Risk Classification

What Does Risk Classification Mean?

Risk classification is the process of grouping individuals or entities based on the risks they present. This includes similarities in the potential costs of losses or damages, the frequency with which these risks occur, and whether measures are taken to reduce or eliminate the risks.

Insuranceopedia Explains Risk Classification

Certain industries classify risks as low, medium, or high, while insurance companies categorize them as standard, substandard, or preferred. This preferred-standard-substandard system is most common in life insurance, where underwriters use health, family history, and lifestyle to place applicants into a tier. The same inputs drive what factors impact the cost of life insurance premiums. Regardless of the classification, members of each group share similar characteristics, such as the same potential cost for a loss or similar methods for reducing or eliminating risks. Insurers may offer credits to insurable subjects that present lower risks. When a property is classified as higher risk because of location, claims history, or condition, the owner may need to look at high-risk homeowners insurance instead of a standard policy.