Risk Classes Of Insurance

Because persons represent varying risks due to differences in age, health, sex, etc., it would not be equitable to place all applicants in a single group. Certain persons have a higher mortality experience that would result in higher premiums for all applicants. For this reason, insureds are placed in risk classes according to their individual characteristics. These classes or groups of risks, however, must remain large enough for the “law of large numbers” to be applicable. The number of classifications utilized by an insurer is determined by considerations such as equity, competition, stability of experience, and administrative efficiency. 

The basic classifications used by life insurance companies are age and sex. Age also may determine the amount of life insurance the company will accept and whether a policy will be issued at all. Physical condition, sex, occupation, and the occupational history of the applicant are particularly important in classifying health insurance applicants. In both life and health insurance certain applicants (10 to 15 percent) do not qualify as “standard” risks because of certain qualities and impairments which make them particularly subject to loss. These “substandard” risks are either rejected, placed in a separate class and charged appropriately higher premiums, or provided with coverage that is limited or restricted in some manner. In this way, each group is relatively self-supporting, paying premiums which provide for its own losses. However, complete equity is seldom achieved, because each individual differs from all others