Which criteria are used in the first step of rate making to classify risks?

The first step of rate making involves classifying risks based on the types of objects insured and the hazards of exposure associated with them. This classification is essential because it allows insurers to categorize different risks into groups that exhibit similar characteristics and potential for loss. By understanding the nature of the objects being insured—such as homes, vehicles, or commercial properties—as well as the specific risks or exposures associated with them, insurers can develop more accurate premium rates tailored to those classifications.

For instance, when insuring automobiles, factors such as the vehicle type, safety ratings, usage patterns, and geographical locations are considered to determine the risk and corresponding rates. Similarly, for property insurance, exposure to natural disasters, crime rates, and the condition of the property can influence risk classification.

Other options focus on factors that may be used later in the process. While historical claims data can inform adjustments in rates based on past performance, it does not form the initial basis for classifying risk. Customer demographics can play a role in underwriting and rate adjustments but are not the primary criteria for classifying the fundamental nature of the insurance risks. Policy limits and deductibles help tailor coverage and financial terms but do not relate to the classification of risk types themselves. Thus, classifying based on objects