What type of risk is represented by policy surcharges based on increased risk?

The scenario of policy surcharges based on increased risk refers to situations where an insurer identifies that an applicant presents greater than average risks due to health issues, lifestyle choices, or other factors. This identification leads to additional costs or surcharges on the premium, reflecting the insurer's need to mitigate the additional risk assumed.

Substandard risk is specifically designed to address these instances, as it categorizes individuals whose risk profiles do not meet the standard underwriting guidelines. To compensate for the heightened risk involved in insuring these individuals, insurers apply surcharges or higher premiums. This ensures that the insurer can still provide coverage while accounting for the elevated likelihood of a claim.

In contrast, standard risk pertains to those individuals who fit into the general criteria for coverage without any extra premium costs, while preferred risk applies to individuals who present lower risk and often enjoy lower premiums. Declined risk refers to applicants who are deemed too risky for coverage at all, thus not receiving a policy offer. The focus on surcharges for increased risk clearly aligns with the definition of substandard risk.