Many insurance applicants are not aware of the risk assessment process of the insurance providers to evaluate the applicant for coverage. The applicant’s information is accessed and then the premium amount is decided. How the insurance providers decide what the insured has to pay is based on the risk assessment process.

Here is a look at how the premium is affected due to life insurance risk assessment process.
Quantifying risk
When the insurance policy is purchased, the risk is transferred to the insurance companies. Insurers predict the losses that will occur based on the law of large numbers within a group of people so as to make the transfer of risk profitable for them.
Law of large numbers
Determining when an individual will die is not possible, but making a prediction of a group of people is possible. Insurers make their prediction based on the law of large number according to which, bigger the group of policyholders, more accurate will be the future losses prediction.
Exposure units
The property or person who is insured is the exposure unit. For law of large numbers, insurance providers combine a number of homogeneous exposure units. The error in predicting losses will be less when the number of exposure units in a group will increase.
Actuaries
Those who collect and evaluate the data related to exposure units and risks are known as actuaries. The data is used to prepare mortality tables. Actuaries can predict the future losses arising due to death or illness of the insured based on the mortality table. The applicant is classified and the premiums are decided based on, where his/her profile falls on the table.
The premium charged by the company covers the losses. There may be some applicants who may outlive their expectancy and some who may die prematurely. Thus average risk is beneficial in determining the expected losses. The risk factors determine the approval or rejection of the insurance policy and also the monthly premium amounts. A young and fit person would have to pay lower premium as compared to an old and ailing person.