Chapter 4 - Preferred Risk Underwriting

Question 1

Preferred Risks

Answer 1

Are those individuals demonstrating low mortality risk features that allow that group to be assigned favorable product pricing. In essence, determining a mortality risk class.
Vary significantly through insurance companies - differentiation rather than duplication.

Question 2

Blood testing was not routinely acquired on standard insured lives until

Answer 2

Late 1980s to early 1990s

Question 3

Standard became two separate classes in

Answer 3

The early to mid 1980s creating one for smokers and one for non-smokers. Noted in the 1990-1995 tables.

Question 4

Residual standard

Answer 4

The remaining standard risk that did not qualify for preferred classes. (Noted in charts from 2002-2004.

Question 5

Conservation of deaths - Intuitive sense model

Answer 5

If there is a range of mortality contained inside the standard class, and
if standard mortality is defined as 1.0 or 100%, and
if a subset of those risks with a lower mortality expectation is identified and offered lower-priced rates class, then
by definition, those remaining in the standard class will exhibit high mortality.

Question 6

Mortality discount

Answer 6

The model assumes there is a correlation between the percent qualifying for a preferred risk class and the mortality discount. Thus, the fewer risks that qualify for the preferred class, the greater the mortality discount.
This process has been called the conservation of deaths.

Question 7

Two preferred risk stratification models

Answer 7

1. Point System

2. Knock-out

Question 8

Point System

Answer 8

Hypothetically few points mean lower risk. 0-4 = super-preferred.
The underwriting debit-credit system can also be used to stratify risk.

Question 9

Knock-out

Answer 9

Employed by the majority of life insurance industry.
These criteria's are established as a series of rules whereby the proposed insured either qualified for the risk class or is "knocked out" of the risk class based upon the rule.

Question 10

Number and size of risk classes

Answer 10

Vary throughout the industry and can vary within the individual companies based by product.
With permanent products offering investment-oriented cash value accumulations having less candidates for fewer preferred classes.

Question 11

The Framingham Study provided convincing evidence that the primary risk factors for the development of CAD including

Answer 11

1. Age
2. Sex
3. BP
4. Chol
5. HDL
6. DM
7. LVH
8. Smoking

Question 12

Framingham risk factors and their applicability to preferred risk underwriting:

Answer 12

1. Age, gender, and smoking status -> appear as predictors of mortality. Life insurance industry employs these factors in risk selection. Baseline mortality features.
2. Blood pressure -> Framingham recognized that even w/in the range of normal (below 140/90) there is a difference in risk of developing CAD. BP also rises as we age - therefore some companies relax BP rules for older proposed insured through age banding of this criterion.
3. Cholesterol -> Recommended a total chol reading of less than 200 mg/dl as an ideal benchmark. 1% reduction in chol caused 2% reduction in CAD. Also undergoes age banding.
4. HDL -> can be used in conjunction with total chol to define risk (chol/HDL). Lower ratio, the lower the risk.
5. DM and LVH on resting EKG -> Risks the life insurance industry would deem to be outside the scope of preferred risk underwriting.
6. Build -> not a component of Framingham risk model. But as weight increases, mortality increased.

Question 13

Additional Mortality Markers

Answer 13

1. Accidental death risk (driving, hazardous avocations, occupations)
2. Drugs and Alcohol
3. Personal Medical Histories
4. Family Medical Histories
5. Treatment

Question 14

Accidental Death - Driving

Answer 14

Many companies employ driving criteria for preferred qualification. The greater the number of moving infractions, the greater the risk of future accidents and accidental death. Also includes serious driving violations such as DUI (drugs or alcohol) or the number of speeding tickets accrued within a specific time frame.

Question 15

Accidental Death - Hazardous Avocations

Answer 15

I.e., those who fly private airplanes, scuba dive (sometimes depending on depth), race motorcycles or automobiles, mountain climb, skydive, parasail, participate in extreme sports, or take part in other such activities.
There is no single clearly defined rule as to what does or does not qualify one for preferred risk class. A company must decide what sort of avocational risk, if any, will be allowed into the preferred risk class and what the inherent mortality and pricing implications are for doing so.

Question 16

Accidental Death - Occupation

Answer 16

Dangerous occupations can be excluded from preferred consideration due to the accidental death risk, although this is increasingly rare given the increased safety measures employed in most occupations today.

Question 17

Drugs and Alcohol

Answer 17

Although the risk of accidental death is increased with a history of drug and alcohol abuse death can occur for other pathologic reasons as well. As a result, some companies exclude histories of drug and alcohol abuse occurring within 5 or 10 years of the application from preferred consideration.

Question 18

Personal Medical Histories

Answer 18

Standard and preferred further blurred by certain disease that cause minimally increased mortality - long-term recurrence and progression.

Question 19

Family Medical Histories

Answer 19

Framingham Study and others have found a statistically credible, predisposition of offspring to develop certain of the same disease as their parents. (CAD, stroke, DM, kidney disease, and certain cancers).
Can be looked at from the date of onset or the date of the death of that family member.

Question 20

Treatment

Answer 20

Some companies will allow treated hyperlipidemia or HTN into preferred classes while others will not.
Tx reduces the future development of CAD, however, there is a difference of opinion on whether the risk is reduced to a level equivalent to or less than the referent non-treated population.

Question 21

Limitations of Preferred

Answer 21

Factors are best suited for middle aged population. Framingham used 30-60 yr olds - average age 45. The assumptions are less well suited to younger or older individuals.
The ability of the risk factors to predict disease varies by age of the insured as well as specific values associated with individual criteria.

Question 22

Advantages of Preferred

Answer 22

The desire to create and reward healthy individuals with lower life insurance premiums.
Preferred risk classes allow companies to compete effectively by applying lower-priced products to healthier risks.
Companies do not want to lose their best risks to other carriers; therefore, preferred risk underwriting is also driven by competition.

Question 23

Challenges of Preferred

Answer 23

1. Height, weight, BP, and lipid panels are often required to achieve the mortality differential that is necessary to justify the creation of the product in the first place. Testing might not have been needed before preferred.
2. Additional exam testing increases expenses.
3. Proposed insured disappointment for not classifying.
4. Uwers under additional scrutiny to stay within g/l for finer mortality classes. Less “good” risk in the Std pot to offset the “bad” risk.
5. More decision points associated with all cases ,there is more potential for u’wer error.
6. Appeals from the field are more common, and admin handling can create its own processing hurdles and delays.