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Difficulty: MediumRisk Classification

An insurance producer submits a life insurance application for a client. During the underwriting review, medical records reveal that the client has an ongoing cardiovascular condition. Actuarial and statistical data indicate that the mortality risk associated with this specific condition increases steadily as the person ages. Based on standard risk classification principles, how will the insurer most likely evaluate and rate this application?

  1. Classify the applicant as a substandard risk and apply a tabular rating to charge a higher premium based on a percentage of standard mortality rates.Answer
  2. B
    Classify the applicant as a substandard risk and apply a flat extra premium that adds a fixed dollar amount per $1,000 of coverage.
  3. C
    Decline the application because chronic health conditions are classified as moral hazards, rendering the applicant uninsurable.
  4. D
    Classify the applicant as a standard risk, but require the applicant to self-insure the condition by accepting an exclusion rider for any cardiovascular-related death.

Answer

Classify the applicant as a substandard risk and apply a tabular rating to charge a higher premium based on a percentage of standard mortality rates.
Because the applicant has a health condition where the risk of mortality increases with age, the insurer will typically classify them as a substandard risk and use a tabular (table) rating method. This method applies a percentage increase (a multiple) to the standard mortality rate, which appropriately scales the premium as the applicant gets older.

Step-by-Step Solution

1
Identify the nature of the risk presented by the applicant.
The applicant has a cardiovascular condition where the mortality risk increases steadily with age.
Understanding whether a risk is increasing or constant is necessary to determine the correct rating method.
2
Determine the appropriate risk classification.
Because the risk is higher than average, it falls into the substandard risk classification.
Standard classification is reserved for average risks, while preferred is for below-average risks.
3
Select the correct premium rating method for an increasing health risk.
A tabular (table) rating method is applied.
Tabular ratings use a multiple of standard mortality rates and are specifically designed for health conditions that worsen over time, unlike flat extra premiums which apply to constant risks.

Key Concept

Substandard Risk Classification and Tabular Rating
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Topics

Risk Classification

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