Definition of "Risk-Based Pricing"

The setting of premiums based on the perceived credit quality of a borrower as well as the LTV of the mortgage. Currently the industry prices risk almost exclusively by LTV. Risk-based pricing represents a matching of premium to risk, which is superior to current practice. However, there is resistance to it because its full implementation would result in considerably lower premiums for the better risks and considerably higher premiums for lower-quality borrowers; this development could significantly reduce the size of the conforming market.