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
9
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
