Risk Selection

What Does Risk Selection Mean?

Risk selection is a method used by insurance companies to evaluate and screen insurance applicants. It involves categorizing applicants based on underwriting principles and determining the appropriate premium rate for each individual.

Insuranceopedia Explains Risk Selection

This screening process is commonly used in the insurance industry. The underwriter determines what the insurer should cover and what exclusions should apply, and categorizes the applicant based on the risk they pose to the company. The category an applicant falls into determines the price they pay, since the factors that affect a life insurance premium include age, health history, tobacco use, and occupation.

Applicants are typically classified into the following groups:

• Standard: The applicant is considered an average risk and is offered the standard premium rate.
• Substandard: The applicant poses a higher-than-average risk and is charged a higher premium.
• Preferred: The applicant is deemed a low-risk and qualifies for a discounted premium.

Tobacco use is a common reason someone gets placed in the substandard category, which is why life insurance for smokers tends to cost more than coverage for non-smokers. The same logic applies to property coverage, where homes in wildfire or flood zones often need high-risk homeowners insurance.