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Question

Difficulty: HardRisk Classification

A 34-year-old applicant submits an application for a permanent life insurance policy. The medical exam confirms perfect health, and the applicant's family history is free of hereditary diseases. However, a supplemental questionnaire confirms the applicant participates in deep-water cave diving multiple times a month. According to standard risk classification practices, how is this application most likely to be treated?

  1. It will be issued as a substandard risk with a flat extra premium added to the base rate to account for the specific avocation hazard.Answer
  2. B
    It will be issued as a substandard risk using a tabular rating system, as the actuarial risk of the hobby increases exponentially with the applicant's age.
  3. C
    It will be issued as a standard risk, but the insurer will document the hobby as a moral hazard that requires annual underwriting reviews.
  4. D
    It will be declined outright because voluntary participation in extreme activities creates a speculative risk that cannot be insured.

Answer

The policy will be issued as a substandard risk with a flat extra premium added to the base rate.
When an applicant is in excellent health but engages in a hazardous avocation like cave diving, insurers typically classify them as a substandard risk. To account for this specific, constant level of risk that does not progressively worsen with age, the standard industry practice is to apply a flat extra premium (a fixed additional charge per $1,000 of coverage) rather than a tabular rating.

Step-by-Step Solution

1
Evaluate the applicant's physical health and family history.
The medical exam and family history indicate a low mortality risk, which would normally qualify for standard or preferred rates.
Health status establishes the baseline mortality risk for the applicant.
2
Analyze the impact of the applicant's avocation (cave diving).
Cave diving is a highly hazardous activity that significantly increases the probability of accidental death, overriding the otherwise excellent health profile.
Underwriters must consider all sources of risk, including occupations and hobbies, before finalizing a classification.
3
Determine the appropriate rating method for the increased hazard.
Because the risk associated with cave diving is constant (it does not inherently worsen due to the applicant aging, unlike a medical condition), a flat extra premium is applied.
Tabular ratings are used for health issues that compound with age, whereas flat extra premiums are used for constant hazards like dangerous occupations or hobbies.

Key Concept

Risk Classification and Premium Rating Methods
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Topics

Risk Classification

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