Chapter

Selection of Risks

Slide prepared
prepared by:
by:Abdullah
AbdullahAl
AlYousuf
Yousuf Khan
Khan
Slide
Assistant Professor
Professor-- IUBAT
IUBAT
Assistant

McGraw-Hill/Irwin

Copyright 2006 by The McGraw-Hill Companies, Inc. All

rights reserved.

Selection of Risk
The selection of a risk is a process
whereby the inferior lives are
weeded out.
The function of the process is to either accept
or reject the applicant.
The degree of risk presented by the applicant
must be proportionate with the established
premium for same category.
Or additional premium should be charged.

Purpose of Selections
To accept or reject the application.
To determine the rate of premium to be charged for the
insurance.
The premium depends upon the degree of risk.
The higher the risk the more will be premium.
It is also known as selection of risk.

Since it is impossible to charge various premiums for each and

every individual (each applicant has different degree of risk)
Risks are classified into standard or sub-standard on the basis of
selection.
So it is possible to determine what risks are to be accepted at
normal rate and what risks will be at extra rate or not accepted at
all.

To avoid discrimination of the lives assured. Different premiums

should be charged for different groups.
Essential to avoid adverse selection.

Factors Affecting Risk

Age
Build
Physical condition
Personal history
Family history
Occupation
Residence
Present habits
Morals
Race and nationality
Gender
Economic status
Defense services
Plan of insurance

Age
Age is important to determine the premium.
Age is rounded to nearer to the birthday.
Person bellow six months and above six months of the
age will be treated of the same age.
E.g. a person of 22 years 7 months and another person of 23
years 5 months will be treated as 23.

Maximum and Minimum Age Limit;

To avoid adverse selection, maximum age limit is fixed.

At advance age the chances of moral hazard is higher.
Most applicant will fail in the medical examination at old age.
Mortality is certainly higher.
The minimum age limit is meant to avoid risk of infant
mortality.

Build
Build refers to physique of the proposed life and includes;

Height,
Weight,
The distribution of weight, and
Chest expansion

There are standard of weight according to maximum weight

reveal the indication of certain hidden diseases.
The relationship between height, weight, and girth, and
expansion of chest are the basic determinants of mortality
expectations.
Overweight is dangerous in advanced age and underweight is
similarly not desirable at younger age.
There is a standard for maximum and minimum weight according to
the height for easy reference.
If any applicant falls outside of the standard than the premium is
adjusted .

Physical Condition
The physical condition of the life proposed has a direct bearing
on the mortality of the life assured.
Conditions like applicants;
Sight,
Hearing,
Heart,
Arteries,
Lungs,
Tonsils,
Teeth,
Kidneys,
Nervous system, etc.
The information is confirmed and supplemented by a medical
examination which is to detect any malfunction of the vital
organs of the body.

Personal History
The history may be connected with
the
Health record; e.g. previous surgical
operation or certain serious disease.
Past habit; e.g. addiction to drugs and
alcohol which may be repeated.
Previous occupation; the past
hazardous occupation generally affects
health slowly.
Insurance history; the previous
amount of insurance may disclose the

Family history
Family history of other family
members like parents, brothers and
sisters. Even the childrens history is
also required.
E.g. diseases like tuberculosis and
insanity, diabetics, high blood
pressure.

Occupation
Occupation is important because;
If the nature is hazardous, than accident may
happen any time.
The morale may go low as a result they may
be tempted to indulge themselves in drinking
or taking drugs.
The chemical effect may be poisonous while
workers may contact chemicals at work.
Unhealthy working condition (or poor
construction without ventilation) may
deteriorate the health of the of the workers.

Residence
The risk is generally less in a good
climate area and more in a bad climate.
The

Geographical location,
Atmosphere,
Political stability,
Climate,
Construction of house,
Travel, etc. are important factors which
may affect the risk.

Present habits
Drunkards and non-temperate people
cause increase in mortality
Excessive and careless smoking tends to
shorten the life due to development of
nicotine poisoning

Temperate habits tend to increase

longevity of a person.
Physical exercise is considered to
increase the longevity.

Morals
Unethical conduct is considered to be
another form of moral hazard.
Infidelity and departure from the code of
sex behavior are seriously regarded to
be a health hazard.
Insurance is not generally given to bankrupt
and reputed dishonest person.
e.g. moral hazard is present when someone
takes an insurance at an old age where the
person is suffering from serious disease.

Race and nationality

The mortality rate differs from race to
race and nation to nation.
In India, person of high race or cast
are expected to live longer than the
scheduled castes or tribes.
Countries nearer to equator have
more mortality.
The climate and way of life of a country
affect the health conditions or the people.

Sex
Mortality among female sex is, generally
higher than that of male sex because the
physical hazard or maternity is present in
the female.
Moreover, the ladies are physically more
handicapped.
The lesser education, conservatism, and nonemployment of the ladies also affect the
mortality.
The chances of moral hazard are also present
in the female insurance.

Economic status
The high insurance (sum assured) for
persons with high income is justified.
The circumstances need to be
investigated to justify the need for
the insurance for the amount applied.
The chances of death is also lower in
higher strata of the society.

Defense service
Certain restrictive clauses are
imposed for insuring persons
engaged in defense service.
E.g. flying, and gliding, etc.
Extra premiums may be required

But for commercial flying, no extra

premium is required since this
profession is regarded not hazardous.

Plan of insurance
Certain plans involve more responsibility
to the insurer at death and not these
plans are restricted to only first class
lives.
Some plans have lesser risk and,
therefore, can be issued without any
extra investigation.
E.g. the multi-purpose policy is issued only to
first class lives and the pure endowment
policy can be issued to any one irrespective
of health.

Sources of Risk
Information
1. The Proposal Form;
The application form;
Home address, term of insurance, sum to be assured, mode of
premium payment, date of birth, object of insurance, name of
the nominee, previous insurance history, acceptance or rejection
of the proposal, engagement in navy, air force, and military
service

The personal statement;

Either the life to be assured
The agent or the development officer, writing at the dictation of
the life to be assured.
The statement mentions name of the life to be insured, family
history of father, mother, brothers and sisters in connection with
their health and illness and cause of death.
Questions about the bodily impairments, serious disease, habits,
operation, accident or injury.

Sources of Risk
Information
2. Medical Examiners Report;

The information is given by medical examiner

is deemed to be correct and it is expected
that the medical examiners would give true
and fair picture; but certain cases in India
have revealed that the reports are not
hundred percent reliable.
Opinions of the medical examiner for the
longevity, suspected health, first class lives,
etc., are required.
He has to declare that the findings are true
and correct.

Sources of Risk
Information
3. Agents Report

The agent is required to state whether the life of

the assured, is insurable or not.
He has to furnish information of sum assured,
name, acquaintances with the proposer, time and
place of first introduction, identity of the life,
medical examiners name and address, occupation
and monthly income of the proposer, general state
of health, relationship with the agent etc.
The agent has also to disclose the financial and
social position of the proposer.
The agent is required to disclose all the
unfavorable information of the life proposed.

Sources of Risk
Information
4. The Inspection Report
The insurers generally verify the information obtained
by an independent agency.
Sometimes this investigation is conducted without the
knowledge of the applicant.

Insurance companies employ their own inspection staff who

are generally known as inspectors or field officers or
development officers.

For a large amount of insurance, a deep and thorough

inquiry of habits, character, social condition,
occupation, and health is required.

Inspectors interview the applicants neighbors, employers,

bankers, business associates, and other who have special
information pertaining to business, ethics, temperate habit,
social behavior, health.

Sources of Risk
Information
5. Private Friends Report;
For some checking purposes,
confidential reports of the friends of the
proposer are considered.
Since friends are fully aware of the
personal and private life of the
proposer, they can give better
information than the agents.

But naturally the real friends do not want to

harm their friend.
So friends report may not always be correct.

Sources of Risk
Information
6. Attending Physicians;

The attending or family physicians can

give better records of health, history of
the proposed life and his family.
It has been revealed that the family
physicians have given true and fair
reports of the required information.

Sources of Risk
Information
7. Medical Information Bureau (MIB);

Sources of Risk
Information
8. Neighbors and Business Associates;

Confidential reports about the applicant

can be easily obtained from the
neighbors and business associates
although it may be prejudice to the
extent friendship or enmity with the
proposer.
The obtained information can be
matched with other collected
information.

Sources of Risk
Information
9. Commercial Credit Investigation
Bureau;

Classes of Risk
All risks cant be treated individually,
so they are put under a few broad
categories based on the degree of
each risk;
Un-Insurable Risks
Insurable Risks;
Standard Risk
Sub-Standard Risk
Super-Standard Risk

Uninsurable Risks
Practically, there are number of reasons
why some persons are not insurable.
If the insurance can be purchased with
higher premium, there should not be any
uninsurable risk.
So people in death bed would buy the
insurance knowing that after few premiums
they will die which will be a case of
speculation.
Then it would be unfair to other healthy
policyholders.

Insurable Risks
The insurable risks are those which after
the selection process can be carried out
by an insurer although there can be
different terms and conditions for different
policy-holders.
There are;
Standard risk; related with normal life
Sub-standard risk; where risks are higher
than the standard
Super-standard risk; risk is less than the
standard risk.

Methods of Risk
Classification
The Judgment Method
Numerical rating System