Selecting the Good Risks
Insurance companies make business choices in selecting individual risks and in selecting the overall amount of risk they’re comfortable with. To “discriminate” is to recognize differences, such as when an individual has a limited amount of money to spend, and they must choose (discriminate) between two investments.
Just as that person would review all of the objective merits that make one investment better than another, an insurance company, before choosing to invest (take a risk), makes choices in their underwriting selection process. Indeed, any process of selection requires us to discriminate, to recognize differences between options and to make choices. The process of risk selection in the insurance business works the same way.
Insurance regulation permits companies to discriminate, as long as they do not do so unfairly. There must be a causal relationship between the existence of a risk’s characteristics and the insurer’s choice not to insure it or to charge for the trait’s existence. Find best home loans offers in the internet. For example, we couldn’t say we choose not to insure people who wear plaid clothing just because we don’t like plaid clothing or because we simply believe that people who wear plaid clothing are poor risks.
That might be viewed as being unfairly discriminatory. However, if we could demonstrate that there is a causal relationship between plaid clothing and loss frequency/severity, we could use it to determine eligibility or pricing for people who wear plaid. This is why insurers are allowed to consider prior driving citations to determine rate and eligibility for coverage; we have proven that the occurrence of the citations affect future loss frequency.
Some insurance companies believe that virtually all risks are insurable at the right price. They believe that it is simply a matter of identifying the appropriate rate for the specific risk presented and whether the person is willing to pay that price. There are insurance companies in the United States, for example, that specialize just in “high risk” drivers, who must pay higher prices than the average-risk driver to get insurance. If they are willing and able to pay the price the company has established for the higher risk they present, then the company is willing to insure them.
Different insurers also choose the level of overall risk and exposure they are comfortable with, and that is how they choose to allot capital, i.e. invest in their business. Again, this is much like how an
individual chooses to invest personal income. Insurers (in fact, all businesses) make choices where to allot capital.
The important message here, regarding selecting good risks, is that insurance companies use objective, quantifiable data to select and price risks. You need to prove that the price you are charging is fair and based upon fact and that your choices in selecting those risks meet the same criteria.
