Risk Classification in Voluntary Individual Disability Income and Long-Term Care Insurance

■ To avoid insolvency, insurers must charge adequate premiums to pay policyholder claims. ■ Risk classification groups together individuals with similar levels of risk and expected costs, and permits insurers to charge an adequate premium. ■ If individuals purchase insurance on the basis o f health information that is unknown to the insurer, adverse selection results. Adverse selection means that healthier people subsidize the less healthy, which tends to drive healthier people from the insurance system, leading to higher average costs. Ultimately, if enough healthy individuals leave the system, it may lead to insurer insolvency. ■ Advances in technology and research continually reveal new information that helps insurers better classify risks. Banning the use of such information could lead to higher costs and reduced access to individual insurance than might otherwise be expected.