Calculating Insurance Premiums: How to Determine a Client’s Exposure to Risk

The art and science of determining a motor vehicle owner’s risk profile by the insurance company can end up as quite a process. Essentially, the insurance company needs to determine how much of a risk it needs to take when insuring a client.

Before we look at the factors taken into account when calculating insurance premiums, let’s consider the definition of “the risk profile.”

What is risk and what is a risk profile?

According to, risk “involves exposure to… danger and the possibility of [financial] loss… In finance, risk often refers to the chance an outcome… will differ from an expected outcome.”

In other words, the insurer’s value proposition is to provide insurance against the loss or damage to a motor vehicle as a result of incidents like motor vehicle accidents, severe weather incidents like a tornado or hailstorm, or windscreen damage caused by loose stones on the road thrown up by other vehicle’s tires. 

How is risk calculated?

A potential client’s risk is quantified and assessed by analyzing past behaviors and the consequences of those behaviors. A metric known as a standard deviation is part of the risk calculation. Essentially, the standard deviation calculation determines the risk profile’s volatility concerning its historical average. Ergo, the standard deviation looks at the current risk profile against the backdrop of its average over time.

Another primary factor when determining a client’s risk profile is the police report from any car accidents. This report is not admissible in court, but it is used by insurance companies to determine risk.

It is worth noting that the police report seems to play a significant role in the substantial increase in the client’s insurance premiums. And, it takes hiring an Allstate insurance attorney in LA to argue against the use of this police report.

This risk calculation is possibly best described by citing an example. Let us assume that we have two clients, Client A and Client B. Every aspect of their lives is equal, the number of years they have been driving, their ages, their gender, their daily stress levels, and the distance and roads that they travel to work and back every day.

The fundamental difference between the two drivers is the number of accidents that Client B has had. Client A has had no accidents over the last five years. Therefore, there have been no claims.

Client B, on the other hand, has been involved in three motor accidents over the last five years with the car being written off or scrapped as a result of two of these accidents.

Without involving any math or statistics, it is reasonable to assume that Client A is treated as one of the insurer’s valued clients. It is wise to accept that Client A’s risk profile is relatively low. Consequently, Client A’s monthly insurance premiums will be relatively small.

On the other hand, Client B’s risk profile is high and would have increased after every accident. It is also realistic to assume that Client B’s risk profile would have increased exponentially after every claim.

Final thoughts

Thus, a reasonable assumption to make is that insurance companies reward good driving behavior. And, it is equally plausible to conclude that the same insurance companies punish irresponsible driving habits. Thus, it makes sense for many reasons, including financial, to practice safe driving behavior

Colin Shaw
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Written by Colin Shaw

Colin has been in the finance market for over 20 years and specialises in best business practice to make an organisation profitable. The only man for the job when it comes to numbers and accounts with a keen talent for simplifying finance for the wider market.