Territorial Grouping of Risks
Definition - What does Territorial Grouping of Risks mean?
Territorial grouping of risks is a system of classifying risks for the purpose of establishing equitable rates according to their contiguity in territory or other measuring standards for hazard and expense variations. In many liability and property insurance lines, such as automobile insurance, the rates are set according to their zip code locations, which may not be equitable since a zip code can change on the other side of the street. The method allows for the grouping of risks according to their classifications and territories based on the insurance companies' claims experience.
Insuranceopedia explains Territorial Grouping of Risks
Location is a very important determinant of a company's loss experience. Even in other lines, like worker's compensation or health insurance, the prevailing atmosphere that can affect claims experience varies according to state. The role of the insurance company is to define a grouping of territories that exhibits either a lower or greater exposure than the standard, but large enough to provide significant claims experience to be used for rate making. Such a territorial grouping of risks should lead to developing a risk classification system that is reasonable, just, predictive of risk as well as distinctive of individual risk classification.