Introduction

Risk classification is the process of separating into groups (classifying) potential insureds (risks). The mechanism of classification is to group the risks by various pieces of information, such as age or occupation. The purposes of classification include, but are not limited to, the determination of acceptability for insurance and the type, amount, and price of that insurance. The justification for classification is that risks are assumed to be placed in relatively homogeneous groups—that is, groups in which the risks have similar probabilities of loss. If classification is accurate, insureds are treated equitably (since similar insureds pay similar premiums and the premiums are related to expected loss) and insurance companies can accurately estimate expected losses.