Numerical Rating System
This system is based upon the principle that a large number of factors enter into the composition of a risk and that the impact of each of these factors on the longevity of the risk can be determined by a statistical study of lives possessing that factor.
It assumes that a standard risk has a rating of 100. Each factor has 100 if they are standard and no marks will be assigned. Information of each factor one by one is considered.
Favorable factors are assigned negative values called credits while unfavorable factors are assigned negative values called debits. The particular percentages to be added or deducted for each favor will depend upon the degree or its variation from the situation assumed for the normal risk and the experience of each insurer.
The algebraic summation of the debits and credits added to the per value of 100 represents the numerical value of risk. In practice, values are generally assigned to the important factors such as build, Physical condition, personal history, family history, occupation, residence, habits, moral and plan. The values assigned to the various factors are on the basis of mortality. For example, if the mortality experience of a group of insured lives with a particular medical history reflected a certain degree of overweight has been found to be 135 per cent of that among all standard risk, debit (+) of 35 marks will be assigned to such medical history.
Similarly, the degree or risk on the basis of each factor is evaluated in terms of percentage. If it is more than 100, i.e., if the risk is more than the standard the extra percentage will be debited (+) and if the degree of risk expressed in percentage is less than the 100, the lesser percentage will be credited (-) up to the difference.
The method expedites the handling of cases and holding done the expense of the selection process. It enables to make decision on the medico-actuarial investigation and reduces the operation of the subjective factor in the under-writing of risks to a minimum. The basic ratings are continuously reviewed in the height of up-to-date trends in insurance.
Various criticisms have been levied on the system. The system is thought to be too arbitration. There is much impairment concerning which knowledge is too limited to permit the assignment of numerical values. The interrelated factors are non-additive. Too many minor debits and credits are taken into account in evaluating risk.
Ratings have often to be modified by taking into account the interaction of various aspect of the risk and in particular, the probable influence on the risk of occupation, habits, mode of living, socio-economic status, moral hazard, etc.
Supporters of the system recognize its flaws but fell that it is still superior to any other method. The numerical ratings arrived at can only be regarded as a guide, and the selection of risk depends to a considerable extent on the individual judgment and skill of the medical examiner, actuaries and underwriting officers of the life insurance business.