Risk Classification: Preferred, Standard, and Substandard

In health insurance, underwriting is the process by which an insurer evaluates the risk of an applicant to determine if they are insurable and, if so, at what rate. Risk classification is the outcome of this process. The underwriter's primary objective is to ensure that the premiums charged are commensurate with the level of risk the company is assuming, thereby preventing adverse selection—the tendency for higher-risk individuals to seek insurance more aggressively than lower-risk individuals.

Underwriters use a variety of sources to assess risk, including the initial application, medical examinations, the Medical Information Bureau (MIB) reports, and attending physician statements (APS). Once the data is gathered, the applicant is placed into a specific risk category. For a deeper understanding of how these processes fit into the broader industry, see our complete Health Insurance exam guide.

Standard Risks represent the majority of the insured population. These individuals possess an average life expectancy and health profile based on the insurer's mortality and morbidity tables. When an applicant is classified as standard, they pay the base premium rate without additional surcharges or restrictive riders.

Preferred Risks are individuals whose health, habits, and occupational hazards are significantly better than the average. To qualify for preferred status, an applicant typically must demonstrate:

• Excellent physical condition and low Body Mass Index (BMI).
• No history of tobacco use.
• A clean family medical history.
• Low-risk occupations and hobbies.

Because these individuals are less likely to file claims, insurers reward them with lower-than-standard premium rates. This classification is a powerful tool for insurers to attract high-quality business.

Substandard Risks (also known as "rated" risks) are individuals who do not meet the requirements for standard insurance due to physical impairments, unfavorable medical history, or hazardous occupations/hobbies. While these individuals are still insurable, the risk of loss is higher than average, requiring the insurer to adjust the policy terms.

To account for this increased risk, underwriters may use several methods:

• Rated-up Premiums: The insurer charges a higher premium, often calculated as a percentage of the standard rate (e.g., 150% of standard).
• Exclusion Riders: Also known as impairment riders, these are attached to the policy to specifically exclude coverage for a pre-existing condition while providing full coverage for all other health issues.
• Temporary Increases: For certain conditions that may improve over time, an insurer might apply a temporary surcharge.

If you are preparing for your certification, you can test your knowledge of these rating methods with our practice Health Insurance questions.

Underwriters look at a holistic picture of the applicant. The following factors are critical in determining if someone is Preferred, Standard, or Substandard:

• Age: Generally, the older the applicant, the higher the risk of health issues, leading to higher premiums.
• Gender: Statistically, women tend to seek medical care more frequently than men, which can influence health insurance rates (though this is strictly regulated in many jurisdictions).
• Occupation: Someone working in a coal mine or as a high-rise window washer represents a higher risk than an office administrator.
• Lifestyle: High-risk hobbies like skydiving or auto racing may lead to a substandard rating or specific exclusions.
• Medical History: This includes chronic conditions like diabetes, heart disease, or past surgeries.