Chapter 31 - Underwriting

Question 1

What is underwriting?

Answer 1

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 terms and conditions of cover. It may also include assessing the risk in the context of the other risks in the portfolio

Question 2

Main ways of managing risks through underwriting: (6)

Answer 2

1. Protect LI company from anti-selection
2. Identify lives with substandard health risk for whom special terms would need to be quoted
3. For the substandard risks, the UW process will identify the most suitable approach and level for the special terms to be offered
4. Adequate risk classification within the UW process will help to ensure that all risks are rated fairly
5. Will help to ensure that actual mortality does not depart too far from that assumed in the pricing of the contracts being sold
6. Financial underwriting will help reduce the risk from over-insurance

Question 3

4 main types of underwriting:

Answer 3

Lifestyle underwriting
Medical underwriting
Financial underwriting
Claims underwriting

Question 3

Medical evidence can be obtained from the following sources: (4)

Answer 3

1. Questions in the proposal form completed by the applicant
2. Reports from medical doctors that the applicant has consulted
3. Medical examination carried out on the applicant by a doctor, nurse, paramedic or pharmacist
4. Specialist medical tests on the applicant

Question 4

Finacial underwriting aims to ensure that: (2)

Answer 4

1. Person concerned is not trying to commit fraud
2. Premiums payable by the person are affordable, controlling persistency risk

Question 5

3 main ways in which special terms can be specified:

Answer 5

1. Addition may be made to the premium, which would have been charged to an applicant who did meet required standard (proportionate to degree of extra risk)
2. Deduction from benefit, which would have been paid to an applicant who did meet the required standard
3. Exclusion clause may be added to the contract, which excludes payment of benefit claims that arise due to specified cause

Question 6

Common exclusions that wil lead to claims not being paid are for claims arising from: (4)

Answer 6

1. Alcohol or drug abuse
2. Self inflicted injury or attempted suicide
3. War or civil commotion
4. Failure to follow appropriate medical advice (especially for AIDS)

Question 7

Factors to consider in an analysis of the appropriate level of underwriting to use: (9)

Answer 7

1. Expenses associated with the level of UW
2. The extent, and in particular the financial significance, if any potential anti-selection risk
3. Interaction between level of UW and the potential level of sales
4. Claims UW may deter people from taking up a contract, due to uncertainty as to whether a claim may be accepted
5. Effectiveness of proposed UW, exclusions may be difficult to police
6. More detailed UW = greater homogenisation of risk
7. Impact of regulation, might constrain level of UW and/or type of UW
8. Interaction between UW level and terms offered by company’s reinsurer
9. How to vary UW criteria by age, SA, target market and various other factors

Question 8

Common measures used to limit the risk of anti-selection on group cover: (5)

Answer 8

1. Applying exclusions
2. Setting free cover limits
3. Ensuring members are actively at work when cover begins
4. Setting take-up rates in voluntary schemes
5. Laying down take-over terms where the insurer accepts a scheme previously insured elsewhere

Question 9

What is free cover limit?

Answer 9

The amount of cover automatically granted without UW to individuals in a group scheme

Question 10

Resasons why not all sources of medical evidence may be use for all applications in practice: (11)

Answer 10

1. Save in expenses
2. Oppertunity for anti-selection in negligible
3. To be competitive and increase sales
4. Cover amount is small
5. Group cover is being applied for
6. Cover is compulsory
7. Such an invasion of privacy is not culturally acceptable
8. Not allowed under legislation
9. Earlier sources (eg proposal forms) suggest no problems,then further investigation may not be cost effective
10. Product specifies UW will not be performed
11. Information is simply not available

Question 11

How substandard risks can be dealt with: (4)

Answer 11

1. Declined
2. Deferred
3. Offer special terms
   - increase premium
   - reduction in benefit
   - an exclusion
4. Offered alternative policy

Question 12

4 main general stages of underwriting for a proposal that is not acceptable at ordinary rates:

Answer 12

1. Identification of overall class of life
2. Obtaining medical and financial evidence
3. Assessment of extra risk
4. Translation of extra risk into terms to be offered to policyholder