Standard Risk

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Definition:

Insurance risk that the underwriters of the insurance companies consider common or normal is called standard risk. The standard risk is associated with almost all life insurance applicants.

Description:

Insurance companies scrutinise every proposal before accepting the risk. If the risk is profitable, the probability of the insurance company making a profit is high. This is why the insurers segregate their risk into types of risk that include standard risk, substandard risk, and poor risk. Profitable risk for the insurance company can be offered without premium loading or any cover restrictions.

When the proposer applies to buy a health plan and is said to have all healthy habits, she/he will be considered a standard risk for which the commonly applied premium rate will work. On the contrary, if the proposer is found to have a smoking or drinking habit, the proposer will be considered a substandard risk.

The standard risks are insured on the standard premium rate because they pose less challenge for the insurance company.

Example:

Mohit was a 28 years old guy. He applied to buy a term insurance policywith coverage ₹1 Cr. The insurance company conducted the risk analysis on his application and considered him a standard risk. Because Mohit was a healthy male, he was used to regular exercise and yoga. Plus, he did not have any bad habits of smoking or consuming alcoholic beverages. Hence the insurer offered him the cover of ₹1 Cr at the standard price of ₹ 948 per month.