Insurance Risk Class

Insurance companies don’t have psychics with crystal balls on staff. They don’t know what’s going to happen in the future. However, their business depends on making very good guesses about what’s likely to take place...at least in the aggregate.

They do this by looking at an individual situation and picking out key attributes. Then they compare these facts to large sets of data in order to make educated determinations of likely probabilities for certain events.

If you are a 95-year-old smoker who still works as a high-dive performer, you might have trouble getting life insurance. Actuarial tables suggest that your remaining life expectancy is about, oh...95 minutes.

The act of categorization and comparison that insurance companies do in order to make these risk determinations creates groups of similar situations. As in: all chain-smoking nonagenarian high-divers go in the same group. These groups form insurance risk classes. They help determine how easy it is to get insurance (whether the company will give you a policy at all) and how much they will charge for the policy.

The highest-risk classes might be out of luck entirely. The company isn't willing to take on the risk. For the classes they are willing to insure, high-risk ones will pay more for the policies than those in lower-risk groups.