🎯 Why Risk Classification Matters

Insurers collect premium from many to pay claims for a few.
If risks are not classified properly:

• Safe customers would end up paying for risky ones

• High-risk clients may get cheap cover and cause heavy losses

• The insurance pool becomes unbalanced

So, correct classification keeps insurance sustainable and fair.

🧠 How Insurers Think During Classification

When reviewing an application, insurers basically ask:

• How likely is this person/property to face a loss?

• How severe can that loss be?

• Has anything in the past shown risk behaviour?

The answers decide premium, terms, and sometimes eligibility.

🔍 Factors Insurers Use to Classify Risk

Insurers study several aspects depending on the product type. Some common ones:

✅ Age

Younger customers (life/health/motor) usually pay lower premiums.
Older customers → higher risk → higher premium.

✅ Occupation

Office worker vs. construction worker — who faces more physical hazard?
Riskier professions = higher premium.

✅ Lifestyle & Habits

Smoking, alcohol intake, high-stress jobs, adventure sports — all increase risk.

✅ Health Condition

Medical history, weight, family history of illness — impacts life/health premium.

✅ Location & Environment

A shop in a fire-prone or theft-prone area may pay higher premium than one in a mall with safety systems.

✅ Nature of Property / Vehicle

• High-end car vs. basic car

• Old building vs. modern building with fire safety

• Commercial vehicle vs. private car

Each carries different risk levels.

✅ Past Claims History

Frequent claims in the past = higher perceived risk.
This may result in loading (extra premium) or stricter conditions.

🧯 Risk Classification in Action – Simple Example

Two people buy motor insurance:

• Asha drives safely, no accident history, lives in a safe locality

• Rahul has two past accident claims, lives in a theft-prone area

Who pays higher premium?
👉 Rahul, because the insurer sees a higher probability of future claims.

🧾 Risk Classes You Will See in Practice

Insurers broadly classify clients into:

• Standard Risk – normal expected risk, regular premium

• Preferred Risk – lower than average risk, possible discount

• Substandard/High Risk – higher chance of claim, loaded premium

• Uninsurable – risk too high, insurer declines cover

💡 Advisor Tip

When clients ask, “Why is my premium higher?”, you can say:

“Insurance premiums are based on risk.
Better safety + good health + responsible behaviour = better price.”

Encourage them to:

• Maintain good health

• Follow safety practices

• Avoid unnecessary claims

• Maintain property and vehicles well

Doing so not only protects them — it also reduces their premium over time.

🧠 Quick Recap

• Risk classification helps insurers decide premium fairly

• It depends on factors like age, health, location, lifestyle, claims history, occupation, and property type

• Lower risk = lower premium

• Higher risk = loading or stricter terms — sometimes even rejection

• Good behaviour and safe habits reward clients over time