Commonly Used Rating Factors By Type of Insurance

The following lists common rating factors for most of the common lines of insurance offered. I didn’t create these lists. I compiled these from an alternative source for future reference. Also they only represent a subset of all the possible rating factors that can be used.

Travel insurance:
• Length of holiday – The longer the trip the longer the period of cover and hence increasing the probability policyholders making a claim
• Destination – different destinations have different exposures to risk. The cost of attaining medical attention or transport costs is also different for different areas.
• Age and gender – This rating factor impacts the likelihood and the type of medical claim the policyholder is exposed to.
• Cover type – This includes how many people are covered and the level of inclusions such as cancellations, baggage loss and medical costs.
• Length of time between purchase and travel – The longer the gap the higher the chance that a cancellation claim may occur.

Motor:
• Age of driver(s): this is seen as a proxy for experience or riskiness of driving behaviour, which will influence the size and frequency of claims
• Sum insured: a higher sum insured may lead to higher payouts if a claim occurs
• Claims history: previous claims may indicate poor driving and therefore a higher likelihood of future claims
• Type of car: factors such as make/model and age may influence the occurrence and severity of claims (for example, if it is an expensive car)
• Business vs private use: commercial vehicles are typically driven more often or for longer periods of time, which increases relative exposure
• Location: the postcode may be an indicator of various risks such as weather and theft (due to local crime rates)
• Parking location: whether it is parked in a secure garage or on the street may affect the possibility of theft

Medical malpractice insurance for doctors:
• Specialty of practice – the most important rating factor – the type of work that doctoris performing (i.e. General Practice, Obstetrics, Neurosurgery, etc.). Certain practices are riskier than others.
• Location of work – State of practice (i.e. NSW, VIC, SA, etc.), urban or rural location (rural locations can have a higher risk), private practice or in a public or private hospital (practice in public hospitals can have a higher risk and are not subject to certain government recoveries).
• Expected billings/sessions for the year, which is a proxy for how much work the doctor expects to perform. The higher the billings/sessions the greater than risk.
• Number of years being covered (i.e. claim made years) – measures/identifies how many years of historical plus current work will be covered under the claims made policy, since claims are • covered by the year in which they are reported (rather than occurred). If it is an occurrence year based policy, then this might not be a rating factor (except to maybe get a sense at how proficient the doctor may be at his/her practice).

Home property insurance:
• Sum insured – key exposure measure linked with claim size
• Location – the perils a risk is exposed (and hence its claim costs) to will depend on its location. E.g. properties in Far North Queensland are more prone to cyclone/windstorm damage, while properties in Sydney are subject to hail and earthquake damage.
• Age of property – older properties would generally be prone to more damage to newer houses, but newer houses may be more costly to repair.
• Building material – how prone a property is to damage will depend on its construction materials. E.g. a weatherboard house would sustain more damage than a brick/concrete built house.
• Policy age – tend to find that newer policies tend to have worse claims experience, possibly due to bad risks constantly churning between insurers to get best price.
• Prior claims experience – this is a contentious rating factor (on a technical level anyway) I believe. Similar to how NCB status on motor insurance is generally found to be a non-significant factor in technical analysis, claims history does not appear as a significant predictor of claim costs. However most insurers include it as part of their target price calculations.

Consumer Credit Insurance:
• Length of the loan – The longer the loan length, the larger the exposure to risk
• Type of cover, whether it is a single cover or double cover
• Occupation of the insured – Some jobs are more prone to redundancy than others
• Age of the insured – Older people will have more chance to have accident
• Exposure measure is sum insured/loan amount

Workers’ Compensation:
• Occupation of Employees
• Wages Paid to Employees
• Industry of Employer
Certain industries may often be subjected to additional safety criteria (e.g. mining)
• Claims history of Employer
• Special rates for apprentices and non permanent workers

Extended warranty product:
• Type of products (e.g. washing machine, TV, fridge)
both claim frequency and repair cost would vary by different type of product
• Cost of goods
key exposure measure links to the repair cost, hence claim size
• Manufacturer
likely to impact the claim frequency, as some brands are more reliable then others even after their original warranty
• Length of original warranty
linked to exposure measure, as don’t need to cover for the period of the original warranty
• Domestic/ imported good
likely to impact the repair cost, as there might be no part to replace for imported good
• Location
linked to the cost of transport to the repair centre

Boat Insurance:
• Age of Boat. Newer boats attract a higher premium, while older boats attract a lower premium. The repair costs for newer boats are higher in general.
• Boat Value. The higher the boat’s value at the commencement of the policy, the higher the premium due to our increased exposure to risk.
• Type of boat. Small powerboats or sailing boats attract lower premiums than high speed powerboats or yachts.
• Hull construction material. Boats constructed of fibreglass tend to attract lower premiums than boats constructed of timber.
• Optional covers (eg. Waters Skiers Liability, Racing Cover, Additional Boat Contents Cover). The more optional covers you choose the higher your premium will be.
• Level of basic excess. If you choose a higher basic excess this will attract a lower premium, due to a lower claim cost retained by the insurer.
• Payment frequency. If you pay by the month your premium will be higher than if you chose to pay in one annual payment because insurer charges a monthly fee.

Lenders Mortgage Insurance (LMI):
• Region: different areas are subject to different property market forces, for example prices in Sydney continue to trend upwards, while those in Hobart have been going sideways.
• Type of property (i.e. free-standing house, apartment, etc) and its value
• Loan to valuation ratio: the more that is being borrowed the higher the risk
• Loan term: shorter term loans are riskier due to higher monthly repayments
• Rating variables using the borrower’s information include:
• Credit score
• Employment history, for example, if the borrower is self-employed or have had unexplained periods out of the workforce they’de be considered higher risk
• Income and details on any existing loans
• Whether they’re a first home buyer or not

Business insurance (SME):
• Location for each of the business(e.g. franchise)
• Then for each of the business:
• Liability sum insured (there is usually a minimum sum insured requirement)
• Building sum insured
• Stock & content sum insured which may contain regular stock and seasonal stocks
• Turnover
• Occupation
• Number of employees

Business Interruption:
• Business type – different businesses have different suppliers and may be more susceptible to disruption and thus have differing claim frequencies;
• How long the business has been running – more established businesses may have contingency plans in place which may reduce the frequency of claims;
• Annual gross revenue – the greater the revenue, the larger the average claim size;
• Number of employees – indicator of the size of the business where a greater number of employees suggests a larger business and a greater than average claim size;
• Past claims history – businesses which have had claims in the past may be more likely to claim in the future.

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