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Difficulty: HardRisk Classification

A home office assessment of a 40-year-old's whole life insurance submission reveals two distinct non-standard factors: a chronic physiological health condition (moderate hypertension) and a high-risk recreational avocation (advanced wreck diving). The mortality tables confirm that while both factors present elevated exposure, the overall profile remains within the carrier's issuance parameters. Which of the following represents the standard underwriting methodology for classifying and pricing this specific combination of risks?

  1. Assign a substandard classification, utilizing a tabular rating approach for the physiological condition and a flat extra premium for the avocation.Answer
  2. B
    Assign a standard classification but attach a permanent impairment rider to exclude any death benefit arising from either the hypertension or the diving activity.
  3. C
    Assign a substandard classification and apply a unified flat extra premium surcharge to account for the increased exposure of both the medical history and the hobby.
  4. D
    Reject the application due to the compounded moral hazard, but offer an alternative graded benefit policy.

Answer

Assign a substandard classification, utilizing a tabular rating approach for the physiological condition and a flat extra premium for the avocation.
The correct response accurately pairs the distinct types of risks with their corresponding actuarial rating methods. In life insurance underwriting, physical health impairments that statistically worsen as an individual ages are rated using tabular methods (percentage increases of the base rate). Conversely, constant hazards such as dangerous occupations or avocations are addressed by adding a flat extra premium per thousand dollars of face amount.

Step-by-Step Solution

1
Analyze the applicant's risk factors identified in the stem.
Two factors are present: a chronic health condition (hypertension) and a hazardous hobby (wreck diving). Both elevate mortality risk.
Identifying the distinct nature of each risk factor is necessary to determine the appropriate rating method.
2
Evaluate the rating mechanism suitable for the chronic health condition.
Health conditions that worsen with age are standardly addressed via tabular ratings (e.g., Table B, Table 2), which apply a percentage increase to the standard premium.
Tabular ratings accurately reflect risks that compound as the insured ages.
3
Evaluate the rating mechanism suitable for the hazardous avocation.
Dangerous hobbies are standardly addressed via a flat extra premium (a set dollar amount per $1,000 of coverage).
Avocation risks remain relatively constant regardless of the insured's age, making a flat surcharge the most actuarily sound approach.

Key Concept

Substandard Risk Rating Methods
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Topics

Risk Classification

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