Legal Definitions - rating

In the context of insurance, rating refers to the systematic process by which an insurance company evaluates the level of risk associated with insuring a particular person, property, or activity. This evaluation helps the insurer determine whether to offer coverage and, if so, what premium (cost) to charge. The process involves analyzing various factors that influence the likelihood and potential cost of a future claim.

• Example 1: Auto Insurance

  When a new driver applies for car insurance, the insurer conducts a rating assessment. They consider factors such as the driver's age, driving history (e.g., past accidents or traffic violations), the type of vehicle being insured, and the geographic location where the car is primarily driven. If the driver is young and has a history of speeding tickets, the insurer will likely assign a higher risk rating, resulting in a more expensive premium compared to an experienced driver with a clean record. This illustrates rating because the insurer is determining the driver's risk profile to set the appropriate cost for their coverage.

• Example 2: Homeowner's Insurance

  A homeowner living in a coastal region applies for homeowner's insurance. During the rating process, the insurance company will evaluate the property's specific characteristics, such as its construction materials, age, proximity to the coastline, and the local history of natural disasters like hurricanes or floods. If the home is older, built with less resilient materials, and located in a high-risk flood zone, the insurer may assign a higher risk rating, leading to a higher premium or even specific exclusions for certain types of damage. This demonstrates rating as the insurer assesses the property's condition and location to determine its insurability and the appropriate premium.

• Example 3: Life Insurance

  An individual applies for a life insurance policy. As part of the rating process, the insurance company will review their medical history, current health status (often requiring a medical exam), lifestyle choices (e.g., smoking, participation in dangerous hobbies), and family medical history. If the applicant has a chronic health condition or engages in high-risk activities, the insurer might assign a "substandard" rating, which means they are considered a higher risk than average. Consequently, the premium for their life insurance policy will be higher than for someone of the same age in excellent health. This shows rating in action, as the insurer assesses the individual's health and lifestyle to determine the risk of paying out a death benefit and adjusts the premium accordingly.