Risk Assessment and Management
Risk varies by the class of business an insurer chooses to write. As a specialty personal lines insurer, our company’s principal risks include fire, theft, liability and any number of different weather-related causes. Certainly there’s a financial risk component to the insurance business. Investing in dangerous investment vehicles that fail to perform as expected would be a risk of another sort. But in terms of the insurable risk, it’s principally the moral fiber of our policyholders and weather conditions. Understanding the moral fiber of our policyholders can assist us in predicting the ultimate risk profile of a particular insured.
It can manifest itself in terms of an insured party’s upkeep of its property, its Aside from the moral hazard, the physical condition and location of a property can also provide insight into the nature of a given risk. We can generally price for most of these factors. In much the same way as a life insurer can predict death rates from mortality tables, we can reasonably predict our losses based on the history of our book of business and the nature of the policyholder.
The one thing we can’t predict is what Mother Nature is or isn’t going to do to us in a given year. We do know, however, what she’s done to us on average over time; so, we build our premium rate levels and our business forecasts based on historical weather loss averages. When weather is better than average, we benefit, and when it’s worse than average, we come up short. When we benefit, it’s reflected in our premium rate levels, either in the form of rate decreases or in the form of lesser rate increases.
When we come up short, likewise, it’s reflected in our premium rate levels in the form of increased rates to absorb the impact of excessive weather. Weather can include anything from tornadoes to floods, hurricanes, snowstorms, ice storms and more. We insure a lot of manufactured housing and low-valued housing, principally, property risks. When Mother Nature decides to get ugly, it impacts our book of business. We tend to live with the Weather Channel in the spring and summer months.
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