Why might an underwriter assess frequency and severity of risks?

An underwriter assesses the frequency and severity of risks primarily to determine pricing structures. Understanding the likelihood of a claim occurring (frequency) and the potential cost if it does occur (severity) allows underwriters to accurately evaluate the level of risk that an insurer is taking on. This comprehensive risk assessment informs the premium that must be charged to cover anticipated losses, administrative costs, and a profit margin.

By analyzing historical data and trends related to specific types of insurance coverage, underwriters can establish a pricing strategy that reflects the risk profile of the clients or insured entities. This systematic approach helps ensure that the insurer remains financially viable while also being competitive in the market.

While preparing legal documents, improving customer service, and meeting regulatory standards are important functions of insurance practice, they do not directly relate to the fundamental reason for analyzing risk frequency and severity in the context of underwriting and pricing.