Underwriting

Question 1

List the four main types of underwriting

Answer 1

1) Medical underwriting
2) Lifestyle underwriting
3) Financial underwriting
4) Underwriting at claims stage

Question 2

What is the main purpose of underwriting?

Answer 2

To manage risk

Question 3

Uses of underwriting

Answer 3

1) Protect the insurer against anti-selection
2) Identify the lives with substandard health risk
3) Identify the special terms to offer to substandard risks
4) Help ensure that all risks are rated fairly
5) Help ensure that mortality experience is consistent with the pricing basis
6) Reduce the risk from over-insurance

Question 4

What would justify going further than a proposal form in the underwriting process?

Answer 4

1) Answers leading to a suspicion of poor health
2) Medical limits (limits on sum assured) trigger more detailed underwriting

Question 5

List the sources of evidence of applicant health

Answer 5

In order of detail and cost

1) Questions on the proposal form completed by the applicant
2) Reports from medical doctors that the applicant has consultated
3) A medical examination carried out on the applicant
4) Specialist medical tests on the applicant

Question 6

Medical underwriting

Answer 6

Obtaining various pieces of medical evidence to gauge the health of the applicant and hence to decide whether or not to offer cover and on what terms.

Question 7

Financial underwriting

Answer 7

Obtaining various pieces of financial information to ensure that the proposed policy is in keeping with the probable needs of the insured life.

Checks ratio of sum assured to salary of applicant

Question 8

List the aims of financial underwriting

Answer 8

1) To ensure that the applicant is not trying to commit fraud
2) To ensure that the premiums are affordable, controlling the persistency risk

Question 9

List some components of lifestyle underwriting

Answer 9

The applicant’s:

1) Occupation
2) Hobbies
3) Country of residence
4) Socio-economic status

Question 10

As a result of underwriting, applicants may be…

Answer 10

1) Accepted at standard rates
2) Offered alternative terms
- an increased premium
- a reduced benefit
- an exclusion
3) Offered an alternative policy
4) Deferred
5) Declined

Question 11

The Sentinel effect

Answer 11

Offering the same product with less underwriting than other insurers in the peer group may mean an insurer attracts a disproportionate share of the anti-selection risks

Question 12

Medical limits

Answer 12

Threshold/trigger sums assured, above which increasing levels of medical insurance are required.

Usually set by reference to market practice to avoid losing any business from an underwriting stance that is too exacting

Question 13

Group business underwriting is characterised by…

Answer 13

1) Compulsory cover or minimum take-up rates for voluntary schemes
2) Free cover due to reduced anti-selection risks, but only below a free cover limit
3) Exclusions
3) Eligibility to start cover is typically conditional on an employee being “actively at work”
4) Laying down take-over terms where the insurer accepts a scheme previously insured elsewhere

Question 14

Free cover

Answer 14

The amount of cover automatically granted without underwriting to individuals in a group scheme. Where cover is required beyond this limit, individual underwriting will be conducted

Question 15

Aims of free cover

Answer 15

1) To reduce the cost of underwriting to the insurer
2) To avoid inconveniencing the client by asking tol many people to be medically examined

Question 16

Factors to be considered in an analysis of the appropriate level of underwriting to use

Answer 16

1) The expenses associated with the level of underwriting proposed
2) The extent and financial significance of any potential anti-selection risk
3) The interaction between the level of underwriting and the level of sales
4) The interaction between the level of underwriting and the terms of reinsurance offered
5) The effectiveness of the proposed underwriting
6) The potential homogenisation of risks that may be achieved
7) The impact of regulation, which may constrain the level/type of underwriting permitted
8) How to vary underwriting criteria by age, sum assured, target market etc
9) Underwriting at claims stage may deter people from taking out a contract, due to uncertainty as to whether a claim may be accepted