31 Underwriting Flashcards
Definition & related risks
Underwriting
The process of considering an insurance risk.
Includes assessing whether a risk is acceptable, and if so, setting appropriate premiums (and terms and conditions of cover)
It allows policies to be grouped into homogenous groups
A company is exposed to two fundamental underwriting risks:
* Premium rates are inappropriate for lives concerned
* Permits selection against company
How underwriting manages risk?
- Identifies suitable approach for risk (e.g. accept, reject, accept on special terms)
- Anti-selection is avoided – being different from market standards may leed to an accumulation of anti-selection
- Financial underwriting protects against over-insurance
- Ensures actual experience is in line with expected (pricing basis to correspond with underwriting practice or vice versa)
- Ensure risk classification is adequate i.e. risks are rated fairly
- Identify substandard health risks for whom special terms would need to be quoted
- Additional aims:
a. Ensure policyholders are charged appropriate premiums
b. Secure equitable treatment for normal/special classes of business
c. Avoid unnecessary loss of business
SAFARI
Four main types of underwriting
- Lifestyle
- medical
- financial
- claims
LIfestyle underwriting
other factors that can affect the mortality or health and care risks need to be investigated:
- the applicant’s occupation
- the leisure pursuits of the applicant
- the applicant’s normal country of residence (and its health care environment).
Medical underwriting
Process of obtaining evidence on whether the life attains the company’s standard of health, and if not, what it is relative to the standard.
Sources:
* Questions on proposal form completed by applicant (e.g. height, weight, smoker status, etc)
* Reports from doctors that the applicant has consulted
o There may however be some privacy issues
* Medical examination carried out by doctor (e.g. blood test/urine sample)
o Usually, only if unsatisfactory answers on proposal form and or high sum assured
o Costly
o Risk of discouraging healthy patients
* Specialist medical tests (e.g. x-ray)
o Done only if medical examination has indicated it is necessary
o May be required for very high SA on TA
o Very intensive and expensive
Financial underwriting
Reasons for:
* To ensure fraud is not being committed e.g. higher levels of sums assured than could be justified by applicant’s current circumstances (check total sum insured over all policies and other inusrers if possible)
* To ensure the premiums are affordable, and to control the persistency risk
Usually only for large sums assured
Standard check: Ratio of sum assured to salary of the applicant
Claims underwriting
- to ascertain whether the claim is subject to an exclusion clause, or
- if there is suspicion of non-disclosure (although obtaining evidence to substantiate this can be difficult).
- CI:need to collect information about the medical events surrounding the illness, and the results of tests that show whether or not the insured event has occurred.
- IP: assess the continued validity claim to ensure that policyholders who have recovered do not continue receiving benefits.
- ## IP: level of benefit will be checked against current salary to ensure that the policyholder retains an incentive to return to work
The main ways in which the special terms can be specified
- Addition to premium, size of addition is in line with the degree of risk
- Deduction from benefit, in line with degree of risk
- An exclusion clause may be added to the contract, which excludes payment of benefit claims that arise due to specified causes
Common exclusions
- alcohol and drug abuse,
- self-inflicted injury or attempted suicide,
- war or civil commotion
- the failure to follow appropriate medical advice (particularly for health and care and products specifically designed for HIV+ individuals).
- Claim payments may also not be made while the claimant is resident outside an agreed geographical location
Determining the level of underwriting to use
Overview
Need to ensure that BENEFITS of more relaxed underwriting outweight the COSTS.
Benefits:
- increased volumes and profit
- reduced u/w expenses
- increased attractiveness of product
Costs:
- increased anti-selection
- increased costs of obtaining reinsurance
Too strict underwriting:
Benefits:
- improved mortality experience
Costs:
- higher relative u/w costs for small SA
- discouragement to new business
Determining the level of underwriting to use
List of factors to consider
(DEAR Valentine SHER CD)
1. Claims u/w may discourage take-up because you don’t know if claim will actually be paid out
2. Expenses associated with underwriting proposed (e.g. salary of underwriter, medical reports) and whether extra premium justifies extra cost of u/w
3. Financial significance of anti-selection risk (the less u/w the more anti-selection; sentinel effect i.e. guarding effect)
4. Impact of regulation e.g. whether genetic testing is permitted
5. How to vary u/w criteria by age, sum assured, target market and various other factors
6. Marketing: level of u/w vs potential levels of sales (u/w discourages sales and leads to longer time taken to process new business proposals) ‘‘Note
7. The more detailed the underwriting, the greater the homogenisation of risk
8. Effectiveness of proposed u/w (exclusions may be difficult to police, or medical evidence may be limited)
9. Interaction of the underwriting level vs terms offered by company’s reinsurers (the more u/w, the more predictable the claims, the smaller the reinsurance margins and the lower the reinsurance premium)
10. Underwriting done by competitors– if they distinguish between smokers and non-smokers and there is evidence to suggest the two is different. We are at risk of anti-selection if we do not also include that distinction in our underwriting.
11. There will be a level of dishonesty – this will also differ by distribution channel
Methods to reduce anti-selection with no underwriting
- Low sum assured.
- Available to recipient of letter (and spouse, perhaps) only.
- No death benefit payable within, say, two years.
- Target at unsophisticated market.
- Limited time available in which to apply after a mailing or advert.
- Underwrite at claim stage? However, for life assurance, this is not a popular strategy in the UK.
- Exclude pre-existing conditions.
- Maximum age at entry.
Determining the level of underwriting to use
Marketing
- Underwriting is generally recognised as a barrier to sales as well as being time-consuming and invasive
- less (or no) underwriting may be used to increase the marketability of policies
- risk costs would be higher with such policies the other costs may not be, making overall pricing competitive.
- More underwriting would reduce claim costs, thereby allowing lower premiums which would increase marketability
- underwriting may be used with annuities in order to be able to offer enhanced terms to impaired lives
Determining the level of underwriting to use
Reinsurance terms
- the reinsurer will require a certain level of underwriting to be in place and will carry out reviews of the underwriting carried out
- terms offered will depend on the past claims experience of the insurer and the underwriting standards in place
- potentially considerable operational risk, as the reinsurer may not pay claims if the underwriting was not up to the specified standard.
Underwriting for group cover
Underwriting for group cover
Here’s a summary of the common measures used to limit the risk of anti-selection:
- Applying exclusions
- Setting free cover limits
- Ensuring members are actively at work when cover begins
- Setting take-up rates on voluntary schemes
- Laying down take-over terms for previously insured schemes
Key Points:
- Schemes with a minimum number of compulsory members and fixed benefit levels related to salary reduce anti-selection risk.
- These schemes can have more generous free cover limits and lower risk loadings in premiums.
- All employees must meet the “actively at work” criterion and fall within the “free cover” limits to join.
- Free cover grants automatic cover without underwriting up to a certain limit.
- Free cover is not free of charge; standard premiums apply without the need for medical screening.
- Large groups are treated as separate insurance units to minimize underwriting costs and client inconvenience.
- Higher-paid employees with benefits above the free cover level will be subject to underwriting.
