Using the numerical rating system or some other method of rating, an insurance company classifies certain risks as substandard. A group or classification of risks rated substandard is expected to produce a higher mortality than a group of normal lives. The group concept must be emphasized, since�as with insuring standard risks�there is no certainty about any one individual�s longevity expectations. All calculations therefore are based on the anticipated average experience of a large number of individuals, and the experience of any one individual is merged into that of the group.

This is an elementary concept, but it needs to be reiterated in any consideration of substandard insurance, involving, as it does, extra cost to or restricted benefits for the policyowner or beneficiary. It is commonly supposed that if an individual is placed in a substandard classification and subsequently lives to a ripe old age, the company erred in its treatment of the case. However, if 1,000 persons, each of whom is suffering from a particular physical impairment, are granted insurance, it is certain that the death rate among them will be greater than the death rate among a group of people the same age who are free from of any discernible impairments. To allow for the higher death rates that will certainly occur within the substandard group, the company must collect an extra premium from�or impose special terms on�all who are subject to the extra risk since it is not known which of the members of the group will be responsible for the extra mortality. It is not expected that every member of the group will survive for a shorter period than the normal life expectancy. In fact, it is a certainty that this will not be the case; it is known merely that a larger proportion of people in a normal group will attain normal life expectancy.

The fact that certain members of the impaired group reach old age is, therefore, no indication that an error was made in their cases. If they had paid no extra premium, a still higher premium would have been required from the others. Generally speaking, nothing could�or should�be refunded to members of a substandard group who live beyond the normal life expectancy, provided that the extra premiums charged (or other special terms imposed) were a true measure of the degree of extra hazard represented by the group.