Insurance Underwriting is a tricky business. It’s sometimes hard to explain to a client, why apparently identical risks, such as two similar cars or houses, can attract different premium rates and be subject to different conditions.
The reason is actually quite simple. It all goes down to risks being similar but not necessarily identical.
Let’s take for example the policy covering the legs of former Victoria’s Secret Model Heidi Klum. While it’s not necessarily your everyday policy, it perfectly highlights the risk assessment process.
At the height of her career, Ms. Klum insured her legs for $2.2Million.
Logically, that would mean $1.1Million per leg. Two legs, same person. It doesn’t get any more identical than that, right?
Not according to the underwriter who quoted the policy, it isn’t!
For it seems that Ms. Klum fell on glass once, an incident which resulted in a small scar on her left leg.
While most women would kill for Heidi Klum’s legs, scar and all, from an underwriting perspective, this meant that her left leg was not as perfect as her right one. Therefore, while similar, the legs were not identical in the value placed on them.
So, the underwriter did not split the $2.2Million equally between both legs. Instead the policy covered the right leg for $1.2 Million, and the scarred left one for a mere $1Million.
Similar risks are not necessarily identical. While it is possible to standardize to a certain extent, mainly for certain types of simple risks, a particular risk may be different from others in its class. Therefore the underwriter will always want to know the risk they are asked to insure.
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