Chapter 31: Underwriting

Question 1

The 3 steps in the underwriting process:

Answer 1

1. Obtain evidence
2. Interpret the evidence
3. Decide terms

Question 2

The main purpose of underwriting is to manage risk, in particular to: (6)

Answer 2

1. protect the insurer against anti-selection
2. identify the lives with substandard health risk
3. identify the special terms to offer the substandard risks
4. help ensure that all risks are rated fairly
5. help ensure that mortality experience is consistent with the pricing basis
6. reduce the risk from over-insurance (through financial underwriting).

Question 3

The four main types of underwriting: (4)

Answer 3

1. medical underwriting - the medical assessment of a potential policyholder’s health.
2. lifestyle underwriting - the influence of sporting and hazardous leisure pursuits on the risk, and the extent to which the lifestyle might increase the possibility of contracting dangerous diseases such as AIDS.
3. financial underwriting - assessing the financial situation of a potential policyholder; and
4. claims underwriting - underwriting at the claims stage.

Question 4

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

Answer 4

1. questions on the proposal form completed by the applicant.
2. reports from medical doctors that the applicant has consulted.
3. a medical examination carried out on the applicant by a doctor, nurse, paramedic or pharmacist.
4. specialist medical tests on the applicant. (e.g. blood, ECG, Chest x-ray)

Question 5

Other evidence (that can have affect the mortality or health and care risks): (4)

Answer 5

1. the applicant’s occupation
2. the leisure pursuits of the applicant
3. the applicant’s normal country of residence (and its health care environment.)
4. socio-economic factors

Question 6

Financial underwriting will help ensure that: (2)

Answer 6

1. the premiums are affordable, controlling the
   persistency risk
2. the applicant is not trying to commit fraud

Question 7

Applicants whose state of health does not reach the required standard might be: (4)

Answer 7

1. declined
2. deferred
3. offered special terms, e.g:
   
   • an increased premium
   • a reduction in benefit
   • an exclusion
4. offered an alternative policy.

Question 8

There may be a number of circumstances in which claims will not be paid. Common exclusions include: (4)

Answer 8

1. alcohol and drug abuse,
2. self-inflicted injury or attempted suicide
3. war or civil commotion
4. the failure to follow appropriate medical advice

Question 9

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

Answer 9

1. The expenses associated with the level of underwriting proposed.
2. The extent, and in particular the financial significance, of any potential anit-selection risk.
3. The interaction between the level of underwriting and the potential level of sales.
4. Claims underwriting may deter people from taking up a contract, due to the uncertainty as to whether a claim may be accepted.
5. The effectiveness of the proposed underwriting.
6. The more detailed the underwriting, the greater the homogenisation of risk that may be achieved.
7. The impact of regulation, which may constrain the level and/or type of underwriting that is permitted, e.g. the use of genetic testing.
8. The interaction between underwriting level and terms offered by the company’s reinsurers.
9. How to vary underwriting criteria by age, sum assured, target market and various other factors.

Question 10

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

Answer 10

1. applying exclusions
2. setting free cover limits
3. ensuring members are actively at work when cover begins.
4. setting take-up rates on voluntary schemes.
5. laying down take-over terms where the insurer accepts a scheme previously insured elsewhere.