Everyone knows that we get insurance to cover potential risks. Insurance premiums will of course be directly proportional to the level of risk that their attached policies are covering. This article explores the curious relationship between risk and insurance prices.
Different insurance products may have different interpretations of how risky certain things are. You would expect an eighty year old to pay lower car insurance premiums than a twenty one year old but, the same twenty one year old will come up on top every time when it comes to life insurance. It can therefore be said that different insurance products will have their own interpretations of risk
I'm going to take a risk of sounding patronising: do we really know what risk is? When you take a second or two to think, this question is actually far more expansive than it seems. Risk is actually derived from the Italian word 'rischio' meaning a source of peril.
Taking a look at my Oxford English Dictionary I get no fewer than six distinct meanings. When accounting for the life insurance industry jargon we get a seventh meaning referring to 'the risk' which in this context means whoever is being insured rather than an event that might cause loss or damage.
As a life insurance specialist two key element of what risk is have emerged to me, there must be an element of uncertainty, and there must be a potential for loss.
This is, however, seemingly too simplistic for the insurance industry to use. When calculating life insurance policy costs we also need to encompass a third ingredient which is a measurement that allows risk to be distinguished from uncertainty.
The probabilities of certain events happening, such as death or injury need to be calculated. This process involves using complex financial models based on past statistical data. While pricing factors such as age and sex are beyond your control there are some steps that can be taken to save some money. Smokers will always get a lousy deal when it comes to life insurance, so quitting can save you a packet. Insurance firms will class you as a smoker if you have consumed a cigarette in the last twelve months. If you're classed as overweight you'll also take a hit to the pocket. So cutting down on those excess pounds is a great idea.
Hopefully I have demonstrated how insurance and risk are intertwined and in order to understand the price of life insurance we must first define just what risk is.
Bryan Collins is a life cover specialist, specializing in Endowment Mortgage Insurance and Endowment Insurance
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