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
- setting the appropriate premium, together with the
- terms and conditions of cover
- May also include assessing risk in the context of the 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
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
- 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
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
- longevity risk
- could also obtain evidence of health
- if insurer intends to offer different terms according to applicant health
Medical underwriting comes with a cost - therefore its use depends on the extent of the loss that the life insurance company will make if it mis-estimates the state of health of the applicant (usually for higher levels of benefit)
The main aimes of medical underwriting are to:
- improve marketability of product
- increase fairness
- control risk
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
- heigh/weight, smoking/drinking habits, occupational/dangrous 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
However, dishonesty is a problem if:
1. it is increasing
2. the company’s rates are based on some other group of lives and underwriting procedures were stricter for these lives.
-
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, bu additionally, allowing doctor to check obvious problems
- costly option + risk of discouraging healthy applicants
- usually only done if
- answers in proposal form unsatisfactory
- for high sum insured
- no reports from previously consulted doctors are available.
-
Specalist medical tests on applicant eg blood tests, electrocardiogram, chest x-ray
- most intensive+ expensive option
- maybe indicated as necessary by basic medical exam
- maybe automatically required for high sum insured on temporary assurance product
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
With regard to the process financial underwriting, list:
What are its main aims? (5)
What role do brokers play? (2)
Financial underwriting is imposed mostly on large sum assured cases, and it main aims are to ensure
- premiums payable by applicant are affordable (checking their income, which is used to control persistency risk)
- applicant is not trying to commit fraud
- by having higher levels of sum assured than could be justified
- can check across all assurances across the company, tricky when considering assurances across companys
Expectations of brokers re financial underwriting
- brokers should financial consider needs of customer
- when making recommendation on appropriate insurance policy regardless of size of sum assured
With regard to the process financial underwriting, list:
What information may be gathered? (3)
Life company gather information on
- sums assured applied for by applicant
- sums assured on existing policies
- income of applicant
Outline the process by which the evidence gathered by underwriting will be interpreted. (7)
- Evidence obtained is interpreted in terms of standard of health required by life company.
- 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 major 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
What is the very first hurdle for insurance to be granted if underwriting is done? (3)
Suppose applicant gets past financial reinsurance (if applicable) what would be the next steps after underwriting? (6)
Very first hurdle regading underwriting is that of financial underwriting
- 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, where applicable, either of the following may happen
- normal terms offered: for applicants whose health state reaches required standard, else…
- …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 regulatorily permitted, but actually sound premium may then be charged
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 clause appended to contract, excludes benefit payment arising due to specific issues
- least preferred, since exclusion may go against PH needs
- not always easy to enforce at time of claim
- common exlusion 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
For the following contracts, which of the special term approaches is the most suitable: (a) regular premium endowment assurance (b) term assurance.
(a) Regular premium endowment assurance: the product is a savings vehicle, where policyholders generally decide what premiums they can afford to pay, and then see what eventual benefit they get at maturity. If this is so, then an approach which involves reducing the death benefit (only) would probably be most suitable. It also means that policyholders who do, in the end, survive to the end of the term (and hence have not contributed in any way to any mortality loss), receive the same benefit for the same premium as an unimpaired life. This seems very fair, and appears to meet most policyholders’ needs from this contract. A variation would be to impose a reducing debt, where the debt reduces by level amounts over the term of the policy, reaching zero by the maturity date. On the other hand, if for any reason the policyholder needed to have some specific amount of sum assured on death, (eg to repay a house mortgage), then an increase in premiums would be more appropriate.
(b) Term assurance: the policyholder normally decides on some necessary level of cover, and then pays the required premiums. So it will be more appropriate to increase premiums, rather than to reduce the cover from what the policyholder originally wanted.