Chapter 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
Two fundamental risks the insurance company is exposed when setting premiums
- Premiums are not appropriate for lives concerned
- Premium rates permit selection against the insurer
How does underwriting help insurer to manage risk?
6
- Protects life insurer from anti-selection.
+Being slightly different from market standards may lead to increased anti-selection
+But also needs to ensure this doesn’t discourage new business or cost more than what is saved - Enables company to identify 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
What are the main types of undewriting (4)
- 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 proposal stage info
rejecting claims may => bad publicity. need to consider this
What are the aims of medical underwriting? (3)
The main aims 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?
- Proposal form questions completed by applicant
- Medical doctors reports from that applicant has consulted
- Medical examination
+costly option + risk of discouraging healthy applicants
+usually only done if answers in proposal form unsatisfactory
+ or high sum assured - Specalist medical tests on applicant
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?
- 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
Discuss the four main ways in which special terms can be specified for a contract after underwriting has been conducted
- addition to standard premium, commensurate with degree of risk
+preferred 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 - 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.
What are 2 main costs of relaxed/reduced underwriting? (2)
Main costs of relaxed/reduced underwriting
- increased costs of anti-selection
- increased costs of obtaining reinsurance
What are the key considerations an insurer should bear in mind when deciding on the level of underwriting to use
Key considerations when determining levle of underwriting to use
- Expenses associated with the level of underwriting proposed
- Extent and financial significance of any potential anti-selection risk
- Impact on the potential level of sales
+less underwriting=> quicker processing of new business proposals
+people maybe more inclined to take contracts with less underwriting - The uncertainty caused by claims underwriting
- Effectiveness of proposed underwriting if underwriting leads to benefit exclusions, it may be difficult to police
- Extent of homogenisation of risk that may be achieved
- Impact of regulation
- Terms offered by company’s reinsurers
- How to vary underwriting
+eg by age, sum assured, target market and other factors
Underwriting in a group cover context
Give examples of common measures to reduce anti-selection risk taken by providers of group benefits
- applying exclusions
- setting free cover limits
- ensuring member actively working when cover begins
- setting take up rates on voluntary schemes
- laying down take over terms eg where insurer accepts a scheme previously insured elsewhere
