Chapter 31 Flashcards
Define underwriting.
It is the process of consideration of an insurance risk. This includes:
* Assessing whether the risk is acceptable, and if so:
– Setting the appropriate premium
– Together with the Ts & Cs of cover
* Assessing the risks in the context of the other risks in the portfolio
IC will generally aim to accept as many policies as possible at appropriate premium rates. To what fundamental risks are the company exposed?
- Premium rates are not appropriate for the lives concerned - to ensure premium rates are appropriate, break down lives into homogeneous groups with respect to mortality and price accordingly
- Premium rates permit selection against the company - the more we categorise lives into groups, the more we prevent selection against the company. However, IC must balance underwriting with cost and encouragement of NB
How is underwriting used to manage risk?
LEASHI
L - Larger proposals: financial underwriting will help to reduce the risk from over insurance
E - Ensures that the actual mortality experience does not depart too far from that assumed in the pricing of contracts being sold - underwriting aligns risks written by company with pricing performed by actuary
A - Protects the provider from anti-selection
S - Substandard risks: the underwriting process will identify the most suitable approach and level for special terms to be offered, e.g. A REDDD
H - Adequate risk classification into homogeneous groups within the underwriting process will help to ensure that all risks are rated fairly
I - Enables the provider to identify substandard health risk for whom special terms need to be quoted - aim to accept a large proportion of business at standard rates for admin simplicity
What is a standard life?
An individual whose health characteristics are of a minimum acceptable standard.
What are typical special terms offered to substandard risks?
- Addition to premium for a given level of benefit
- Reduction in benefit for a given level of premium
- Exclusion clauses
- Deferred and waiting periods
- Declining cover temporarily - until more information becomes know
- Declining cover permanently
What are the 4 types of underwriting?
- Medical underwriting
- Lifestyle underwriting
- Financial underwriting
- Claims underwriting
Why is underwriting more complex for health products than for life insurance products?
- Underwriting is about assessing the risk of the company in terms of probability and size of claim.
- Probability of claim:
– TA: probability of dying is relatively easy to assess as it is mainly affected by age + gender
– IP: probability of being unable to follow your normal occupation as a result of illness or accident is affected by many more factors, in particular occupation - Size of claim
– TA: fixed and known
– IP: length of period of sickness is influenced by lots of health factors
What is the purpose of medical underwriting?
Assessing the applicant’s health.
What is the purpose of lifestyle underwriting?
Assessing the impact of lifestyle on the level of risk, e.g. occupation, leisure pursuits, country of residence.
What is the purpose of financial underwriting?
To assess whether the proposed benefits are reasonable relative to the financial loss suffered by insured or dependants. It reduces the risk of over insurance.
What is the purpose of claims underwriting?
Check that claims are valid and to check the details declared at policy proposal.
What is a test to do with regards to non-disclosure?
Would you have insured the risk if you had known beforehand?
* If yes - subtract additional premiums from claim amount
* If no - provide evidence
Why would an IC want to obtain evidence about health of an applicant?
- Assess whether he/she attains the company’s required standard of health
- If not, what their state of health is relative to that standard
How can medical evidence be obtained?
- Questions on the proposal form completed by the applicant (very cheap)
o Height & weight (⇒ BMI)
o Smoking & drinking status
o Current health status
o Medical history – personal & family
o Details on any current treatment received
o Occupation & potentially dangerous pastimes - Reports from medical doctors
o If company has access to these → cost-effective way of learning most of applicant’s history
o Problems
▪ Countries where people do not have a single doctor to whom they refer queries, idea is not so useful
▪ Difficulties with privacy of records & data protection - Medical examination carried out on applicant: (costly)
o Typically, a half-hour examination (e.g. cholesterol, blood pressure, liver function)
o Problems
▪ Costly option
▪ Risk of discouraging healthy applicants
o Normally only used in event of unsatisfactory answers on proposal form or high sum insured
o Some tests may be required for very high SAs on temporary LI contracts - Specialist medical tests on the applicant: (most intense & expensive)
o e.g. ECGs, cancer screenings, blood-tests, X-rays
o Might be indicated by above medical examinations
o Might be automatically required for high sums insured
How would a LIC determine the degree of medical underwriting to use?
- The extent of medical underwriting necessary would depend on the extent of the loss that the LIC will make if it misestimates the state of health of the applicant.
- Level of medical evidence required normally increases for higher levels of benefits.
What should the relationship between the level of underwriting and extra premiums be?
The extra premiums received for the efforts put into underwriting should be greater than the costs involved.
What can the IC do to trigger different underwriting processes?
Set appropriate medical limits that trigger different underwriting processes.
What is an important thing to remember with regards to underwriting?
It should not be too time consuming and invasive relative to market standards so that we do not discourage potential PHs.
What are the lifestyle factors that affect mortality or health and care risks?
- Applicant’s occupation (e.g. deep-sea welding, oil rigs)
- Leisure pursuits of the applicant
- Applicant’s normal country of residence (perhaps ask for notification when visiting certain countries)
o Claim frequency may be affected by:
▪ Climate
▪ Diseases
▪ Availability and quality of medical facilities
▪ Levels of violent crime
Why do we do financial underwriting?
To ensure that:
- The person concerned is not trying to commit fraud.
o Indication of this could be having higher levels of sums assured than could be justified by applicant’s current circumstances (not necessarily financial)
o Simplest level – aggregating total SA across proposed new policy + any existing policies held
o Complicated level – aggregating total SA across all insurers, where there is a database to which all insurers contribute - The premiums payable by the person are affordable – control persistency risk
o Look at: income (and source), net worth & that of spouse
Who will handle policy proposals for which queries have been raised and what will they use?
Specialist underwriters employed by the LIC, who will make use of:
- Any doctors specifically employed by LIC for this purpose
- Underwriting manuals (software/websites these days) prepared by the major reinsurance companies
What happens if an applicant fails the financial underwriting process?
They would be declined of insurance.
What terms are offered to applicants whose state of health reaches the required standard and those who don’t?
- The company’s standard terms.
- Special terms (A REDDD) or an alternative policy.
How will insurance companies rate abnormal lives?
They will normally rely on reinsurer and industry data.
