Ch 31: Underwriting Flashcards
Explain what is meant by underwriting (6)
Underwriting is
- The process of consideration of an insurance risk
- Includes assessing
- whether a risk is acceptable, and if so
- appropriate premium, and
- terms and conditions of cover
- May also include assessing risk in context of other risks in portfolio
What is the main purpose of underwriting? (1)
How does underwriting help insurer to achieve this main purpose? (13)
Main purpose of underwriting is to help insurer manage risk
Underwriting helps insurer to achieve this main purpose (managing risk) as follows:
- Protects life insurer from anti-selection.
- Insurer is exposed to 2 key premium rate risks
- premiums not appropriate for lives insured
- premiums permit anti-selection against insurer, particularly anti-selection from unhealthy PHs
- Being slightly different from market standards may lead to increased anti-selection
- But also needs to ensure this doesn’t discourage new buss or cost more than what is saved
- Insurer is exposed to 2 key premium rate risks
- Enables company to indentify lives with substandard health risk, for whom special terms would need too be quoted
- For substandard risks, it identifies most suitable approach and level for special terms to be offered
- Adequate risk classification within underwriting process will help to ensure all risks are rated fairly ie better categorisation and grouping similar lives together=> more effectively prevent anti-selection
- Helps ensure that actual mortality experience does not depart too far from that assumed in pricing
- Financial underwriting will help reduce risk from over-insurance
SAFARI
How does underwriting compare for health and care contracts vs other contracts? (3)
Underwriting for health and care contracts is
- more complex than for other contracts
- this presents actuary with opportunity to become involved in multi-disciplinary teams with non-actuaries
- allowing actuary to be aware of standard approaches in industry without requiring detailed knowledge
There is no such thing as a bad risk, only an insufficiently priced risk.
Discuss (7)
- Statement is true for most unhealthy lives
- life insurer will want their business, albeit subject to their paying an appropriate premium
- However, statement not true for seriously impaired lives
- much more difficult to rate them accurately
- risk of death may be so high that little hope of recouping initial expenses
- appropriate premium may be unaffordably high to realstically sell policy
- So in case of seriously impaired lives, rather just decline application for insurance
What are the main types of undewriting (4)? Give brief outlines of each (4).
What other types of underwriting might we find in practice? (2)
Main types of underwriting:
- medical underwriting
- medical assessment of potential PH’s health
- financial underwriting
- assess financial situation of PH
- lifestyle underwriting
- assessing influence of sporting/hazardous leisure pursuits on the risk and the extent to which lifestyle might increase possibility of contracting dangerous diseases
- claims underwriting
- eg checking validity of claims, checking claim info vs proporsal stage info
- rejecting claims may => bad publicity. need to consider this
Other potential types of underwriting
- occupational underwriting
- territorial underwriting
Give a broad overview of the underwriting process (1)
What are the steps in the underwriting process? (7)
- consider proposal stage
- consider claims stage
Underwriting process involves
- requesting adequate information prior to acceptance of business/claim, such that the risk can be properly estimated
Steps in the underwriting process
- At proposal
- Decide on which type of underwriting to use
- Decide on level of underwriting
- Collect adequate evidence
- Specify the terms to be offered
- At claims
- Consider claims underwriting
The underwriting process
Why might an insurer make use of medical underwriting? (7)
What are the aims of medical underwriting? (3)
A life insurer may have
- mortality (or health and care) risks
- obtain evidence about applicant health
- assess whether they attain required standard of health…
- …if not, what state of health is relative to standard
- Morbidity risk
- could also obtain evidence of health
- if insurer intends to offer different terms according to applicant health
The main aims of medical underwriting are to:
* Underwrite just enough to not hurt marketability
* increase fairness
* control risk
The underwriting process
What are the 4 main sources of medical evidence for an insurer?
Describe some features and given examples
(18)
-
Proposal form questions completed by applicant
- height/weight, smoking/drinking habits, occupational/dangerous pastimes
- current health eg details of current treatment being received
- personal medical history eg any major illnesses or operations
- family medical history eg hereditary ailments such as hear disease
- dishonesty not really a problem if
- it is not rising
- if insurance premiums allow for it, because they’re based on insurer’s own history of mortality experience
- may be picked up at claims stage
- sum at risk is low
-
Medical doctors reports from that applicant has consulted
- still carries a cost compared to proposal forms…
- …but if insurer can access, cost effective way to get most of medical history
- maybe not useful where people have multiple doctors
- may be difficulties with privacy, data protection, etc
-
Medical examination
- carried out on applicant by doctor, nurse, paramedic, or pharmacist
- usually covers many points in proposal form + any obvious problems
- costly option + risk of discouraging healthy applicants
- usually only done if
- answers in proposal form unsatisfactory
- for high sum assured
-
Specalist medical tests on applicant eg blood tests, electrocardiogram, chest x-ray
- most intensive+ expensive options
- maybe indicated as necessary by basic medical exam
- maybe automatically required for high sum assured on temporary assurance product
The underwriting process : other evidence required
Besides the state of health of an applicant given by medical evidence, what other factors can affect mortality risk and so need to be investigated? (4)
- Applicant’s occupation
- Applicant’s leisure pursuits
- Applicant’s normal country of residence (and attendant health care environment)
- Some companies also attempt to use socio-economic factors
CHANGE DOG
The underwriting process: Financial underwriting
Describe financial underwriting (4)
What are its main aims? (5)
What role do brokers play? (2)
Financial underwriting is imposed mostly on large sum assured cases
Life company gather information on
* sums assured applied for by applicant
* sums assured on existing policies
* income of applicant
Aims to ensure
* premiums payable by applicant are affordable (persistency risk)
* applicant is not trying to commit fraud
* by having higher levels of sum assured than could be justified eg SA:Income
* can check agg SA across all assurances across the company,
* tricky when considering assurances across companys
Expectations of brokers re financial underwriting
* brokers should consider financial needs of customer
* when making recommendation on appropriate insurance policy regardless of size of sum assured
The underwriting process: Interpretation of evidence
Outline the process by which the evidence gathered by underwriting will be interpreted. (7)
- Proposal form processed electronically
- Standard cases are done by admin staff.
- Non-standard cases are assessed by specialist underwriters using:
- doctors specifically employed by insurer for this purpose
- underwriting manuals prepared internally or by reinsurers
- Basic vs complex cases
- specialist underwriting software used to assess + rate basic medical evidence + disclosures
- experienced professional underwriters used for moderately complex + financial underwriting cases
The underwriting process: Specification of terms
Why is financial underwriting done first? (3)
Suppose applicant gets past financial reinsurance (if applicable) what would be the next steps after underwriting? (6)
Why financial underwriting first
* applicants who fail financial underwriting tests would be declined
* insurer may request more info, before declining, but if fraud suspected then further info treated with caution
* loss of goodwill (due to declining) small price compared to reduced risk of fraud and avoiding costs of further investigations
Passing the financial underwriting, Health status is considered
* normal terms offered: for applicants whose health state reaches required standard
* special terms may be offered
* decline
* where applicant health state doesn’t meet any of insurer’s standards..
* ..could decline cover temporarily
* declines on health grounds may not be permitted by regs, but actually sound premium may then be charged
The underwriting process: Special Terms
Discuss the four main ways in which special terms can be specified for a contract after underwriting has been conducted (10)
- addition to standard premium, commensurate with degree of risk
- preffered for protection policies as PH decides on some level of protection required, then pays premium
- deduction from standard benefit, commensurate with degree of risk
- preferred for savings policies
- exclusion clauses
- least preferred, since exclusion may go against PH needs
- not always easy to enforce at time of claim
- common exclusion examples
- alcohol and drug use
- self inflincted injury/attempted suicide
- war/civil commotion
- failure to follow appropriate medical advice
- claimant outside agreed geographical region
- offer a different policy
- e.g. reduced term, but might not be acceptable to policyholder, as
- might not meet the PH needs and/or
- premiums may be not be affordable.
- e.g. reduced term, but might not be acceptable to policyholder, as
A311 Special terms and u/w outcomes
The underwriting process: Claims underwriting
What do we mean by claims undewriting? (4)
For what contracts is claims management particulalry difficult? ()
Claims underwriting essentially relates to
- checking validity of a claim at claims stage
- if the claim is subject to any exclusion clauses / fraud
- for suspicion of non-disclosure (may be difficult to obtain evidence)
- potentially rejecting claims that do not meet requirements set out in terms
Claims management difficult for health and care contracts as.
* complicated to assess claim validity and
* required need to assess continued validity of income protection claim
* to ensure policyholders who have recovered do not continue receiving benefits.
Check process diagram notes
Determining the level of underwriting
What is the key message regarding the balance between costs/benefits of relaxed underwriting? (1)
What are 2 main costs of relaxed/reduced underwriting? (2)
What would be the main benefit(s) of relaxed/reduced underwriting (3)?
Maintain a balance between the costs and benefits of underwriting.
* underwriting is justified to the extent that it pays for itself in improved experience
Main costs of reduced underwriting
* increased costs of anti-selection
* increased costs of obtaining reinsurance
Main benefits of reduced underwriting would be
* reduced underwriting expenses
* increased attractiveness of product to distribution channels/customers
* increased profits, from increased volumes of new business undertaken
* assuming benefits of greater marketability and lower underwriting costs outweigh the effects of the premium increases for worsening mortality experience