Definition of Standard Risk
A standard risk refers to an individual who, according to an insurance company’s underwriting criteria, presents a normal or average risk level. Such individuals are eligible for coverage at typical or standard premium rates applicable broadly across many policyholders without additional specific risk factors.
Implications of Standard Risk
Individuals determined to be standard risk:
- Can qualify for standard premium rates, which are neither highly discounted nor significantly surcharged.
- Are considered to pose average likelihood of filing an insurance claim relative to the aggregate portfolio data the insurer holds.
Distinguishing from Other Risk Levels
- Preferred Risk: Individuals who may qualify for discounted premium rates due to better-than-average characteristics indicating lower risks.
- High Risk / Non-Standard Risk: Those who may face higher premiums or have restrictions on coverage due to increased likelihood of risk or claims.
Legal Aspects
In many regions, underwriting standards, including what constitutes ‘standard risk’, are influenced by regulations intended to ensure fair practices and non-discriminatory risk assessment. These procedures and standards are partly framed by guidelines such as the principles established in the (U.S.) Fair Credit Reporting Act and compliance measures enacted in the Affordable Care Act (ACA).
Calculation of Standard Risk
Insurers utilize an extensive variety of personal and demographic information in their underwriting processes including, but not limited to, age, gender, health history, occupation, and even hobbies to determine whether an individual fits into the standard risk classification.
Impact on Policyholders
Understanding where one stands in terms of insurance risk classification (as standard risk or otherwise) can be pivotal in financial planning and negotiating terms of coverage with insurers.
