white paper on advanced insurance underwriting

8/6/2019 White Paper on Advanced Insurance Underwriting

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ADVANCEDInsurance Underwriting

White Paper

Sujin

INSURANCE



Advanced InsuranceUnderwriting

.

About the Domain

Insurance in the broadest sense includes methods of transferring or distributing risk. Any

risk that can be quantified can potentially be insured. Automobile insurance, known in

the UK as motor insurance, is probably the most common form of insurance and may

cover both legal liability claims against the driver and loss of or damage to the insured's

vehicle itself. Insurers are faced with shrinking premiums, growing customer

expectations and tightening regulations all of which are narrowing their margins. With

globalization being the buzzword across economies, the industry is going through a phase

of consolidation and integration. With the increased volume of claims in insurance,

efficiency in Underwriting becomes the need of the hour to sustain the growth and

competition.

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Contents

INTRODUCTION ............. .............. .............. .............. ............... .............. .............. .............. ......... ..... ..... ..... ..5

NECESSARY OF UNDERWRITING ............. .............. .............. .............. .............. ............... .............. ........6

THE UNDERWRITING PROCESS ............. .............. .............. .............. ............... .............. .............. ...........7

RISK CLASSES IN UNDERWRITING ............. ............... .............. .............. .............. ........... ...... ..... ..... .....9

RISK ASSESSMENT FACTORS: .............. .............. .............. .............. ............... .............. .............. .......... .11

SOURCES OF UNDERWRITING: .............. .............. ............... .............. .............. .............. .............. .........13

UNDERWRITING DECISION .............. .............. ............... .............. .............. .............. .............. ............. ...16

CONCLUSION ............. .............. .............. .............. .............. ............... .............. .............. ............ ...... ...... .....16

.......................................................................................................................................................................17

REFERENCES .............. .............. ............... .............. .............. .............. .............. .............. ........ ..... ...... ...... ...18

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Introduction

Insurance underwriting is the process of classification, rating, and selection of risks.

In simpler terms, it's a risk selection process. This selection process consists of evaluating

information and resources to determine how an individual will be classified, whether a

standard or substandard risk. After this classification procedure is completed, the policy

is rated in terms of the premium that the applicant will be charged. The policy is then

issued and subsequently delivered to the purchaser by the producer. It is more commonly

issued to the insurance agent.

The underwriter's job is to use all the information gathered from numerous sources

to determine whether or not to accept a particular applicant. Individuals applying for

individually-owned life and health insurance typically receive more underwriting scrutiny

than members holding a group policy. As such, the concepts discussed in this article

apply primarily to underwriting for individual coverage. The underwriter must employ

sound judgment based on his or her years of experience to read beyond the basic facts

and get a true picture of the applicant's lifestyle. For instance, the underwriter will look

for any factors, such as occupation, dangerous hobbies, etc. that could make the applicant

more likely to die before his or her natural life expectancy, or reasons to anticipate that

the individual may become ill or involved in an accident that will create high medical

expenses. The underwriter's primary function is to protect the insurance company insofar

as is possible against adverse selection (very poor risks) and those parties who may have

fraudulent intent.

Confidential 5

http://www.finweb.com/insurance/types-of-life-insurance.html

http://www.finweb.com/insurance/your-health-insurance.html

http://www.finweb.com/insurance/underwriting-group-policies.html

http://www.finweb.com/insurance/types-of-life-insurance.html

http://www.finweb.com/insurance/your-health-insurance.html

http://www.finweb.com/insurance/underwriting-group-policies.html




Necessary of underwriting

In group insurance, underwriting standards as well as rates are the same for every

member of the group. In other words, no one pays a higher premium to offset what might

be a higher risk. Instead, specific conditions may be excluded from coverage to mitigate

risk and keep rates consistent for all participants. If underwriting were not required, a

group plan would attract a disproportionate number of medically impaired individuals.

This would result in high ratios of benefit payments compared to premiums, thus causing

rates to rise for all insured participants. The two important factors for the necessary of

underwriting are

• Anti selection

• Persistency

Anti selection:

The tendency of people who suspect or know they are more likely than average to

experience loss to apply for or renew insurance protection to a greater extent than people

who lack such knowledge of probable loss. The possibility of anti selection makes

underwriting an important task. Anti selection can be said to exist when a risk (an

individual) or group of risks that are insured is more likely than the average

corresponding group to experience a loss. As a basic example, let's say that in a

randomly-selected group of 1,000 25-year-old individuals, only two might be expected to

die in any given year. However, human nature is generally such that many healthy 25-

year-old young adults do not typically regard the need to buy life insurance, and therefore

prefer to spend their money on other things. It's usually only those 25-year-olds who are

ill or perhaps employed in dangerous occupations that are likely to purchase insurance.

The underwriter's job is to ensure that an inordinate number of these poorer-than-average

risks aren't accepted or the insurance company will lose more

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Persistency:

Persistency is the retention of business that occurs when a policy remains in force.

To improve persistency, underwriters must approve amounts of coverage that customers

can afford.

The underwriting process

The underwriting process is various steps carried out by an underwriter while

underwriting a policy. For this the underwriter uses underwriting philosophy. An

underwriting philosophy is a set of objectives for guiding all of an insurer's underwriting

actions that generally reflects the insurer's strategic business goals and includes its pricing

assumptions for products. An insurer's underwriting philosophy shapes its underwriting

guidelines, which specify the parameters within which proposed insured may be assigned

to one of an insurer's risk classes established for each insurance product. The

underwriting process is different for both individual and group insurance.

The underwriting process for individual life insurance products:

• Perform field underwriting

• Review the application

• Gather additional information to make a sound underwriting decision

• Make an underwriting decision

The underwriting process for group life insurance products:

• Reviews the characteristics of the proposed group

• Evaluates the insurance coverage and services requested

• Assesses any previous claims and premium experience for the group

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Field underwriting:

Field underwriting is the process in which a producer screens an applicant for life

insurance and gathers initial information about the proposed. To assist a producer during

field underwriting, most insurers develop a field underwriting manual. A field

underwriting manual is a document that has specific guidance for a producer's assessment

of the risks represented by proposed insured’s and guides the producer in assembling and

submitting the evidence of insurability, which is documentation that the proposed insured

appears to be an insurable risk.

A key element in the underwriting process is the role of the insurance producer, or

agent. It may even be argued that the producer is the most important part of the risk

selection process. This is due to the fact that the producer is in a position to actually see

and talk to the proposed insured, to ask the questions contained on the application and

gauge the responses, and too accurately and completely records the answers to those

questions. Thus, one of the most important functions of the producer is to oversee the

completion of the insurance application. Much of the information reported on the

document becomes the basis upon which to accept or reject the proposed risk.

The most essential element of this process for the producer is the display of

accuracy, thoroughness, and honesty when completing the application. Answers to

questions must be recorded with exactness and totality, along with frankness and

sincerity. The producer may not omit pertinent information or report it inaccurately in

order to facilitate the policy's issuance. The ethical conduct of the producer with regard to

the underwriting process must be, in all instances, above reproach. Additionally, the

producer can also help to expedite the underwriting process by the prompt submission of

the application, by scheduling the applicant for any necessary physical exams, and by

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assisting the home office underwriter with other requirements such as obtaining an

Attending Physician's Statement.

Finally, if the applicant is rated or declined for coverage, it's the producer's role as a

field underwriter to explain the reasons for the underwriting action. Seldom is an

individual totally declined for life insurance, but it does happen that he or she may be

classified as substandard and thus receive a rated (or substandard) policy in place of the

one originally applied for. When this occurs, the producer must be prepared to not only

explain the reasons for the substandard rating but also to explain the rated policy that the

company has countered with.

Risk classes in underwriting

A risk class is a group of insured that represent a similar level of risk to an

insurance company. The risk classes defined according to the mortality rates. Mortality

risk, for life insurance, is the likelihood that a person will die sooner than statistically

expected. The rate at which death occurs among a defined group of people during a

specified period, typically one year is know mortality rates. Generally, the higher the

mortality rate, the higher the benefit cost and the higher the premiums for life insurance.

To evaluate the degree of mortality rate presented by a proposed insured, the underwriter

looks at information about impairments. Impairment is any aspect of a proposed insured's

current health, health habits, medical history, or family medical history that could

increase his expected mortality risk. According to the mortality rates the risk classes are

divided in to four.

Preferred class:

Proposed insured whose anticipated mortality is lower than average and who

represent the least degree of mortality risk. The underwriter will approve the policy

without further investigation. Nowadays companies added another preferred class known

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as super preferred class. True, the lowest rates offered today are these "Super Preferred"

rates. However, please understand when comparing policies is that even if you're in very

good health, there is a good chance you won't qualify for the best rates. In fact, only

about 25% of all applicants get this "Super Preferred" rate. About 60% can qualify for the

"Preferred" rate and the rest fall in the "Standard" or below category.

Standard class:

Proposed insured whose anticipated mortality is average. It refers to persons who

have had some minor health impairments in their lifetime. An example of Standard risk

would be someone taking medication for high blood pressure, or a borderline diabetic. In

some cases, we have been able to get better rates for those with very well controlled high

blood pressure

Substandard class

Proposed insured whose anticipated mortality is higher than average, but who are

still considered to be insurable. It refers to people who are having more than minor health

problems. Companies charge them additional premiums depending on the risk factors

involved.

Declined class:

Proposed insured whose impairments and anticipated extra mortality are so great

that the insurer cannot provide coverage at an affordable cost or whose mortality cannot

be predicted because of recent medical conditions. The underwriter will decline the

application in most of the cases for this class or very high premium to such applications.

The below table represent the various classes of risks with examples

Category Super Preferred Preferred Standard

Blood

Pressure

No current or history

of blood pressure

treatment

No current or history

of blood pressure

treatment

Currently controlled

BloodPressure

No current or history of blood pressure readings

No current or history of blood pressure readings

Average readings inthe past 2 years

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Readings

in excess of:140/85 Age 60 or

younger

150/90 Age 61 or older

in excess of:140/90 Age 60 or

younger


does not exceed:155/95 Age 60 or

younger


Family

History

No cardiovascular disease

or internal Cancer

in either parent or siblings before age 60

No cardiovascular or internal Cancer death

in either parent

before age 60

Not more than onecardiovascular or

Cancer death

in parents before age 60

Driving

History

Not more than 1

moving violation in

the last 2 years. No DUI in the

past 5 years

Not more than 1

moving violation in


past 5 years

Not more than 1

moving violation in


past 2 years

NicotineUsually 5 years

no nicotine

Usually 3 years

no nicotine

Usually 1 year

no nicotine

Cholesterol/HDL Ratio

Cannot exceed 5.0 Cannot exceed 6.0 Cannot exceed 8.0

Alcohol/

Substance

Abuse

No alcohol or

substance abuse history

No alcohol or

substance abuse in past

10 years

No alcohol or

substance abuse

in past 7 years

Risk assessment factors:

Underwriters typically divide risk factors into three categories, they are

Medical risk factors:

For underwriting individual life insurance include build, which is the shape or form

of the person's body, including the relationships among height, weight, and the

distribution of weight. Medical risk factors also include personal medical history, family

medical history, tobacco use, and alcohol and substance abuse. The table below explains

the medical risk factor.

Height Weight Weight Weight Weight

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Super

Preferred

(Male)

Super

Preferred

(Female)

Preferred

Male/

Female

Standard

Male/

Female

5' 0" 145 130 161 189

5' 1" 149 133 165 193

5' 2" 153 135 170 197

5' 3" 158 138 175 204

5' 4" 162 140 180 209

Personal risk factors:

For underwriting individual life insurance include moral hazard, which is the

likelihood that a person involved in an insurance transaction may be dishonest in thattransaction. Personal risk factors also include occupation, avocations and hobbies,

aviation activities, international residence, and driving history. The below table will

explain the personal risk factor.

Category Super Preferred Preferred Standard

Cancer History

No cancer history(except certain

skin cancers)


skin cancers)


skin cancers)

Aviation

Private pilots will

have extra premiumor exclusion

Private pilots will


Private pilots may


Avocation

Available,

possible extra

premium dependingon avocation

Available,

possible extra


Available,

possible extra


Financial risk factors:

The underwriter ensures that the amount of insurance is not excessive. In addition,

most jurisdictions require that, at the time of policy issue, the applicant or beneficiary

must have an insurable interest in the risk that is insured—that is, the applicant or

beneficiary must be likely to suffer a genuine loss or detriment should the event insured

against occur. An underwriter has a more difficult time assessing insurance interest in a

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third-party application, which is an application submitted by a person or party other than

the proposed insured.

Sources of underwriting:

The underwriter has a number of resources that can be called upon to provide thenecessary information for the risk selection process. These sources include:

• The policy application

• Medical examinations

• Inspection reports

• The Medical Information Bureau (MIB)

The Application:

The application is an absolutely crucial document because it's usually attached to

and incorporated as an integral part of the insurance contract. The producer must

therefore take special care with its accuracy in the interests of both the insurancecompany and the insured. The application is divided into sections, with each designed to

obtain specific types of information. Although the form of the application may differ

from one company to another, most provide for submission of the following data: Part 1

(General Information), Part 2 (Medical Information), the Agent's Statement or Report,

and the proper signatures of all contractual parties.

Part 1 of the application requests the insured's general or personal data, such as

name and address, date of birth, business address and occupation, Social Security

number, marital status, and other insurance that may be owned. Additionally, if the policy

applicant and the insured are not the same person, the applicant's name and address

would also be required in this section.

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Part 2 of the application is designed to provide information regarding the insured's

past medical history, current physical condition, and personal morals. If the proposed

insured is required to take a medical examination, Part 2 is usually completed as part of

the physical exam. After reviewing the medical information contained in the application

and the medical exam, the underwriter may also request an Attending Physician's

Statement, or APS, from the proposed insured's doctor. The APS is typically used to

obtain more specific information about a particular medical problem or issue.

The Agent's Statement, which is part of the application, requires that the insurance

agent provide certain information regarding the proposed insured. This generally includes

information regarding the agent's relationship to the insured, data about the proposed

insured's financial status, habits, general character, and any other information that may be

pertinent to the risk being assumed by the insurance company.

Medical examinations:

Medical exams and tests, when required by the insurance company, are conducted

by physicians or paramedics at the expense of the insurer. Such exams usually aren't

required for health insurance. The medical exam requirement is much more common for

life insurance underwriting than for health insurance. As a side note, simplified issue life

insurance requires no medical examination and the application asks only very basic

health-related questions. This type of coverage is usually only available in low face

amounts to reduce the insurance company's subjection to the hazard of adverse selection.

Inspection reports

To supplement the information on the application, the underwriter may order an

inspection report on the applicant from an independent investigating firm or credit

agency, which provides financial and lifestyle choices information. This data is used only

to help determine the insurability of the applicant. If the amount of insurance being

applied for is average, the inspector will typically write a general description about the

applicant's finances, health, character, occupation, hobbies, and other habits. When larger

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amounts of coverage are requested, the inspector will provide a more detailed report. This

information is based on interviews with the applicant's associates at home including

neighbors and friends, at work, and elsewhere. Such "investigative consumer reports"

may not be made unless the applicant is clearly and accurately told beforehand about the

report in writing. This consumer report notification is usually part of the application. At

the time that the application is completed, the producer will separate the notification and

present it to the applicant.

The Medical Information Bureau

Another source of information that may aid the underwriter in determining whether or not to underwrite a particular risk is the Medical Information Bureau, or MIB, which is

located in Massachusetts. The MIB is a nonprofits trade association that maintains

medical information on applicants for life and health insurance. It consists of well over

six hundred member companies that write more than eighty percent of the health

insurance and over ninety-eight percent of the life insurance policies in the United States

and Canada. The MIB maintains an extensive database of medical information and

occupational risks on applicants for life and health insurance. For every ten insurance

applicants, the MIB will have a file on one or two of them. Medical Information Bureau

data is reported to member companies in code form so as to preserve the confidentiality

of the file's contents. The database contains no details about the individual. The codes

simply alert companies to the fact that there was information obtained and reported by a

member company on a particular medical impairment or vocational risk. Furthermore, the

report does not disclose any action taken by other insurers, nor does it indicate the

amount of insurance that was requested.

Underwriters use the MIB by comparing its file against the information contained in

the prospective insured's application. If the MIB file contains a code for a condition that

should be listed on the application but is not, the underwriter would then inquire more

specifically about that area. For example, an MIB file might contain a code indicating

that an applicant suffers from high levels of cholesterol, while the application indicates

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http://www.mib.com/

http://www.mib.com/




that he or she has no ongoing medical conditions. This discrepancy would prompt the

underwriter to investigate whether the applicant has misrepresented his or her health

status, or perhaps alternatively has recovered completely from the condition.

Underwriting decision

When making an underwriting decision, an underwriter generally has one of three

choices. Approve the coverage as applied. Rate the application; Rating is the process of

increasing the premium rate or modifying the type or amount of coverage to approve arisk. If the both didn’t happen the underwriter will decline the application. To make risk

classification and premium rate decisions, life underwriters typically use a numerical

rating system, which is a risk classification method in which a number is assigned to an

individual proposed insured according to the degree of risk he presents to the insurer. If

the underwriting decision is to approve the coverage, the underwriter releases the file to

the policy issue department. Policy issue is the insurance company functional area that

prepares the insurance contract and facilitates the delivery of the policy to the policy

owner, usually by way of the producer who sold the insurance.

Conclusion

Underwriting is the base of all insurance industry. If the underwriters access the risk

properly and rate the policy according to the underwriting principles and policies, the

business will give great success other wise it will be great risk for the insurance industry.

The modern technique made the insurance underwriting so easier.

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References

• en.wikipedia.org/wiki/Underwriting

• www.finweb.com/insurance/the-basics-of-underwriting-insurance.html

• http://www.insurancedirectonline.com/low-cost-life-insurance-underwriting.htm

• LOMA290 manuals

C fid i l 18

http://www.finweb.com/insurance/the-basics-of-underwriting-insurance.html

http://www.insurancedirectonline.com/low-cost-life-insurance-underwriting.htm

http://www.finweb.com/insurance/the-basics-of-underwriting-insurance.html

http://www.insurancedirectonline.com/low-cost-life-insurance-underwriting.htm

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