What it means
Insurers group applicants by how likely they are to make a claim. Most people fall into a standard class, and those with a higher expected risk are called substandard or rated.
Reasons vary. In life insurance, they include health conditions, a dangerous occupation or hobby, or a family history of serious illness.
In property insurance, they might include a building in a flood-prone area or one with old wiring. Instead of declining, the insurer offers a policy at a higher price, which is known as a rating or loading.
It may also add an exclusion for a specific risk or limit the amount of cover, so the buyer should read the policy to see exactly what is and is not covered. For businesses, substandard insurance matters when a company has a poor claims record or works in a risky field.
The cost can be reduced by improving safety, installing alarms or sprinklers, raising the deductible (the amount the policyholder pays before the insurer pays) or shopping around specialist insurers. Disclosure is central.
The buyer must answer the insurer's questions honestly, because a missing or false answer can lead the insurer to cancel the policy or refuse a claim later. Medical examinations, claims histories and surveys of the property are the usual ways the insurer checks what it is being asked to cover.
The word substandard describes the risk class, not the quality of the insurer or the policy. A rated policy still pays valid claims, and many people who start with higher premiums can ask for a review when their circumstances improve.
In practice
Real-world examples.
Example
A 45-year-old with a managed heart condition applies for life insurance. The insurer offers cover at a premium 100% higher than the standard rate. The applicant agrees, and the adviser notes that the rating can be reviewed after five years of stable health.
Example
A bar owner applies for liability cover but has a record of three claims in two years. The insurer offers cover with a higher deductible and a surcharge until the safety record improves. The owner installs better cameras and trains staff, so he can ask for the surcharge to be removed at renewal.
Example
A homeowner in an area with a high risk of flooding finds that standard insurers decline cover. A specialist insurer offers a policy with an extra premium and a flood limit. The homeowner compares that cost with the cost of raising the ground floor and decides to accept the policy for now.
Formula
Calculation
The premium for a rated policy is the standard premium multiplied by a rating factor:
Rated premium = Standard premium x Rating factor
A business would pay $1,200 a year for a standard fire policy on its warehouse, but the building has poor wiring and the insurer applies a rating factor of 2.5, meaning 250% of the standard premium. The rated premium is $1,200 x 2.5 = $3,000 a year, which is $1,800 more than the standard premium. If the owner spends $4,000 to rewire the building and the insurer then reduces the factor to 1.5, the premium falls to $1,200 x 1.5 = $1,800, saving $1,200 a year.Case study
Seen in the real world.
Ironbridge Fabrication is an illustrative, fictional metalworking company that was quoted a standard premium of $20,000 a year for its workshop. Because of two fires in three years, the insurer rated the risk at 180% of standard, a premium of $36,000.
The company's finance director asked what would lower the rating and what the improvements would cost. The insurer said it wanted a sprinkler system, better storage of flammable materials and a safety audit.
In this illustrative story, the company spent $45,000 on the improvements. After a claims-free year, the insurer cut the rating to 120% of standard, a premium of $24,000, saving $12,000 a year and paying for the upgrade in under four years.
Watch out
Common mistakes.
- Assuming a substandard policy is of poor quality, when the term describes the risk of the buyer.
- Hiding a condition or claims history to get a standard rate, which can lead to a refused claim.
- Accepting the first rated offer without comparing insurers, who may rate the same risk differently.
Questions
People also ask.
Can a substandard rating be reduced later?
Often yes, if health improves, safety measures are put in place or a clean record builds up over time, though the insurer will usually ask for fresh evidence first.
Is substandard insurance the same as high-risk insurance?
The terms overlap, and both describe cover for applicants who present a higher chance of a claim.
Why would an insurer offer cover instead of refusing it?
Charging a higher price lets the insurer take on the risk while still expecting to make a profit across many policies.
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