Why don’t Insurance Companies accept proposals from those who have adverse health history (or) very old people?

Why don’t Insurance Companies accept proposals from those who have adverse health history (or) very old people?

Insurance is nothing but pooling of risks: Let us understand this with an example.

·       100 healthy (Normal) people take up insurance policies for each 1 lakh cover.

Assuming the total claim amount in the year is 10 lakhs (with 10 people claiming 1 lakh each), Premium payable will be around 10,000/- per person in this case.

Now if high risk people enter this group (say 10 of them), the probability of claims will go up. Assuming 5 out of these 10, claim 1 lakh each, then total claims amount now will 15 lakhs in the group of 110 people. The premium payable in this case will become 13,656/-. per person.

Due to such premium increase, healthy individuals will tend to opt out of insurance leaving the group with more & more riskier people and the premium will only increase, which the high-risk group would continue to pay. This would in the long run keep only high-risk people in the insurance cover, with healthy individuals left with no cover at all.