Borderline Risk (Insurance)

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 this individual.

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 or not to offer coverage. 
  • To determine a person's risk, an actuary uses a variety of methods and tools designed to calculate levels of risk.
  • Insurance applications require applicants to answer a number of questions relevant to the type of insurance policy offered.
  • 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.

Underwriting Process

The underwriting process is how insurance companies decide if they should offer insurance to an individual, how much insurance, the amount of premium to charge the insured, and the likelihood that an individual will need to claim their policy.

Underwriters use a significant amount of information to answer these questions. The data used includes past insurance history, statistics, and actuary models. The process helps estimate the amount of risk and based on the amount of risk, how much premium to charge an applicant.

In purchasing insurance, individuals usually work with an agent or broker that directly liaises with the underwriter.

The starting point is always the individual's application that allows underwriters to put an individual in specific buckets, for example, if they are a smoker or not, how dangerous their job is, what kind of violations exist on their driver's license, and so on.

Underwriters also constantly review policies and the claims history of individuals to make updates that correspond with the change in risk. For example, health insurance usually becomes more expensive as individuals age due to the increased likelihood of health problems in older age.

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 a genetically passed disease 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.

Can an Insurance Underwriter’s Decision Be Changed?

Yes, an insurance underwriter's decision can be changed. The first step in overturning a negative decision is finding the reason the decision was made. From there, you can gather further documentation that will help your case, explain areas that may have been of a confusing nature, and submit an appeal.

What Is a Substandard Risk Insurance Policy?

Substandard risk insurance is insurance for individuals who have a higher chance of making an insurance claim. These types of individuals include those with poor health or with many violations listed in their driving history, for example. These individuals will pay a higher premium for their insurance and also have lower coverage amounts.

How Do Insurance Companies Limit Their Risk?

Insurance companies employ a variety of methods to limit their risks, such as increased premiums, higher deductibles, diversification of assets, and exclusions in their policies.

What Is Adverse Selection?

Adverse selection in insurance refers to the process of individuals with higher risks being more likely to purchase insurance, such as life insurance. The buyer has more information than the seller, such as about their health, job, or lifestyle, and benefits in the situation. Insurance companies seek to minimize adverse selection.