Introduction
Understanding risk and how insurance works is essential for anyone, including a 19-year-old student. Here is a clear, step-by-step explanation of the main concepts you provided.
1. Five Risk Management Concepts
- Avoidance: Avoiding a risk means choosing not to engage in the activity or exposure at all. Insurers may view some risks as too large to insure if the potential loss is unacceptable.
- Reduction: Reducing the likelihood or severity of a loss. Example: installing a sprinkler system to limit damage from a fire.
- Retention: Keeping the risk yourself instead of buying insurance; this is sometimes called self-insurance.
- Transfer: Moving the risk to someone else, often through a contract. A common form is insurance, where your risk is transferred to the insurer.
- Sharing: Pooling risk across several insurers or members so that a large loss is spread out. This is more common for very large risks.
2. Company Underwriting
Insurance companies use their own standards to decide who is insurable and under what terms. Company underwriters review each application to determine eligibility and risk level.
- Risk Rating: How risks are rated can be based on:
- Class: How the applicant compares to similar groups of insureds.
- Insured’s Experience: Past behavior and experience of the applicant.
- Underwriter’s Experience: The underwriter's best judgment.
3. Field Underwriting
Field underwriting is the screening process agents use when evaluating and qualifying prospects before issuing a policy.
4. Classifying Risks
After collecting essential underwriting information, applicants are classified to determine rates or denial of the application:
- Preferred Risk: The applicant is above the standard health and moral guidelines.
- Standard Risk: The applicant falls within normal underwriting guidelines.
Practical Note for a 19-Year-Old
Young drivers, renters, and students often face higher rates due to perceived higher risk. Building a safe driving record, maintaining stable housing, and providing accurate information can help improve risk classification over time.