What is meant by "risk classification"?

"Risk classification" refers to the process of categorizing insured individuals or entities based on their risk profiles, which includes analyzing factors such as health, age, occupation, location, and previous claims history. This classification helps insurance companies to assess the potential risk they undertake when issuing a policy and to determine appropriate premiums based on the level of risk associated with insuring that particular individual or entity.

By accurately categorizing insureds, insurers can ensure that they maintain financial stability and offer fair pricing to policyholders. This method is crucial for risk management, allowing insurers to group similar risks together and predict future claims more reliably. Risk classification is a fundamental concept in insurance underwriting, guiding not only premium calculations but also policy terms and conditions.