The first thing, probably the most important thing, an insurance company have to do in underwriting process is determining the insurance risk profile. Insurance companies make "groups" or categorize individuals that have similar characteristics. These groups or category will be used to determine the risk when the company writing a new policy and determine the premium that will be charged for insured's coverage. It is true that no individuals are having exact same characteristics, but some people showing similarities in particular category. This is not apply only to individuals or person but also companies or business venture. Why the insurance company need to categorize their applicant? The reason is company's profit, underwriting new policy determine company's profit. If the company make a right calculation, they can gain profit from the policyholder's premium. Even if insured file a claim, it won't hurt the company's financial state. However, it is not good idea in taking several hundred dollars a year as premium but the policyholder end up creating thousand of dollars in claims because insurance company make miscalculation. 

I take auto insurance as example because the case is common and the risk class is easier to classified than any other insurance. As explained in previous article, insurance company use several measurement in examine their applicants. The age of the vehicle, driver's age, history of driver, the amount of coverage requested and the area that the vehicle operated are the basic information they need. These information will create a profile of driver's type which can determine how the drivers act on the road. This actuarial analysis can determine actual risk of the drivers might have. The amount of coverage needed and how much the coverage should cost also are determined by the insurance risk profile. Insurance company then make risk classes for individuals and companies with the similar characteristics. The risk classes are preferred, standard and substandard.  

Many Insurance companies will combine their premium earnings by balancing the low premiums (which means low revenue) with policyholder which have bigger premiums (most likely preferred risk classes) associated with more risky drivers. They take this measurement to limit the risk between 

policies' portfolio and the amount of premiums from all the policies they bring in.