depends on these factors previously determined.

Segmentation is carried out within each branch of the insurance according to their nature and severity, establishing a series of risk groups or classes, within which the risks that are homogeneous are included.

 The classification factors depend on the insurance branch in question and generally there are several influencing factors, so the classification will be made according to the possible combinations of them.

Thus, for example, in death insurance the factors that most Influencing the probability of occurrence are the age of the insured, their state of health, sex, and perhaps other factors such as lifestyle (such as smoking);

                                                               That is, there is not a single influencing factor, but several.

Insurance entities can choose, to classify risks, a small or a large number of ranking factors. In the first case, people or objects whose behavior is not strictly homogeneous;

                                                                                   In the second case, on the other hand, the valuation of each risk will be tighter but the complexity will also be greater and, on the other hand, in each group of risks, there will be fewer of them, perhaps producing the effect that the statistical results are less significant.

                     Many times, on the other hand, the influence of a factor on the Risk does not occur in isolation, independently of other factors, but rather it is the combinations of several of them that have an influence on risk. Thus, for example, in the automobile insurance industry, the sex of the driver may be a determining factor in risk behavior, but it does not have a homogeneous influence, as it also depends on age and marital status, for example.

                                    Risk segmentation is essential for the insurer and for the insured. For the insurer, because, if the forecasts indicated by the calculated probabilities are met,        it guarantees a price or sufficient premiums according to the risk that he assumes.       For the insured, because in this way his insurance premium corresponds to the severity of the risk and pays the right price.

In order to achieve the fairest possible premiums, banks Insurers have established different classes and categories in each branch, reaching in In some cases a growing number of risk groups and a complicated index of classifications and in other cases, on the contrary, as occurs in an accident insurance, a few classifications are sufficient.

                   Many times, the experience of each insurance company is not enough for the establishment of an adequate classification, because there is a lack of a sufficient mass of insured risks to give reliability to the statistical results, requiring the most generalized experience possible, which is only achieved through groupings made up of insurers that put together the experiences collected or through statistical sources of the general population.

                The risk classification cannot be static. The accelerated technological advance and social changes require constant observation and at the same rate of the changes that take place, for which reason the modification of the risk classification criteria used in each branch by the insurance companies are more and more frequent.

                           According to the above, we can distinguish different methodologies to carry out the risk classification or what is the same, to find the factors that are significant and influence the probability of occurrence of the risk on a specific person or object.

 

Static and dynamic risk classification;

                                                                      When the study of risk behavior is carried out on a past accident experience, with observational data corresponding to a closed observation period, the classification is said to be static.

On the contrary, the dynamic classification implies that, on a permanent basis, the statistical bases are updated with the information on new claims that are occurring, so that these may affect the risk classification in the future if, from said claim experience, it is appreciated that the factors influencing it are changing.