In 1730, the most disastrous fire Philadelphia had ever witnessed ravaged through storefronts and homes on Fishbourn’s Wharf—and from its ashes arose a mighty empire that continues to exist today: the insurance industry (“Philadelphia”). It was this fire that ultimately led Benjamin Franklin to form the first American insurance company in 1752 to be named the Philadelphia Contributionship (“Invented”). This would be an incredibly successful endeavor that would insure homes across Philadelphia against fire hazards for centuries to come (“Invented”), and it would eventually lead to the trillion-dollar era of the insurance industry that continues to exist today. This industry is one that almost everyone has heard of from advertisements, commercials, …show more content…
Car insurance professionals pour over data for hours to determine and evaluate the risk that each client poses to them, and they then set a premium based on that determined risk to remain profitable (Hussain). This process of risk management is known as underwriting, and it is pivotal to the success of auto insurance companies (Hussain). The reason why is because it increases revenue with the risk of added expense and therefore softens the blow that the potential risk of losses could have on these insurance companies (Hussain). For example, take a risky policyholder paying $1,000 a month in premiums to a car insurance company and who has an accident after just ten months that costs that company $10,000 to cover. Then, by the end of those ten months, that insurance company will have generated $10,000 in revenue from the policyholder and lost $10,000 to cover the accident. This would make it so that the company will have generated no profit from that risky client as a result of the fact that they were riskier and thus had a crash so early on. On the other hand, if the insurance company had charged the same policyholder $2,000 a month in premiums, then even after the $10,000 accident, they would still have $10,000 in profits because they would have gotten $20,000 in premiums from those ten months and only lost $10,000 for the coverage of the accident. From this example, it is not difficult to see how managing risk by setting a client’s premium based on their riskiness has a huge effect on the profitability and success of any auto insurance company. And setting that premium is no easy task—car insurance companies use many factors to manage risk by determining the rates of each of their customers. Just a few of these extensive factors that are used for this essential risk management are gender, stability and past records, and the condition of a client’s