Question 74

Preferred risks pay a lower premium than standard risks.

In the classification of risks, preferred risks indeed receive lower premiums compared to standard risks due to their favorable characteristics and lower likelihood of claims.

A) Substandard applicants are never issued policies.

This statement is incorrect as substandard applicants can still be issued policies, but typically at higher premiums due to the increased risk they represent. Insurers often provide coverage to higher-risk individuals, albeit with adjustments in terms and pricing.

B) Rated policies merit lower premiums.

This statement is false because rated policies, which are issued to applicants considered to have higher risk, generally incur higher premiums. The rating reflects the additional risk associated with insuring these individuals.

C) A preferred individual is issued a rated policy.

This statement is incorrect. Preferred individuals are characterized by lower risk profiles and are typically issued standard or better policies, not rated policies. Rated policies are reserved for those with higher risk factors.

D) Preferred risks pay a lower premium than standard risks.

This statement is true as preferred risks are viewed as less likely to file claims, resulting in lower premiums compared to standard risks, which have average risk profiles.

Conclusion

The classification of risks is crucial in determining insurance premiums, and preferred risks are rewarded with lower premiums due to their favorable risk characteristics. Options A, B, and C misrepresent the classifications and their implications, while Option D accurately reflects the established relationship between risk classification and premium pricing.