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Difficulty: EasyRisk Classification

An underwriter is evaluating a life insurance application. The applicant has a stable chronic medical condition that presents a higher-than-average mortality risk compared to individuals of the same age and gender. However, the underwriter determines that the applicant is still insurable. Which of the following risk classifications will the underwriter most likely assign to this applicant, and how will it affect the premium?

  1. Substandard risk, resulting in a higher premiumAnswer
  2. B
    Standard risk, resulting in an average premium
  3. C
    Preferred risk, resulting in a discounted premium
  4. D
    Declined risk, resulting in the application being rejected

Answer

Substandard risk, resulting in a higher premium
The correct answer correctly identifies that an insurable applicant with a higher-than-average mortality risk is classified as a substandard risk. To offset the increased probability of a loss, the insurer charges this applicant a higher premium, often referred to as a rated policy.

Step-by-Step Solution

1
Analyze the applicant's risk profile presented in the scenario.
The applicant has a higher-than-average mortality risk but remains insurable.
Identifying the mortality risk level is the first step in determining the correct underwriting classification.
2
Match the identified risk profile to the standard insurance risk categories.
A higher-than-average but insurable risk corresponds to the 'substandard' category.
Insurers categorize risks into preferred (lower risk), standard (average risk), substandard (higher risk), and declined (uninsurable).
3
Determine the premium impact for the assigned risk category.
Substandard risks require a higher premium (a rating or surcharge) to account for the increased likelihood of a claim.
Insurance premiums must be commensurate with the level of risk assumed by the insurer.

Key Concept

Risk Classification Categories and Premium Impacts
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Topics

Risk Classification

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