Substandard risk

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Substandard risk
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Substandard risk (also known as impaired risk) is a term in insurance industry for a person who is riskier to insure than average. There are certain factors that determine what is considered risky and what is not. If a person has characteristics which are risky to an insurer, he is considered as a substandard risk. It means that the substandard risk has to pay more money, than some other person which is in another class in risk classification, for the same insurance. Insurance companies have to equalize the difference between the money they get from risky individuals, and the money they need to pay them, so they use methods of rating substandard risk to evaluate the risk and classify their applicants[1].

Substandard risk factors

The factors that can trigger a substandard risk are for example[2]:

  • high age,
  • health issues,
  • family history of health issues,
  • drinking alcohol above average,
  • smoking cigarettes,
  • using drugs,
  • a poor driving record,
  • dangerous occupation,
  • dangerous habits,
  • residence in unhealthy surroundings.

Methods of rating substandard risk

There are several methods of rating the risk, such as[3]:

  • Extra percentage tables - a method using a numerical system. A number of premium rates are set for varying ages and policy types based on the number of deaths per thousand that will increase with age for varying cases. The additional rate can increase by 125% to 500% of the standard premium rate.
  • Permanent flat extra premiums - in this method insurance company charges a fixed amount of money per $1000 of insurance. It can be removed over time if the factors will disappear.
  • Temporary flat extra premiums - the same method as above, except for the fact that the amount is established only for a certain period of time because of a risk that is higher at the beginning but it will decrease over time.
  • Rating-up in age - a method that assumes that a person is older than he actually is and he is charged more due to the "assumed" age.
  • Lien system - in this method insurance companies can place a lien on policy. If the insured dies too early, the benefits are decreased by the lien.

Risk classification

There are five basic risk classes[4]:

  • Preferred Plus - it is the best class you can get. It means you have perfect health and other factors.
  • Preferred - you have good health but there are some minor issues.
  • Standard Plus - you still have good health but there are more issues that in Preferred.
  • Standard class - you have average health with some issues and your family history may be a problem.
  • Substandard

Also, if you are a smoker, you have an additional denotation next to the classes above[5].


  1. R.D.C. Brackenridge, R. S. Croxson, R. Mackenzie 2016
  2. R.D.C. Brackenridge, R. S. Croxson, R. Mackenzie 2016
  3. J. F. Outreville, J. F. C. Outreville 1998
  4. J. D. Cummins, B.D. Smith, R.N. Vance, J.L. Vanderhel 2013
  5. J. D. Cummins, B.D. Smith, R.N. Vance, J.L. Vanderhel 2013


  • Berglund S., Grunewald Ch., Pettersson H., Cnattingius S. (2010), Risk factors for asphyxia associated with substandard care during labor, "Acta Obstetricia et Gynecologica Scandinavica", vol. 89, issue 1
  • Brackenridge R.D.C., Croxson R. S., Mackenzie R. (2016) Medical Selection of Life Risks 5th Edition Swiss Re branded, Palgrave Macmillan, New York
  • Cummins J. D., Smith B.D., Vance R.N., Vanderhel J.L. (2013), Risk Classification in Life Insurance, Springer Science & Business Media, New York
  • Einav L., Finkelstein A., Ryan S. P., Schrimpf P., Cullen M. R. (2013) Selection on Moral Hazard in Health Insurance, "American Economic Review", vol. 103, no. 1, p. 178-219
  • Gatzert N., Schmitt-Hoermann G., Schmeiser H. (2012), Optimal Risk Classification with an Application to Substandard Annuities, "North American Actuarial Journal", vol. 16, issue 4, p. 462-486
  • Outreville J. F., Outreville J. F. C. (1998), Theory and Practice of Insurance, Springer Science & Business Media, New York

Author: Adrian Poprawa