Each
Insurance product is designed to provide
specified coverage for a premium that allows
the insurer to offer the coverage while
fulfilling its financial obligations. An
insurer designs the premium structure for each
product so that the premiums charged to each
insured person or group reflect the amount of
risk that each represents in relation to other
people or groups insured by the product. A
person or group that represents a greater
amount of risk is charged an appropriately
higher premium for coverage.
In order to establish an appropriate premium,
underwrites undertake risk assessment, which
involves ascertaining the degree of risk
represented by each proposed insured person or
group according to a range of criteria
established when a specific insurance product
was designed. Underwriters evaluate the level
of risk according to an individual proposed
insured's impairments or a proposed group's
characteristics. For underwriting purposes, an
impairment is any aspect of a proposed
insured's present health, medical history,
health habits (such as tobacco use), family
history occupation, or activities that could
increase that person's concerned with
mortality, which is the relative incidence of
death occurring among a given group of people.
For health and disability income insurance, in
contrast, underwriting is particularly
concerned with morbidity, which is the
relative incidence of sickness and injury
occurring among a given group of people.
In assessing the degree of risk represented by
a proposed insured, an underwriter also stays
alert for signs of possible anti-selection,
which produces a higher degree of risk.
Anti-selection is the tendency of people who
suspect or know they are more likely than
average experience loss to apply for or renew
insurance to a greater extent than are people
who lack such knowledge of probable loss. For
example, a person who believes or knows he is
suffering from cancer, emphysema, or another
serious illness probably is more likely to
apply for insurance than a person who believes
he is in good health.
During risk assessment for individual life
insurance, applicants are assigned to risk
classes. A risk class represents a grouping of
insureds that represent a similar level of
risk to an insurance company. Although each
insurer defines the parameters of its own risk
classes, most insurers identify risk classes
as preferred, standard, substandard, and
declined.
The preferred class generally designates
proposed insureds whose anticipated mortality
is significantly lower than average and who
represent a lower-than-average degree of risk.
Increasing numbers of insurers underwrite
according to use or nonuse of any tobacco
product during a specified period and,
therefore, establish "preferred non-tobacco"
an "preferred tobacco" subclasses for people
who do not use any tobacco products or use
only cigars, pipe, or smokeless tobacco; use
tobacco products infrequently; or have not
used such products for a defined period of
time, usually from one to three years.
The standard class designates proposed
insureds whose anticipated mortality is
average. That is, the mortality of these
proposed insureds is higher than the mortality
predicted for persons in the preferred class,
but lower than the mortality predicted for
persons in the substandard class.
Traditionally, most applicants for ordinary
life insurance fall into this class. The
standard class typically has been divided into
standard non-tobacco and standard tobacco
subclass.
The substandard class, also called special or
impaired risk, usually designates
persons whose anticipated mortality is higher
than average. Many insurers establish this
class for proposed insureds who have
impairments that are likely to produce a
greater-than-average risk of illness or
accidents. At most insurance companies today,
five to seven percent of policies are issued
on a substandard basis. Improved medical
technology an mortality/morbidity information
allow insurers to provide coverage at
competitive rates for people with impairments
- such as previous heart attacks, cancer
history, or insulin dependent diabetes - that
would have caused them to be declined 20 years
ago.
The declined class designates only proposed
insureds whose impairments and anticipated
extra mortality are so great that the insurer
cannot provide coverage at an affordable cost
for them. For instance, a person who has a
terminal illness or who has recently undergone
cancer surgery and needs continuing treatment
would typically be declined. A very small
percentage of proposed insureds - generally
from one to four percent - are assigned to the
declined class; insurers generally try to
offer affordable coverage on some basis to as
many proposed insureds as possible.
some insurers distinguish further among
preferred risks by assigning risks with
extremely low anticipated mortality to a
supper-preferred class. A super-preferred
class typically designates proposed insureds
whose anticipated mortality is among the
lowest of those in the preferred class. A
number of insurers have created
super-preferred classes to offer lower
premiums to their lowest-risk customers. The
factors generally considered for inclusion in
the super-preferred class include medical
characteristics and personal activities.
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