California Life-Only & Accident and Health AgentCalifornia Law - Life and Accident & HealthEasy
An applicant for a life insurance policy has a history of specific health conditions. The insurer decides to issue the policy but at a higher premium rate due to increased risk. This is an example of what underwriting principle?
- ARisk Classification
- BMoral Hazard
- CInsurable Interest
- DAdverse Selection
Show answer & explanationAnswer & explanation
Correct answer: A. Risk Classification
Risk classification is the process by which underwriters assess and categorize applicants based on their health, occupation, and lifestyle to determine the appropriate premium rate that reflects their individual level of risk. Issuing a policy at a higher premium for increased risk is a direct application of this principle.
Why the other options are wrong
- B. Moral hazard refers to increased risk due to a change in behavior after obtaining insurance, not initial risk assessment.
- C. Insurable interest is the financial stake one has in the life of another, a requirement for policy issuance, not an underwriting principle for pricing risk.
- D. Adverse selection is the tendency of higher-risk individuals to seek insurance more than lower-risk individuals, not the act of classifying risk itself.
Risk Classification
The process by which insurers evaluate and categorize applicants based on their risk factors (health, occupation, lifestyle) to determine appropriate premium rates.
- Ensures fairness among policyholders.
- Prevents adverse selection.
- Results in different premium rates (standard, preferred, substandard).
Memory trick: Underwriters balance risk with classification.