Questions and Answers
What are substandard risks expected to produce compared to a group of normal lives?
What concept must be emphasized in substandard risks?
Group concept
All members of a substandard risk group will survive for a shorter period than the normal life expectancy.
False
What must be known about extra mortality in the incidence of extra risk?
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Which of the following factors influences the financial burden of extra mortality?
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What are the three broad groups that substandard risks typically fall into?
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What do most companies utilize for the treatment of substandard risks?
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What does 'rate up' the age of the applicant mean?
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What do Extra Percentage Tables classify risks based on?
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Rates under substandard classifications increase in proportion to the degree of extra mortality involved.
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Study Notes
Substandard Risks
- Defined as individuals likely to have a higher mortality rate than normal life groups.
- Emphasizes group concept; predictions are based on average experiences of large groups rather than individuals.
- Not every member of a substandard group will have a reduced life expectancy; rather, more members are expected to not achieve normal life expectancy.
Incidence of Extra Risk
- Involves assessing both the degree of extra mortality and the life stage when this extra mortality is likely to occur.
- Financial impact varies depending on when the increased claims arise—early life, middle age, or old age.
- Groups with mortality occurring later in life generally pay lower extra premiums than those with earlier risks.
- Three broad hazard categories for substandard risks:
- Hazard increases with age.
- Hazard remains constant across ages.
- Hazard decreases over time (e.g., past illness impairments).
Treatment of Substandard Risks
- Insurance companies employ various methods for managing substandard risks.
- Risk treatment adjustments often take the specific nature of the hazard into account, though practical considerations can lead to deviations from theoretical treatments.
Increase in Age
- The "rate up" method requires applicants to be considered older than their actual age when calculating premiums.
- This adjustment accounts for extra mortality risk and aligns premiums using standard tables based on the applicant’s rated-up age.
Extra Percentage Tables
- A prevalent method for assessing substandard risks by classifying them into groups determined by expected mortality percentages.
- The number of classifications varies between three to twelve, based on the extent of extra mortality the insurer will cover.
- Premium increases are not always proportional to the mortality risk—rates for different classifications may not reflect doubling or one-and-a-half times the standard rates.
- This inconsistency arises because premiums incorporate loading that remains consistent across classifications.
- Calculations for substandard classifications rely on actual mortality rates rather than overly cautious tabular mortality estimates.
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Description
This quiz explores the concept of substandard risks and how they relate to mortality rates. It covers the assessment of extra risks at different life stages and the financial implications for insurance companies. Dive into the hazard categories and treatment of substandard risks.
