What Is Borderline Risk (Insurance)?

Borderline risk in the insurance industry refers to a policy applicant who poses such a significant risk to the underwriting insurance company that the insurance company carefully weighs whether to offer coverage to these individuals.

Some prospective customers are deemed a borderline risk if the company has not yet been able to fully evaluate their application, or if for some reason the insurer doubts its ability to cover the applicant.

Borderline risks most often apply to health insurance.

Key Takeaways

  • Borderline risk refers to an insurance policy applicant who poses such a significant risk to the underwriting insurance company that the company carefully weighs whether to offer coverage. 
  • To determine a person's risk, an actuary uses a variety of methods and tools designed to calculate levels of risk.
  • Some prospective customers are deemed borderline risks if the company has not been able to fully evaluate their application or if for some reason the insurer doubts its ability to cover the applicant.
  • Insurance companies separate applicants by risk classes based on their risk profiles, which insurers develop from the policy application.

Understanding Borderline Risk (Insurance)

Borderline risk denotes a customer with a high risk profile. Insurance companies separate applicants by risk classes based on their risk profiles, which insurers develop from the information provided on the policy application.

Insurance applications require applicants to answer a number of questions relevant to the type of insurance policy offered. The applicant’s answers help the insurance company develop a risk profile for the applicant.

Once the insurer creates a risk profile for an applicant, it can determine a preliminary premium that the applicant must pay. However, in some cases, the insurance company needs to do some homework before providing a final quote.

Actuaries and Risk

To determine a person's risk, an actuary—someone whose job it is to assess risk for insurance companies and sometimes financial institutions—uses a variety of methods and tools designed to calculate levels of risk. Prediction models based on statistics and analysis are the main tools that actuaries employ to help them estimate risk.

Life tables are another common risk assessment tool that actuaries use, though they are more instrumental in pricing insurance than estimating particular individual risks. They are used to estimate the probabilities of someone's death—some before a person's next birthday based on age and other factors, some that cover a certain time period, and some that break down risk through various demographic populations.

Determining Borderline Risk

Say an applicant for health insurance provides questionnaire responses relating to their personal medical history. A few of the answers provided indicate health issues that are known to recur in many people. This poses a significant risk to the insurer because of adverse selection, which states that people with a higher risk of health problems are more likely to purchase health insurance.

When people apply for health insurance, the insurer usually asks about their own medical history, their family’s medical history, and their current lifestyle. People in good health and with a healthy lifestyle still can be a borderline risk, however, if the genetically passed disease ALS runs in their family.

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