DEFINITION of 'Borderline Risk (Insurance)'

An insurance policy applicant that an insurance company has not yet been able to fully evaluate, or that the insurer may be unable to cover. Borderline risk is a category used to denote risk uncertainty, as well indicate that any policy underwritten to cover the applicant may not be quality.

BREAKING DOWN 'Borderline Risk (Insurance)'

Insurance applications require the applicant to answer a number of questions. The answers provided are used by the insurance company to determine how much risk it will take on by underwriting a new insurance policy. Insurance companies separate applicants by risk classes based on their risk profile, which is developed from the information provided on the policy application. The risk profile that the insurer develops allows the insurer to determine a preliminary premium that the applicant will have to pay. In some cases this estimate will be the same as the final premium, but in other cases it may take some time for an insurer to provide a final quote.

If an insurer does provide a quote to an applicant considered a borderline risk, it has done so after weighing the probability that a claim will occur against the premium that it could earn. This is ultimately a function of the insurer’s tolerance for risk. Because it is less sure of the true risk associated with the policy, it may be more difficult for the insurer to purchase reinsurance.

Borderline risks are most often associated with health insurance. An applicant may provide acceptable answers to many questions relating to medical history, but a few of the answers provided may indicate that health issues may arise in the future. This can pose a significant risk because of adverse selection, which states that people who are more at risk of having health problems are more likely to purchase health insurance.

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