other factors. Some persons in the group might be near death, while others might confidently look forward to a long lifetime comparatively free of bodily ailments. The relative frequencies of mortality expectation represented in any randomly selected group of people who are the same age approximates the curve shown in figure 21-1, with 100 percent representing average mortality for the group. The graph reveals a wide range of mortality expectations for a group of persons falling within a risk category measured by age alone. Clearly, all should not be offered insurance on the same terms. Considerations of equity would suggest that those persons subject to the lowest degree of mortality should pay a lower premium than those who represent an average risk; those with greatly impaired longevity expectations should be charged more than the standard premium or even declined altogether.

The insurance company must establish a range of mortality expectations within which applicants will be regarded as average risks and hence entitled to insurance at standard rates or, conversely, the limits beyond which applicants will be considered either preferred or substandard and subject to a discount or surcharge. The insurance company should be guided by the principles set forth below.

After the limits for the various risk categories have been established, the company must adopt selection and classification procedures that will enable it to place applicants for insurance into the proper categories. This process is complicated by the fact that applicants for insurance may not fit the curve illustrated in figure 21-1. That curve depicts the mortality expectations of a randomly selected group, whereas applicants for insurance do not constitute such a group. The observation has frequently been made that a life insurance company could safely insure the life of everyone who passes by any designated location in a typical American city, so long as the practice does not become public knowledge. Unfortunately, the applications received by a life insurance company do not reflect such randomness. Instead, they are biased by antiselection (or adverse selection). Many who seek insurance have knowledge of an impairment that might be expected to shorten their life span or at least suspect that they have such an impairment that they may conceal. A company�s underwriting procedures must either screen out such applicants or classify them into appropriate substandard groups. Thus it might be argued that the primary purpose of risk selection is to protect the company from antiselection. If there were no antiselection, there would be no need for the underwriting process except to separate and classify substandard risks.