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Question

Difficulty: EasyRisk Classification

An underwriter is reviewing a life insurance application. The applicant has a chronic health condition that increases their mortality risk above the statistical average, but they are still deemed insurable by the insurance company. Which of the following risk classifications will the underwriter most likely assign, and how will it affect the premium?

  1. Substandard risk; the applicant will pay a higher premium than a standard risk.Answer
  2. B
    Standard risk; the applicant will pay the average premium since they are still considered insurable.
  3. C
    Preferred risk; the applicant will pay a lower premium as long as the chronic condition is currently being managed.
  4. D
    Declined risk; the applicant will not be offered a policy because their mortality risk exceeds the average.

Answer

Substandard risk; the applicant will pay a higher premium than a standard risk.
In life insurance underwriting, an applicant who represents a higher-than-average risk (due to health, occupation, or habits) but is still insurable is classified as a substandard risk. To appropriately offset the increased risk of loss, the insurer charges this applicant a higher premium.

Step-by-Step Solution

1
Analyze the applicant's risk profile provided in the scenario.
The applicant has a chronic health condition causing an above-average mortality risk, but remains insurable.
Identifying the severity and insurability of the risk is the first step in risk classification.
2
Evaluate the standard risk classifications (Preferred, Standard, Substandard, Declined).
Preferred is below-average risk, Standard is average risk, Substandard is above-average but insurable risk, and Declined is uninsurable risk.
Understanding the definitions of each class allows for accurate categorization.
3
Match the applicant's profile to the appropriate classification.
The above-average but insurable risk profile matches the 'Substandard' classification, which requires a proportionately higher premium.
Insurers charge higher premiums to substandard risks to compensate for the increased likelihood of a claim.

Key Concept

Risk Classification and Premium Rating
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Topics

Risk Classification

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