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?
(1) 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
(2) Enables company to identify lives with substandard health risk, for whom special terms would need too be quoted
(3) For substandard risks, it identifies most suitable approach and level for special terms to be offered
(4) 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
(5) Helps ensure that actual mortality experience does not depart too far from that assumed in pricing
(6) Financial underwriting will help reduce risk from over-insurance
What are the main types of undewriting (4)? Give brief outlines of each (4).
What other types of underwriting might we find in practice? (2)
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
Other potential types of underwriting
occupational underwriting
territorial underwriting
Why might an insurer make use of medical underwriting? (7)
What are the aims of medical underwriting? (3)
(1) mortality (or health and care) risks
+obtain evidence about applicant health
+assess whether they attain required standard of health…
+…if not, what state of health is relative to standard
(2) longevity risk
+could also obtain evidence of health
+if insurer intends to offer different terms according to applicant health
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?
(1) Proposal form questions completed by applicant
+heigh/weight, +smoking/drinking habits, +occupational/dangerous pastimes
+current health eg details of current treatment being received
+personal medical history eg any major illnesses or operations
+family medical history eg hereditary ailments such as hear disease
(2) Medical doctors reports from that applicant has consulted
+still carries a cost compared to proposal forms…
+…but if insurer can access, cost effective way to get most of medical history
+maybe not useful where people have multiple doctors
+may be difficulties with privacy, data protection, etc
Medical examination
carried out on applicant by doctor, nurse, paramedic, or pharmacist
+usually covers many points in proposal form, but additionally, allowing doctor to check obvious problems
+costly option + risk of discouraging healthy applicants
+usually only done if
answers in proposal form unsatisfactory
for high sum assured
Specalist medical tests on applicant
+eg blood tests, electrocardiogram, chest x-ray
+ most intensive+ expensive options
+maybe indicated as necessary by basic medical exam
+maybe automatically required for high sum assured on temporary assurance product
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
With regard to the process financial underwriting, list:
What are its main aims?
What information can be gathered?
premiums payable by applicant are affordable (checking their income)
applicant is not trying to commit fraud by having higher levels of sum assured than could be justified
Life company gather information on
sums assured applied for by applicant
sums assured on existing policies
income of applicant
Outline the process by which the evidence gathered by underwriting will be interpreted.
Evidence obtained is interpreted in terms of standard of health required by life company. Standard cases are done by admin staff/electronically.
Non-standard cases are assessed by specialist underwriters using:
+doctors specifically employed by insurer for this purpose
+underwriting manuals prepared internally or by reinsurers
specialist underwriting software used to assess + rate basic medical evidence + disclosures
experienced professional underwriters used for moderately complex + financial underwriting cases
Discuss the four main ways in which special terms can be specified for a contract after underwriting has been conducted
(1) 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
(2) deduction from standard benefit, commensurate with degree of risk
preferred for savings policies
(3) 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
(4) 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 is the key message regarding the balance between costs/benefits of relaxed underwriting? (1)
What are 2 main costs of relaxed/reduced underwriting? (2)
What would be the main benefit(s) of relaxed/reduced underwriting (3)?
The key message/balance is essentially that
underwriting is justified to the extent that it pays for itself in improved experience
Main costs of relaxed/reduced underwriting
+increased costs of anti-selection
+increased costs of obtaining reinsurance
Main benefits of relaxed/reduced underwriting would be
+reduced underwriting expenses
+increased attractiveness of product to distribution channels/customers
+increased profits, from increased volumes of new business undertaken
assuming benefits of greater marketability and lower underwriting costs outweigh the effects of the premium increases for worsening mortality experience
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
(1) Expenses associated with the level of underwriting proposed
underwriting includes various costs eg underwriter salary, medical reports
analysis must also include costs of getting further medical evidence
(2) Extent and financial significance of any potential anti-selection risk
(3) 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
(4) The uncertainty caused by claims underwriting
uncertainty of whether claim is accepted or not
(5) Effectiveness of proposed underwriting
if underwriting leads to benefit exclusions, it may be difficult to police
(6) Extent of homogenisation of risk that may be achieved
(7) Impact of regulation
(8) Terms offered by company’s reinsurers
(9) 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
What kind of special considerations exist regarding claims underwriting for IP policies?
Specifically for IP policies
Insurer needs appropriate info to substantiate claim, checking info consistent policy application info.
Benefit level checked against current salary=>ensure PH retains incentive to return to work.
Once claim has been approved, counsellor will:
+provide advice for the claimant in coping with the disability
+provide for insurer a likely duration of illness (establishing such a date of return to work in the mind of the patient).
Thereafter insurer will put in place procedure for monitoring (focuses on rehabilitation and is performed where appropriate by specialist nurses) ongoing claim, with periodic visits and continuing medical
