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Question

Difficulty: MediumRisk Classification

An underwriter is reviewing two life insurance applications. Applicant X has a chronic health condition that is currently managed with medication. Applicant Y is in excellent physical health but regularly participates in hazardous recreational rock climbing. Both applicants fall outside the parameters for standard coverage, but the insurer is willing to issue policies to both. Based on standard underwriting principles, which of the following best describes how these risks will most likely be classified and rated?

  1. Both will be classified as substandard risks, with Applicant X likely receiving a tabular rating and Applicant Y likely receiving a flat extra premium.Answer
  2. B
    Both will be classified as substandard risks, but Applicant X will receive a flat extra premium while Applicant Y will receive a tabular rating.
  3. C
    Applicant X will receive a tabular rating because health is a physical hazard, but Applicant Y will be declined because hazardous hobbies are considered moral hazards.
  4. D
    Rather than classifying them as substandard, the insurer will require both applicants to utilize risk avoidance before any policy can be legally issued.

Answer

Both applicants will be classified as substandard risks, with the health condition likely receiving a tabular rating and the hazardous avocation likely receiving a flat extra premium.
In life insurance underwriting, applicants who pose a higher-than-average risk but are still insurable are classified as substandard risks. When determining the premium, underwriters use a tabular rating (a percentage increase over the standard rate) for chronic health conditions because the risk of death typically increases progressively with age. Conversely, for hazardous avocations like rock climbing, underwriters apply a flat extra premium (a set additional fee per $1,000 of coverage) because the risk of a fatal accident remains constant regardless of the insured's age.

Step-by-Step Solution

1
Determine the broad classification for both applicants.
Because both fall outside standard guidelines but are insurable, they both fall into the substandard risk classification.
Standard coverage parameters require average risk; any accepted risk above average is substandard.
2
Identify the appropriate substandard rating method for Applicant X's health condition.
Applicant X will likely receive a tabular (table) rating.
Tabular ratings add a percentage surcharge to the standard rate and are used for health issues where the mortality risk progressively increases with biological aging.
3
Identify the appropriate substandard rating method for Applicant Y's hazardous hobby.
Applicant Y will likely receive a flat extra premium.
Flat extra premiums add a constant dollar amount per thousand dollars of coverage and are used when the risk (like a climbing accident) is constant and not tied to biological aging.

Key Concept

Substandard Risk Classification and Rating Methods
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Topics

Risk Classification

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