Final answer:
Upon discovering a misstated age on an insurance application at claim time, an insurer typically may deny the claim, adjust the premium, or pay the claim based on the correct age, aiming to match the benefits paid to the actual risk represented by the policyholder.
Step-by-step explanation:
If an applicant misstates their age on an insurance application, the insurer's reaction upon discovery at claim time can vary based on the policy terms, the laws of the jurisdiction, and the nature of the misrepresentation. Generally, there are a few possible actions an insurer might take:
- Deny the claim: If the misstatement is considered a material misrepresentation, the insurer may have the right to deny the claim.
- Adjust the premium: The insurer may choose to adjust the premium to what it should have been according to the correct age. They may also adjust the benefits accordingly or request additional premium payments from the past.
- Pay the claim based on the stated age: This is less likely, as it would mean the insurer accepts the terms based on false information.
- Pay the claim based on the correct age: The insurer might choose to calculate the benefits based on the correct age at the time of application, which could result in a reduced benefit.
In practice, when charging premiums to a group of policyholders, if an insurance company attempts to charge an actuarially fair premium to the group as a whole, rather than to each subgroup based on their specific risk factors, it runs the risk of not accurately reflecting the risk profile of each subgroup. If higher risk subgroups are not charged a premium commensurate with their risk, the company may experience higher than expected claims, ultimately leading to financial losses.