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Insurance agents are often guilty of over-simplifying risk assessment. Through charts, tick sheets and sheer expertise insurance agents can be extremely efficient in defining your risks. When you ask about risk assessment, your agent will usually give you a broad overview of the process.

This is not meant to keep information from you; it’s done to make a complicated process more accessible. But it may have become too simple. A recent survey by the Consumer Federation of America (CFA) found that consumers oppose the use of factors like education, occupation, and home ownership in calculating insurance premiums. According to the CFA, consumers found it unfair that these non-driving factors affect their premiums.

Risk Assessment Needs to be Better Explained

This result demonstrates the difficulties that some insurance agents, and providers, have in relating how premiums are calculated. Part of this may stem from the simplistic understanding of risk assessment that most non-insurance professionals have.

Their perspective is that risk assessment should only be based on factors that directly influence that risk. So for auto insurance, they expect factors like driving history, previous accidents, speeding tickets, etc. to be the only considerations. Things like occupation and education don’t directly influence the ability to drive, so they shouldn’t count.

Risk Assessment is a Multi-Faceted Process

In fact, risk assessment is a far more complicated process. These non-driving factors are used to define demographics because research has found that different demographics do create different risks. Insurers take these factors into account so they have the most comprehensive understanding of risks, and can create the most appropriate premiums structure. These methods are based on years of research and only factors that could conceivably alter your risk are considered.

The best way to think about it is to consider the wider implications of a demographic. Two people of similar age and driving experience, but working in wildly different occupations may well be identical risks. But when you take into account every single driver in each occupation, one may offer far more risks than the other. This must be a consideration in risk assessment.

The truth of the matter is that risk assessment is most accurate when it takes in every possible factor. This applies to every kind of risk, from auto to property, to cyber liability. Risks can be defined in many ways, using every available piece of information. The more accurate the risk assessment, the more appropriate the resulting premium will be. It’s important that consumers understand this, and that insurance professionals get better at explaining it.

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