Chapter 7

Question 1

Adverse Selection

Answer 1

Adverse Selection is the tendency of a disproportionate number of poor risks to seek or buy insurance or maintain existing insurance in force (i.e., the selection against the insurance company). Sound underwriting reduces adverse selection. One of the primary responsibilities of an underwriter is to protect the insurer against adverse selection.

Question 2

Age Change

Answer 2

Age change is the date halfway between birthdays when the applicant’s age changes to the next higher age. With some insurers, the age is based upon the applicant’s age at his nearest birthday. In others, it is based upon the age of his last birthday.

Question 3

Applicant:

Answer 3

The applicant is the person completing the application to the insurance company for the insurance policy. In most cases, the applicant is also the proposed insured, but this is not always the case.

Question 4

Application:

Answer 4

The application is the Statement of information given when a person applies for life, health, or disability insurance. The insurance company’s underwriter uses this information as a basis in determining whether the applicant qualifies for acceptance under the company’s guidelines. Applications are attached to and made a part of all individual contracts. There are three essential parts to a typical life insurance application:

Question 5

Attending Physician Statement (APS)

Answer 5

): Also known as an APS, these are used when the application or medical examiner’s report reveals conditions or situations, past or present, about which more information is desired. Because of Physician/Patient confidentiality, the applicant must sign an authorization, which allows the physician to release information to the insurance company underwriter.

Question 6

Backdating:

Answer 6

Backdating is the practice of making the effective date of a policy earlier than the application date. Backdating is used to make the issue age lower than an applicant’s real age in order to get a lower premium. State laws usually limit the time to which policies can be backdated to six months. Backdating is not allowed in variable contracts due to the nature of the investment.

Question 7

Binding Receipt (Unconditional Receipt):

Answer 7

Binding Receipts are also known as unconditional receipts. It is one of the types of receipts given by an insurance company upon the completion of an insurance application if the initial premium is collected with the application. Insurance becomes effective on the receipt date and continues for a specified period of time or until the insurer declines the application.

Question 8

Buyer’s Guide:

Answer 8

A Buyer’s Guide is a pamphlet that describes and compares various forms of life or health insurance. This guide must be provided to a consumer by the producer when the latter is attempting to solicit insurance. This guide makes information available to the consumer that helps them make an informed decision when purchasing insurance coverage.

Question 9

Conditional Receipt:

Answer 9

A Conditional Receipt is a form customarily required to be signed by the agent and given to the prospective owner at the time a new application is completed. The issuing of a receipt is subject to individual company rules. Most require that the agent collect an initial premium and, in turn, grant some level of limited coverage under special conditions before issuing the policy. Without a valid conditional receipt, no coverage is in force until the policy is issued, delivered, and accepted with the initial premium paid

Question 10

Consumer Report (Investigative Consumer Report):

Answer 10

A consumer report or investigative consumer report is a detailed background investigation that may include an interview with coworkers, friends, and neighbors about an applicant’s character, reputation, lifestyle, etc. Insurers can conduct a consumer report to obtain additional information as long there is no invasion of privacy present. A common type of consumer report involves a credit report.

Question 11

Credit Report:

Answer 11

A Credit Report is a summary of an insurance applicant’s credit history (credit score, debt levels, repayment history, and assumed creditworthiness, etc.), made by an independent organization that has investigated the applicant’s credit standing. Credit reports are typically obtained from one of the three major credit bureaus (Experian, Equifax, and TransUnion).

Question 12

Declined Risk:

Answer 12

Declined risk describes an individual whose application for coverage was rejected by an insurance company.

Question 13

Disclosure Form:

Answer 13

A disclosure form is a comparison form required by various state regulatory agencies to be given to every policyowner when replacing an existing policy with another

Question 14

Evidence of Insurability

Answer 14

Evidence of Insurability describes a statement or proof of a person’s health history and current health status that qualifies that person for coverage.

Question 15

Field underwriter:

Answer 15

The field underwriter is the agent or producer completing the applicant’s application for insurance.

Question 16

Fair Credit Reporting Act:

Answer 16

The Fair Credit Reporting Act is a federal law passed in 1970 that provides an insurer with the right to receive additional information with regard to applicants for insurance coverage. This law permits an insurer to conduct a consumer report on applicants and proposed insureds. An applicant for insurance must be informed of the purpose of the report. Suppose coverage is declined due to information in the report. In that case, the insurer must provide the name and address of the reporting agency so that the applicant can secure a copy of the information in the report.

Question 17

Free-look Period

Answer 17

All life insurance policies must include at least a ten-day free-look period in a life insurance contract. This period begins when the producer delivers the insurance policy. If the policy owner decides to return the contract to the insurer during this period, they will receive a full premium refund. Mail order or direct response insurers must include a free-look period of at least thirty days.

Question 18

Inspection Report:

Answer 18

An inspection report is a report that contains general information regarding the health, habits, finances, and reputation of an applicant. This report is developed by a firm that specializes in rendering this type of service.

Question 19

Insurable Interest:

Answer 19

Insurable interest describes the financial or emotional relationship between two or more parties justifying one owning a life insurance policy on the other. People are said to have an unlimited insurable interest in their own life. Insurable interest may exist in another person’s life if there is a chance of a financial or emotional loss at that person’s death. The insurable interest must exist at the time of policy issue.

Question 20

Medical Information Bureau:

Answer 20

The Medical Information Bureau is a service organization that collects medical data on life and health insurance applicants for member insurance companies. The MIB contains information about an applicant’s previous health history and helps to detect any adverse health conditions that the potential insured may experience. The MIB report will also identify life insurance in force with other carriers and lifestyle habits, such as drug use.

Question 21

Policy Summary

Answer 21

A Policy Summary summarizes the basic terms of an insurance policy, including the conditions, coverage limitations, and premiums. Policy summaries are often used with life insurance, long-term care insurance, and annuities.

Question 22

Preferred Risk

Answer 22

Preferred risk describes an applicant who represents the likelihood of risk lower than that of the standard applicant, typically due to better than average physical condition, occupation, mode of living, and other characteristics compared to other applicants of the same age

Question 23

Proposed Insured:

Answer 23

The proposed insured is the person whose life is requesting to be insured. Typically, but not always, this is also the applicant.

Question 24

Pre-Selection Underwriting Activities

Answer 24

This involves the process by which an agent / producer completes the initial application, prior to submission to the underwriting department. Appropriate activities would include: (1) obtaining in complete detail all policy application questions, including personal physician information; (2) providing insight with regard to possible underwriting rating services; and (3) stressing the importance of answering all questions honestly. An agent may not legally guarantee or bind coverage.

Question 25

Post-Selection Activities

Answer 25

These involve the activities conducted by the underwriting department once the application has been received including: (1) evaluating the risk utilizing all appropriate sources of information; or (2) determining the acceptability of the risk and whether the applicant will be classified as a preferred, standard or substandard risk (a substandard risk may be uninsurable or can be written with a higher premium).

Question 26

Underwriting Outcomes

Answer 26

Underwriting outcome affect the insurer and the business it writes. It also affects an insured as to whether or not he or she can secure desired insurance coverage. Lastly, agents or producers are also affected as a result of underwriting decisions since positive decisions allow the issuance of policies and the payment of commissions.

Question 27

Rated Policy (Rating Up)

Answer 27

A rated policy is the basis for an additional charge to the standard premium because the person insured is classified as a higher -than-average risk. The above standard rates usually result from impaired health or hazardous occupations.

Question 28

Replacement:

Answer 28

Replacement is a legal activity where a producer convinces a prospective client to lapse or surrender a life or health policy and purchase a new one. Producers must provide a “Notice Regarding Replacement” to the consumer when this activity may occur. The producer must also notify the insurer that a replacement is occurring as well.

Question 29

Representations

Answer 29

Most State laws specify that the applicant’s statements on the application are considered representations and not warranties. A representation need only be substantially accurate to the best of the applicant’s knowledge. Generally, a representation is considered to be fraudulent if it relates to a situation that would be material to the risk and that the applicant made with fraudulent intent.

Question 30

Risk Classification:

Answer 30

Risk Classification describes the underwriting category into which risk is placed depending upon the applicant’s susceptibility to injury, illness, or death.

Question 31

Special Class:

Answer 31

Special class describes an applicant who cannot qualify for a standard policy, but may secure one with a rider waiving the payment for a loss involving certain existing health impairments. They may be required to pay a higher premium or to accept a policy of a type other than the one for which he has applied.

Question 32

Standard Risk

Answer 32

Standard risk describes a person who, according to a company’s underwriting standards, is considered an average risk and insurable at standard rates. High-risk or low-risk candidates may qualify for increased or discounted rates based on their deviation from the standard.

Question 33

Substandard Risk (Impaired Risk)

Answer 33

Substandard risk, also known as impaired risk, describes an applicant whose physical condition does not meet the usual minimum standards. If the substandard classification is due to adverse health, the application may be declined or written with a “rated-up” premium. An applicant may be in excellent health but considered substandard due to their activities, hobbies, or avocations (i.e., scuba diving, skydiving, etc.).

Question 34

Underwriter:

Answer 34

An underwriter is a person who identifies, examines, and classifies the degree of risk represented by a proposed insured in order to determine whether or not coverage should be provided and, if so, at what rate.

Question 35

Underwriting

Answer 35

Underwriting is the analysis of information obtained from various sources pertaining to an applicant for insurance and the determination of whether or not the insurance should be issued as requested, offered at a higher premium, or declined.

Question 36

Warranties

Answer 36

Most State laws specify that the applicant’s statements on the application are considered representations and not warranties. A warranty must be absolutely and literally true. A breach of warranty may be sufficient to void the policy whether or not the warranty is material and whether or not such breach of warranty had contributed to the loss. Therefore, the statements that are made by an applicant and recorded on the application are considered to be representations and not warranties