4.1.6 Methods of Rating Substandard Risks
There are several methods used in assessing premium rates for substandard risks. If an applicant poses a substandard risk, there are ways for the insurer to lessen its own loss exposure.
Extra Percentage Tables
The use of extra percentage tables is the most commonly used method. This method relies on a numerical system devised to calculate premium rates for those who present a higher health risk for the insurer. A number of premium rates are established 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 may be 125% to 500% of the standard premium rate. This rating system is usually utilized in health issues.
Permanent Flat Extra Premiums
The rating system known as the permanent flat extra premiums system charges a fixed amount per $1,000 of insurance over and above the standard premium charge. If the insured's health condition improves significantly over time, the extra charge may be removed.
Temporary Flat Extra Premiums
Temporary flat extra premiums are akin to the permanent flat extra premiums rating system described previously except that the extra charge is only for a designated period of years. This type of rating allows for risk that is higher in the beginning of the policy period and lessens with time; for instance, surgery. Risk may be higher right after the surgery but prognosis becomes better as time passes.
Rating-Up In Age
Rating-up in age is no longer used predominantly, but the Florida manual mentions it. This method assumes the insured is older than stated and therefore charges the higher rate that would normally be charged using the actual age. As stated before, this method can be used in field underwriting.
Lien System
The lien system allows the insurer to place a lien on the policy and is used mostly when the insured has extensive or severe health problems. If the insured dies prematurely, the death benefits are decreased by the lien which is held in conjunction to the relationship between premiums paid and the policy's stated death benefit. For instance, if the insured dies during the policy's first year, only the premiums paid for that year would be repaid and the insurer would retain the full death benefit.
For example's sake, let's assume the insured has a $50,000 policy and the insurer reduces the lien by $10,000 per year. If the insured dies during the second year, the insurer will retain $40,000 and the policy's death benefit would be $10,000. As time goes on, the lien expires and the full face value of the policy becomes payable.
The Florida study manual states that this system is only used now with some money-purchase pension plans where premiums are uniform and pointedly names the drawback that the insured might not understand that they are actually getting less than the face value they are paying for.
