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Home / Important Guide / Selection & Classification of Risks 

Selection and Classification of Risks

Objective of Selection

The premium to be paid by each individual has to vary according to the risk of death. The higher the risk, the higher should be the premium and vice-versa. If there are no adverse features that can shorten the normal expected span of life, a person may be classified as a first class life and his proposal for life insurance accepted at standard tabular rates of premium.

However, a person exposed to any extra hazards may be classified as a sub-standard life as the prospects of his longevity are sub-normal. In such cases, either higher rates of premium will be charged or modified terms will be offered. In extreme cases, the proposal may be declined altogether.

The objective of selection and classification is to arrive at a fair judgement in charging premium to the standard and sub-standard lives.

The judgement regarding selection is crucial for more than one reason. If the premium is inadequate, the insurer's funds will not be adequate to pay its liabilities. The insurer's solvency could be endangered.

Secondly, if any person is not charged what the risk calls for, the additional risk will have to be borne from the premium paid by others. That would not be fair to others within the community of policyholders.

If the premium charged is more than what the risk calls for, it would not be fair to the concerned person. So the selection has implications of fairness to the insurer and to policyholders, individually and collectively.

Click here to learn about the factors that govern assessment of risks.

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