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Risk and Insurable Interest Requirement

    • 144 posts
    February 28, 2014 7:55 AM IST

      Identifying Risks:
    a)      A physical hazard is a physical characteristic that may increase the likelihood of loss.
    b)      Moral hazard is the likelihood that a person may act dishonestly in the insurance transaction.
    Classifying Risks:
    a)      The purpose of classifying risks into categories is to enable the insurer to determine the equitable premium rate to charge for the requested coverage.
    b)      In order to classify proposed insureds, underwriters apply rules of risk selection, known as underwriting guidelines. It identifies the following risk categories


    Proposed insureds that have a likelihood of loss that is not significantly greater than average

    are classified as standard risks and the premium rates they are charged are called standard

    premium rates.

     Those proposed insureds who have a significantly greater-than-average likelihood of loss but

    are still found to be insurable are classified as substandard risks or special class risks.


     The declined risk category consists of those proposed insureds who are considered to present a

    risk that is too great for the insurer to cover.


     Many life insurers classify proposed insureds who present a significantly less-than-average

    likelihood of loss as preferred risks.


    Insurable Interest Requirement:
                   The practice of purchasing insurance as a wager is considered to be against public policy. As a result, laws in all states and provinces require that, when an insurance policy is issued, the policy owner must have an insurable interest in the risk that is insured.

    Insurable Interest Requirement in Life Insurance:
    The presence of insurable interest must be established for every life insurance policy to ensure that the insurance contract is not formed as an illegal wagering agreement.
    Insurable Interest Requirement in Health Insurance:
    For health insurance purposes, the insurable interest requirement are met if the applicant can demonstrate a genuine risk of economic loss should the proposed insured require medical care or become disabled.

    This post was edited by T Ghosh at February 28, 2014 7:56 AM IST

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