When an insurance company starts formulating the interest rate and premium structure for a particular customer, then the most important aspect considered by them is the risk factor associated with the materialization of the hazard or damage or death. Hence, insurance risk is the most important aspect in the insurance sector. It is the risk factor which pushes the customers to access insurance because they want to hedge the future uncertain occurrence of the hazard or damage or loss through financial reimbursement from the insurance company.

In order to evaluate the risks associated with the customer, the insurance company first gathers all the relevant information about the person seeking insurance. This information helps the insurance companies in determining the premium to be charged from the customer.

The different ways of calculating the risk level associated with the insurance seeker are:-

Method of Insurance Scoring for calculating insurance risk

It is the method where the probability of the claim to materialize is measured. If the insurance company's perception on the policy holder is that the concerned person would be most probable to claim the insurance then the premium charged would be higher. As the probability of materialization of the hazard or damage or loss increases, the premium to be paid also increases.

This process involves three basic methods such as:-

•    Neutral Network method
•     Statistical and Segmentation probability
•    Advanced techniques involving the method of rule based modeling.

Method of the factor profiling of the Insurance risk
This is the method where the information collected, is extensively used generally involving a wide array of variables both numerical and categorical type.
The modeling method involving Prediction of Insurance risk
This method utilizes the record of the insurance seeker. That is the history of insurance claims by the concerned person. It helps the companies to formulate a model in assessing the risk associated with the individual by judging their past claim history.