Chapter 13-Selection and Classification of Risks

Question 1

If everyone purchase life insurance why would an insurer be able to accept them without evidence of insurability?

Answer 1

There would be no adverse selection so some would pay more than their share of total death costs and others would pay less but the insurer would collect enough premiums to pay all costs

Question 2

What should the standard insurable group for life insurance be as broad as possible?

Answer 2

• Over-exacting selection standards would hurt agency staff morale
• Over-exacting selection standards would cause a loss of goodwill among the general public
• Too few applicants would increase administrative costs per exposure unit

Question 3

Why do life companies try to select and classify exposure units carefully?

Answer 3

• Maintain equity among insureds
• Have insureds contribute to a common fund according to their potential claims
• Have actual mortality approximate expected mortality
• Achieve fair and just treatment of all insured

Question 4

How do life companies try to maintain a balance within each risk or rate classification?

Answer 4

Each below average risk that the life company accepts must be compensated for by a risk that is above average

(categories narrow as more classifications are created)
(unbalanced risk classification with poor health insured will result in a loss of competitiveness because increases in longevity will be experienced by all insurers but an imbalanced class of products will result in higher costs for that company)

Question 5

What factors affect acceptance and classification of applicants for life insurance?

Answer 5

• Age (most important single factor)
• Build
• Physical condition (and mental impairments)
• Personal history
• Family history (given less consideration than in the past)
• Place of residence (more significant for foreign residents)
• Morals
• Aviation activities
• Occupation (substandard ratings can usually be changed when occupation changes to an unrated field-substandard rated occupations are declining in the U.S.)

Question 6

What are some characteristics of the treatment of life insurance applicants?

Answer 6

• Women are charged lower rates for life policies but higher rates for annuities
• The smaller the amount at risk, the more liberal a life company can be with their underwriting standards
• We all legally have an unlimited insurable interest in our own life, but life companies are careful to prevent over insurance when circumstances do not justify such coverage

Question 7

How are aviation activities treated with life insurance applicants?

Answer 7

• Most life companies treat applicants between 30 and 60 who have adequate hours of flying experience and who only fly a limited number of hours annually a standard risk rating
• Most companies place no occupational rating or restrictions on crew members of regularly scheduled commercial aircrafts
• Many companies exclude aviation deaths for crew members of all types of aircrafts when writing their accidental death benefit riders

Question 8

What is the treatment of military personnel who apply for commercial life insurance?

Answer 8

• “Results” war clause limits the insurer’s obligation if the insured’s death is the result of military service
• “Status” war clause limits the insurer’s obligation if the insured dies while in military service outside the territorial boundaries of the U.S.
• After both World Wars, insurers revoked their war clauses without request from the insured (during the Persian Gulf conflict, life companies were not using war clauses and state insurance departments threatened to label the refusal of coverage for military personnel as unpatriotic)

Question 9

What is the function of the selection process in life insurance?

Answer 9

Decide the degree of risk posed by an applicant and match it to an acceptable classification?

Question 10

How does the risk classification process affect a company’s future?

Answer 10

A poor selection process could result in higher death claims, which would result in increasing premiums and reducing participating policy dividends, which would result in higher costs, lower sales, and higher cancellations.

Question 11

How are build tables used?

Answer 11

Mortality debits are taken for unfavorable combinations of height and weight using intervals of 25 debit points

Question 12

What information does blood tests reveal?

Answer 12

• HIV/AIDS
• Kidneys
• Liver
• Cholesterol
• Diabetes

Question 13

What does urinalysis tests reveal?

Answer 13

• Kindneys
• Infections
• Other organs