Hazard

An underwriter reviews an applicant's height, weight and blood pressure readings against the company's tables before assigning a rate class. What is she assessing?

1. A.A morale hazard.Morale hazard is indifference or carelessness produced by having insurance. Height, weight and blood pressure are measurements, not attitudes.
2. B.The financial justification for the amount of coverage applied for.Financial underwriting looks at income, net worth and the economic loss the death would cause. Physical measurements have nothing to do with it.
3. C.PHYSICAL factors bearing on expected mortality; build and blood pressure are objective measurements used to assign a rate class.Correct. Build, meaning height and weight together, and blood pressure are among the most reliable physical predictors of mortality and directly drive rate classification.
4. D.Whether the applicant has an insurable interest in his own life.A person is presumed to have an unlimited insurable interest in his own life. That question is never in issue on an application for coverage on oneself.

Why: Height and weight together make up what underwriters call BUILD, and build and blood pressure are objective physical measurements with a well-documented relationship to mortality. They are physical factors, evaluated alongside medical history, family history, tobacco use, occupation and avocation, to place the applicant into a preferred, standard or substandard class. They say nothing about the applicant's character or about the financial justification for the amount applied for.

An underwriter explains to a trainee that identical exposures can cost her company very different amounts depending on the venue, because some courts routinely return far larger awards and some statutes expand who may sue and for what. This tendency of the surrounding legal and regulatory environment to enlarge the size or number of losses is called:

1. A.Moral hazard.Moral hazard is a character trait of the insured, the tendency toward dishonesty or fraud that makes a loss more likely, such as an owner who would welcome a fire. It originates with the person, not the courts.
2. B.Morale hazard.Morale hazard is indifference or carelessness produced by having insurance, such as leaving a vehicle unlocked because it is covered. It also originates with the insured.
3. C.LEGAL hazard, a condition of the legal or regulatory environment that increases the likely frequency or severity of loss.Correct. Jury verdict patterns, expansive statutes and liberal standing rules enlarge losses independently of anything the insured does, and underwriters price for that venue effect.
4. D.Physical hazard.Physical hazard is a tangible condition of a person or property that increases the chance of loss, such as an existing heart condition or an oily rag in a workshop.

Why: A hazard is a condition that increases the likelihood or the size of a loss. LEGAL HAZARD refers to conditions of the legal system itself, such as generous jury awards, expansive statutes or liberal rules on who may bring suit, that make covered losses larger or more frequent than the underlying exposure alone would suggest. It sits alongside physical, moral and morale hazard as a category underwriters price for.

Three applicants are identical in age, build and medical history. One is a bookkeeper, one an underground miner, and one a commercial crab fisherman. The underwriter issues all three but adds an extra charge to the last two. What is she pricing, and how is that extra mortality usually charged?

1. A.A moral hazard, charged by declining the risk outright.Moral hazard concerns an applicant's honesty and integrity. Dangerous work is not a character trait, and declining is not a pricing method in any event.
2. B.A physical impairment, charged by a permanent table rating applied to the whole policy.A table rating expresses medical impairment as a multiple of standard mortality. These applicants have no impairment; the extra risk comes from where they work, not from their bodies.
3. C.A change in health class, charged by moving them to a tobacco rate.Tobacco status is a separate underwriting question with its own rate class. Occupation does not move an applicant into a tobacco class.
4. D.An OCCUPATIONAL hazard, extra mortality arising from the work itself, commonly charged as a FLAT EXTRA of a stated amount per thousand of face amount.Correct. The added risk is a constant number of extra deaths per thousand lives, which a flat extra prices directly and which may be permanent or temporary.

Why: This is an OCCUPATIONAL hazard: additional mortality arising from the work itself rather than from anything about the applicant's health. Because the extra risk is a roughly constant additional number of deaths per thousand lives rather than a percentage of the applicant's own mortality, it is normally charged as a FLAT EXTRA of a stated dollar amount per thousand of face amount. A flat extra may be permanent, as with a hazardous occupation, or temporary, as with a recent medical event.