4. Life Insurance: E. Underwriting and Reinsurance

Question 1

Why will pricing of life insurance products not take into account all of an individual’s relevant factors?

Answer 1

• The assessment of health is imperfect
• Insurance involves the pooling of risks
• The cost of doing so would be prohibitive

Question 2

3 Stages of the underwriting process

Answer 2

• Class Selection
• Evaluation of the proposal and any other medical or financial information requested by the company
• Consider the incidence and intensity of the risk and translate this into the special terms to be offered (if the proposal is accepted on special terms)

Question 3

Process of class selection

Answer 3

This involves the choice of the target market and the method in which the product is to be sold.

Question 4

Evaluation of the proposal can lead to the company:

Answer 4

• Accepting the proposal on standard terms
• Accepting on special terms
• Postponing the decision
• Rejecting the proposal

Question 5

8 Sources of information available to the office

Answer 5

• Proposal form
• Primary medical attendant’s report
• Specific conditions questionnaire
• Medical examination
• Specialist medial report
• AIDS supplementary questionnaire
• Reinsurers underwriting manuals
• Financial questionnaire

Question 6

Contents of the proposal form (5)

Answer 6

• Contract details
• Details of the insured
• The insured’s medical or financial history
• Declaration by the proposer
• Debit order instruction

Question 7

Primary medical attendant’s report (PMAR)

Answer 7

A report requested from the insured’s doctor requesting information on:

• Any past illnesses
• Whether the insured is currently undergoing any treatment

Question 8

Under what normal conditions will the PMAR be requested

Answer 8

If:

• the sum assured exceeds certain limits
• the proposal form suggests that further medical information is required

Question 9

Specific conditions questionnaire

Answer 9

An additional questionnaire which aims to collect more information on specific conditions (medical).

Question 10

Medical examination aims

Answer 10

Aims at collecting information on current medical status that is unlikely to appear on a PMAR.

Question 11

Under what normal conditions will a medical examination be requested

Answer 11

• The sum assured exceeds certain limits

- Other medical evidence already collected suggest that further medical information is required

Question 12

Special medical report

Answer 12

Covers things such as blood tests, chest X-rays, ECG’s etc.

Question 13

Under what normal conditions will the Specialist medical report be requested

Answer 13

• The sum assured exceeds certain limits

- Other medical evidence already collected suggests that further medical information is required

Question 14

AIDS supplementary questionnaire

Answer 14

This seeks further information on lifestyle to help assess the AIDS risk.

Question 15

Reinsurers underwriting manuals

Answer 15

These manuals are produced by most reinsurers and contain a section on each medical condition explaining:

• The nature of the condition
• The medical information required by the underwriter
• A description of how to convert medical information into an appropriate measure of the risk.

Question 16

Financial questionnaire

Answer 16

The aim is to attempt to ascertain that the amount of cover applied for is in line with the insured’s needs and means.

Question 17

The information collected in the financial questionnaire

Answer 17

• The reason for cover,
• Existing cover
• Insured’s income and net worth,
• Number of dependants

Question 18

6 Ways of dealing with extra risks identified in underwriting process

Answer 18

• Charge an extra premium
• Impose a debt
• Impose an exclusion clause
• Defer the proposal
• Decline proposal
• Offer an alternative contract

Question 19

Exclusion clause

Answer 19

A clause used to exclude claims from a certain cause.

Question 20

Processing the deference of the proposal

Answer 20

If the underwriter is unable to assess the extra risk at present, the underwriter may decide to postpone the decision until more information is available.

Question 21

Four groups of AIDS applicants

Answer 21

• sick with AIDS
• HIV positive
• At risk
• Clear

Question 22

Professional reinsurers

Answer 22

Companies that only accepted risks from other companies. They do not sell policies directly to the public.

Question 23

Reasons for reinsuring

Answer 23

• Reduces the fluctuations in claim payments to an affordable level.
• Gives access to the reinsurers’ technical assistance
• Allows the reduction of new business strain, and thus allows the company to write more business
• Gives the opportunity for reciprocity
• May be cost effective
• May have tax advantages
• Allows the company to accept large policies without delays.

Question 24

2 Proportional methods of reinsurance

Answer 24

• Original terms reinsurance

- Risk premium reinsurance

Question 25

3 Non-proportional methods of reinsurance

Answer 25

• Catastrophe reinsurance
• Excess of loss reinsurance
• Stop loss reinsurance

Question 26

Original terms reinsurance

Answer 26

The original contract is shared between the insurer and reinsurer in a proportion agreed at the outset. Premiums and benefits are then shared in that proportion.

Question 27

2 Methods used to split funds between the insurer and reinsurer? (Original terms reinsurance)

Answer 27

• Quota share

- Individual surplus

Question 28

Quota share method of reinsurance split

Answer 28

The insurer agrees to retain a fixed proportion of each contract and passes the balance to the reinsurer.

Question 29

Individual surplus method of reinsurance split

Answer 29

Everything above the retention limit on each contract is passed to the reinsurer.

Question 30

Risk premium reinsurance

Answer 30

In this case only (a proportion of) the risk element is passed to the reinsurer. i.e. (a proportion of) the excess of the death benefit over the reserve held for the contract.

The reinsurance contract is then similar to a term assurance policy with the insurer only paying the reinsurer sufficient to cover the risk reinsured.

Question 31

Non-proportional reinsurance

Answer 31

The proportion of the risk borne by the reinsurer is not determined at outset and depends on the size of claims made.

Question 32

Catastrophe reinsurance

Answer 32

This provides cover when more than a certain number of lives in your portfolio are involved in an incident causing death.

Question 33

Excess of loss reinsurance

Answer 33

This type of reinsurance is used for cases where a particular claim exceeds some predetermined amount.

This type of cover is not relevant in life insurance contracts as the benefits to be paid on death are determined at outset.

Question 34

Stop loss reinsurance

Answer 34

This covers the insurer against poor claims experience on a particular portfolio as a whole rather than just looking at individual contracts.

Question 35

Selection process

Answer 35

A process attempting to divide the assured lives into homogeneous groups with respect to the main factors affecting risk. (On the other hand policyholders will be attempting to exercise anti-selection for example preferring annuities to assurances if they feel they are in good health)

Question 36

The aim of the selection process

Answer 36

To reduce the variability of experience within the group selected.

Question 37

Debt imposed during underwriting

Answer 37

An amount deducted from the sum assured.
Starts out at a specified level and decreases with time, until at maturity there will be no debt to be deducted from the maturity proceeds.