Insurance Risk Classification

An insurance company evaluates the risks new business cases present using underwriting to determine whether it can accept the risk that each case poses or whether it should decline the risk.

Underwriting Risks

The purpose of underwriting is to accept the greatest amount of insurance business that will allow the insurance company to remain profitable. With this in mind, an insurance company places each case into one of four risk classes. The risk class determines the premiums paid to the insurance company. If a person is in a higher risk class then he will pay a higher premium.


A person whose risk of dying is considered the same as that of an average person will be in the standard risk class. The premiums for the standard class are the base premiums, and premiums for the other classes are determined in relation to the premiums for a person who is in the standard risk class.


A person who presents a greater risk of dying than the average person will be placed in the substandard category. A person may be in this category due to a medical impairment that decreases life expectancy. A person who in this category will pay a higher premium than a person who is classified as a standard risk because it costs more for an insurance company to insure a substandard risk.


If a person has a lower risk of dying than the average person, he will be in the preferred risk class because of a lifestyle choice that increases life expectancy. Premiums for this category are less than the premiums a person pays if he is considered a standard risk because it costs less for an insurance company to insure a lower risk.


Some people represent too great a risk for the insurance company to insure. A risk that an insurance company could consider too great is a person who is on an active tour of duty in Iraq or Afghanistan. In this case, the insurance company will place the person in the declined class.


  • Risk Management and Product Design for Insurance Companies; Susan Conant, Lisa Kozlowski, Patsy Leeuwenburg; 2008
  • Insurance Administration; Mary Bickley, Jane Lightcap Brown, Kristen Falk, Miriam Orsina, Dorinda Page; 2008

About the Author

Ashley Ward has been writing professionally since January 2010 when she started writing travel articles for Examiner. Ward holds a Bachelor of Applied Business from Seneca College. While at Seneca, Ward completed her Fellow Life Management Institute designation and the Canadian Securities Course. She also holds a Canadian Commercial Pilot License.