The various life risks cannot be treated individually, so they are put under a few broad categories based on the degree of each risk. There are two main classed or risk:
(i) Uninsurable Risks; and
(ii) Insurable Risks.
(i) Uninsurable Risks
If the insurance can be purchased at higher premium, there should not be any uninsurable risk.
Theoretically, after investigating all the factors affecting a risk, the life insurance company should be able to give each due consideration and determining the premium charge for the insurance.
The premium would be much high for these persons which will be against the insurance principle because higher premium will stimulate only to those who are at death bed.
If they are allowed it would be a case of speculation because after payment of a few premiums he will be gaining. It would be unfair to other healthy policyholders. The second reason is that unknown risk cannot be insured to avoid the existing policyholders.
So, in order to protect existing policy-holders, the insurance company must accept those risks against which it can assess adequate and fair premiums to provide for claims.
(ii) 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 is a standard of risk, if the risk is not too great (i.e., uninsurable) it can be insured as sub-standard risks even if he does not meet the requirement of a standard risk.
The risk of death among sub-standard lives varies, but in all cases it is higher than that of standard lives.
Insurable risks are divided into three broad classes – standard, sub-standard and super-standard.
Every insurer, however, does not use all these classifications. Generally distinction between standard and super-standard is not made.
(a) Standard Risk
The standard risk is related with the normal life where there is no much or no less risk. There is certain criteria on which the risks are judged as normal life.
It does not refer to ideal or first class life but it is rather a mix of good and bad lives.
This group does not contain only those persons who are free from all impairments nor those persons who are under serious illness.
It is the group where majority of the persons can be included and who may be either more or less than the average.
(b) Sub-Standard Risk
Sub-standard risks are those risks which are higher though insurable than the standard risk. Thus, the sub-standard risks are above the standard risk and below the uninsurable risk.
If the life proposed crosses the maximum limit of sub-standard risk, that will be treated as uninsurable.
The sub-standard risk is insured after payment of additional premium.
(iii) Super-Standard Risk
The super-standard risk is present where there is lesser risk than the standard risk. This is also called a preferred risk. An insurer does not prefer to issue preferred risk policies because it increases the premium on other standard risk which may cause reduction in loss of business.