Page 34 - Insurance Times May 2023

If a house catches on fire, you have to pay Rs. 200,000 Insuring a smoker, then, is a greater financial risk given
their higher probability of serious illness and, hence, of
Every person pays you Rs. 20 a month, Rs. 240 per year
filing a claim.
Let's use our formula:
Liability and Property:
200,000 x (1000) =200 +( 240 x (999/1000)) = 200 +39.76
Companies that provide property and liability insurance
239.76
use probability to assess risks. Data show that the age
So you'll make Rs. 39.76 on average per person insured. and gender of the driver plays a role in the likelihood of
Therefore you'll make 1000 x (39.76) = Rs. 39,760.
an auto accident. The type of vehicle insured, the driver's
Now this is a really simple example (with really small geographic location and the number of miles driven
numbers), but it's the same math that insurance regularly are additional factors the insurer considers
companies hire statisticians to calculate for them. In fact, when setting premium rates based on probability.
there's a whole branch of mathematics related to this The more miles a policyholder drives, for example, the
concept called Actuarial Science and By collecting lots greater the probability he'll be involved in an accident.
of small payments, insurers know that probability will Setting rates for homeowners insurance also involves
protect them from the occasional loss and That's why probability. Factors considered include the type of
how the insurers stay in business. heating system in the home, the location and age of the
property and any added security features it has.
Applicability of probability to Insurance:
Generally, rates will differ for policyholders contracting Law of probability in insurance :
identical insurance policies depending on several analysable
Law of Large Numbers:
rating factors. Insurance providers have good reasons for
It enables insurers to predict future loss experience.
this practice. As part of the analytical procedures, insurers
study statistics to calculate and manage risk when evaluating In probability theory, the law of large numbers is a theorem
policy applications and setting premium rates. The results that describes the result of performing the same experiment
show that, based on probability, some individuals simply pose a large number of times.
a higher risk and are more likely to file claims.
According to the law of large numbers, the average of the
results obtained from a large number of trials should be close
Health Insurance:
to the expected value, and will tend to become closer as
Insurance underwriters use probability theory when
more trials are performed.
evaluating policy applications. For example, policyholders
who smoke tobacco are at a higher risk for developing Insurance companies use the law of large numbers to lessen
serious health problems. Statistics show that this often their own risk of loss by pooling a large enough number of
results in increased health insurance claims. The people together in an insured group. The size of the pool
applicant's age and geographic location also allow the corresponds to the predictability of the losses, just like the
underwriter to predict future claims based on probability. more eggs we deal with, the more likely we are to know how
many will be cracked.
Life Insurance and Annuities:
Analysing mortality rates, the insurer considers where
the policyholder lives and what socioeconomic factors
apply to the policyholder's current age and health. This
analysis helps the insurer determine rates and options
for life insurance policies and annuities using probability
theory to predict the number of years a policyholder will
live.
Insurance companies use this approach to draft and price
policies. When issuing health insurance, for instance, the
policy given to a smoker is likely more expensive than
the one issued to a non-smoker. Statistical figures show
a stronger association with a variety of health risks for
habitual smokers or those with a history of smoking.

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