But that is a very simple example. Risk classification is more than just looking at a driving record. It is also based on other demographic variables such as age, gender and the value of the car insured, all of which can effect future outcomes. By analyzing these variables and driving characteristics of a large population over time, insurers can better predict risk and reduce uncertainty over prospective claims. This in turn helps consumers by ensuring more fairness and accuracy in the premiums they pay.
Risk classification benefits consumers.
Since risk classification will always be part science and part art, each risk pool is bound to include policyholders that represent less risk than others in their pool. Responding to the competitive pressures of the marketplace, insurance companies will develop or utilize different methods to improve their identification and categorization of such people, thus enabling companies to offer those policyholders a lower premium and attract them away from their current insurers. Risk spreading occurs when the varying risks of individual policyholders are combined and spread among all policyholders of a given population. Negative impact on consumers. Insurers are left with the high-risk policyholders taking advantage of the artificially low rates.