Wednesday, September 28, 2011

LIFE INSURANCE UNDERWRITING

New business includes all the activities required to process applications for insurance products, evaluate the risks associated with applications for life insurance, and issue policies. New Business refers to
  • Insurance product applications submitted to insurers.
  • Area of an insurance company that actually receives the applications.

New business processing for insurance products includes the following activities:
  • Conduct a good order check to ensure that [1] the application used is the correct form for the issuing application,[2] the application is complete & accurate, and [3] the producer who submitted the application is properly licensed and appointed.
  • Perform a suitability check, to determine whether a particular insurance product is an appropriate purchase for the applicant, based on the applicant’s financial needs.
  • Establish a policy record and arrange for special services.
  • For variable life insurance and for all annuity products, send a transaction confirmation.
  • Issue the policy.

Underwriting also called risk selection or selection of risks is the process of [1] assessing and classifying the degree of risk represented by a proposed insured or group with respect to a specific life insurance product and [2] making a decision to accept or decline that risk.


An underwriter is an insurance company employee who evaluates risk, accepts or declines life insurance applications, and determines the appropriate premium rate to charge acceptable risks.


The decision an underwriter makes regarding the classification of a risk and the premium rate to charge for insurance coverage is commonly referred to as the underwriting decision.


The proposed insured is the person whose life is to be covered by the applied-for life insurance policy.

Premium rate is the charge per unit of life insurance coverage.

Premium amount is the monetary amount paid to the insurer for coverage under a life insurance policy.

Persistency is the retention of business that occurs when a policy remains in force.

Underwriting Philosophy & Underwriting Guidelines


An underwriting philosophy, also called underwriting objectives is a set of objectives for guiding all of an insurer’s underwriting actions that generally reflects the insurer’s strategic business goals and includes its pricing assumptions for products.

Underwriting guidelines are the general standards that specify the parameters within which proposed insured may be assigned to one of an insurer’s risk classes established for each insurance product.

Fundamentals of Individual Life Insurance Underwriting


It is mainly concerned with mortality and mortality risk, which for life insurance, is the likelihood that a person will dies sooner than statistically expected. For annuities, the mortality risk is the likelihood that a person will live longer than statistically expected. To evaluate the degree of mortality risk presented by a proposed insured, the underwriter looks at information about possible impairments. Impairment is any aspect of a proposed insured’s current health, health habits, medical history, or family medical history that could increase that person’s expected mortality risk.

A risk class is a group of insured that represent a similar level of risk to an insurance company.

Risk Assessment Factors


Medical Factors

  • Person’s Build
  • Personal Medical History
  • Family Medical History
  • Tobacco Use
  • Alcohol and Substance Abuse
Personal Risk Factors

  • Occupation
  • Moral Hazard
  • Avocations & Hobbies
  • Aviation Activities
  • International Residence
    • Some insurance companies do not approve coverage for proposed insured’s who permanently reside abroad – because obtaining accurate underwriting information on these cases and investigating claims in other countries can be difficult.
  • Driving History
    • Drivers with risky driving habits or those who drive as their occupation are more likely to be involved in accidents.
Financial Risk Factors

Insurable Interest
Life insurance is intended to compensate for financial losses that result from an insured person’s death. It is not intended to provide beneficiaries with the opportunity for financial gain. An underwriter has a more difficult time assessing insurable interest in a third-party application, which is an insurance application submitted by a person or party other than the proposed insured. Insurable interest involving a third-party application is assumed to exist when the applicant is
            A close relative of the proposed insured by blood or marriage.
A relative of the proposed insured who is financially dependent on the proposed insured.

Some jurisdictions, including the US, also recognize insurable interest between
  • A business partner or employer and the proposed insured.
  • A creditor and the proposed insured.

Fundamentals of Group Life Insurance Underwriting


The key difference between individual underwriting and group underwriting is that, the group underwriter evaluates information about the composition of and the risk presented by the group as a whole, rather than evaluating information about individual members of the group.

Risk Assessment Factors
Proposed Coverage

When evaluating the risk associated with the proposed plan of group insurance coverage, the underwriter considers the plans eligibility requirements, benefit levels, method of plan administration, and mode of commission payment.

Eligibility Requirements

Insurers normally allow only full-time, permanent employees and their dependents to enroll in a group plan of life insurance.

Benefit Levels

The group underwriter must determine whether the plan includes excessive benefits, which could result in higher-than-average claim costs for the insurer and higher-than-average premiums later for the group policyholder.

Administration Method

Effective administration of the group life insurance plan helps keep plan costs low and promotes customer-group policyholders and group insured’s satisfaction.

Mode of Commission Payment

An underwriter who has doubts about the persistency of a proposed group may recommend that the producer’s commission be spread over a no. of years. Under this approach, if the policy lapses after the first year, the producer & the insurer share in the loss.

Reason for the Group’s Existence

Should be one of the group type’s employer-employee, discretionary etc.

Nature of the Group’s Business

The nature of the industry in which the group operates can affect the degree of risk the group presents. Group underwriters consider potential hazards and the economic prospects of the industry, in which the group operates, as well as the strength and financial condition of the group’s employer.

Size of the group

To establish the premium rates to charge for a given group, the underwriter must predict the amount of loss the group is likely to experience. The size of a group affects the underwriter’s ability to predict the group’s losses.

Geographic Location of the Group

Mortality rates vary in different regions of the world and even in various parts of a particular country.

Stability of the Group

It refers to how the general composition of the group. From an underwriter’s perspective, the ideal situation is for a steady flow of new, younger members to enter the group as current member’s age and eventually leave the group. A group whose membership remains unchanged over a long period of time presents an increased risk, because as the ages of the group members increase, impairments generally increase.

Age & Sex Distribution of Group Members

Underwriters do not consider the age and sex of each individual group member but they do examine the age and sex distribution of the entire group.

Level of Participation

Group insurance plans can be either contributory or non-contributory.

Classes of Employees

One way to prevent antiselection under group insurance plan is to assign each group member to an employee class and provide an appropriate amount and type of benefits for each class.

Expected Persistency

Indications of a particular group’s expected persistency can be found by examining the group’s prior coverage with other insurers.

Prior Experience

If the group has been covered by group insurance in the past, the group’s previous experience can be an important indicator of the degree of risk it presents to a new insurer.

Regulatory Requirements & Underwriting


Unfair Discrimination

Many jurisdictions have enacted laws that are designed to protect consumers against unfair discrimination in underwriting. Unfair discrimination laws protect proposed insured only from discrimination that is unfair.

Consumer Privacy

Fair Credit Reporting Act FCRA regulates the reporting and use of consumer credit information and seeks to ensure that reports from consumer reporting agencies contain only accurate, relevant & recent information. A consumer reporting agency is a person or organization that assembles or evaluates investigative consumer reports and furnishes these reports to other people and organization in exchange for a fee.

 

Field Underwriting


Is the process in which the producer screens an applicant for life insurance and gathers initial information about a proposed insured. An insurance producer’s responsibility in the selection of risks is important because, in most cases, the producer is the only participant in the underwriting process who has first-hand knowledge of the applicant.
Producers perform field underwriting by determining a proposed insured’s suitability for the requested insurance coverage and making preliminary assessments of her likely insurability.

To assist the producer during field underwriting, most insurance companies develop a field underwriting manual, which is a document that [1] presents specific guidance for a producer’s assessment of the risks represented by proposed insureds and [2] guides the producer in assembling and submitting the evidence of insurability needed for the underwriter to evaluate the risks. Evidence of insurability is documentation that the proposed insured appears to be an insurable risk.



Tele underwriting

Is a method by which a home office employee or a third-party administrator (TPA), gathers most of the information needed for underwriting.

Tele underwriting relives producers from having to complete detailed applications and speeds the underwriting process.

Reviewing the Application for Insurance


An underwriter verifies that the producer is licensed to sell the requested type of policy in that jurisdiction. The underwriter then searches the insurer’s records to determine if the proposed insured [1] is covered by another of the company’s policies or [2] has previously been declined coverage by the company.

Gathering Additional Information


Two types of physician’s reports commonly used by underwriters are attending physician’s statement (APS) and specialized medical questionnaires. A specialized medical questionnaire is a document that requests detailed information about a specific illness or condition from a proposed insured’s attending physician or a physician who has examined the proposed insured at the request of the insurance company.

MIB Reports

Underwriters in the US often request information about proposed insureds from MIB Group, a non-profit organization established to provide coded information to insurers about impairments that applicants have disclosed or that other insurance companies have detected in connection with previous applications for insurance.

Pharmaceutical Databases
Underwriters use this as a screening tool to determine if the company needs additional information about a proposed insured’s health status.

Sources of Additional Personal & Financial Information

Motor Vehicle Records
Inspection Reports
Personal Questionnaires

Table of Underwriting Requirements


It is a document that specifies the kind of information the underwriter must consider when assessing the insurability of a person who is proposed for coverage under that product.


Making an Underwriting Decision

After gathering and reviewing all relevant information about a proposed insured, the underwriter makes a decision, generally one of the three choices:
  • Approve the coverage as applied for.
  • Rate the application.
    • If the proposed insured has certain medical, personal and/or financial risk factors but is still considered insurable, the underwriter rates the application. Rating is the process of increasing the premium rate or modifying the type or amount of coverage to approve a risk.
  • Decline the application.
To make risk classification and premium rate decisions, life underwriters typically use a numerical rating system, which is a risk classification method in which a number is assigned to an individual proposed insured according to the degree of risk he presents to the insurer. This number is used to determine the appropriate risk class for the individual.

After reaching an underwriting decision, the underwriter notifies the soliciting producer of the decision, and the producer communicates the decision to the applicant. If the underwriting decision is to approve the coverage, the underwriter releases the applicant’s file to the policy issue department. Policy issue is the insurance company functional area that prepares an insurance or annuity contract and facilitates the delivery of the policy to the policy owner.

Reinsurance

Reinsurance functions according to agreements between ceding company & reinsurers. The terms of a reinsurance agreement are specified in a reinsurance treaty. Most of reinsurance coverage is yearly renewable term insurance. For individual premiums, the amount of reinsurance premium is typically based on [1] the age and the sex of the insured person [2] whether the insured uses tobacco ands [3] whether the insured’s risk classification is standard or sub-standard.

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