ADVANCED Insurance Underwriting

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INSURANCE

Advanced Insurance Underwriting

Abstract

This paper explains the insurance underwriting and its various processes take place in it. Underwriting is the base of all insurance process. This is the process of classification, rating, and selection of risks among the various insurance applications. This paper explain the various steps taken in insurance underwriting to rate the insurance application, the various risk factor taken while making an insurance underwriting decision and various source of insurance underwriting and this paper will help you to know more about the insurance underwriting.

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Advanced Insurance Underwriting

About the Domain

Insurance in the broadest sense includes methods of transferring or distributing risk. Any risk that can be quantified can potentially be insured. Automobile insurance, known in the UK as motor insurance, is probably the most common form of insurance and may cover both legal liability claims against the driver and loss of or damage to the insured's vehicle itself. Insurers are faced with shrinking premiums, growing customer expectations and tightening regulations all of which are narrowing their margins. With globalization being the buzzword across economies, the industry is going through a phase of consolidation and integration. With the increased volume of claims in insurance, efficiency in Underwriting becomes the need of the hour to sustain the growth and competition.

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Contents
INTRODUCTION..........................................................................................................................................5 NECESSARY OF UNDERWRITING..........................................................................................................6 THE UNDERWRITING PROCESS.............................................................................................................7 RISK CLASSES IN UNDERWRITING......................................................................................................9 RISK ASSESSMENT FACTORS:..............................................................................................................11 SOURCES OF UNDERWRITING:............................................................................................................13 UNDERWRITING DECISION...................................................................................................................16 CONCLUSION.............................................................................................................................................16 .......................................................................................................................................................................17 REFERENCES.............................................................................................................................................18

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Introduction
Insurance underwriting is the process of classification, rating, and selection of risks. In simpler terms, it's a risk selection process. This selection process consists of evaluating information and resources to determine how an individual will be classified, whether a standard or substandard risk. After this classification procedure is completed, the policy is rated in terms of the premium that the applicant will be charged. The policy is then issued and subsequently delivered to the purchaser by the producer. It is more commonly issued to the insurance agent. The underwriter's job is to use all the information gathered from numerous sources to determine whether or not to accept a particular applicant. Individuals applying for individually-owned life and health insurance typically receive more underwriting scrutiny than members holding a group policy. As such, the concepts discussed in this article apply primarily to underwriting for individual coverage. The underwriter must employ sound judgment based on his or her years of experience to read beyond the basic facts and get a true picture of the applicant's lifestyle. For instance, the underwriter will look for any factors, such as occupation, dangerous hobbies, etc. that could make the applicant more likely to die before his or her natural life expectancy, or reasons to anticipate that the individual may become ill or involved in an accident that will create high medical expenses. The underwriter's primary function is to protect the insurance company insofar as is possible against adverse selection (very poor risks) and those parties who may have fraudulent intent.

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Necessary of underwriting
In group insurance, underwriting standards as well as rates are the same for every member of the group. In other words, no one pays a higher premium to offset what might be a higher risk. Instead, specific conditions may be excluded from coverage to mitigate risk and keep rates consistent for all participants. If underwriting were not required, a group plan would attract a disproportionate number of medically impaired individuals. This would result in high ratios of benefit payments compared to premiums, thus causing rates to rise for all insured participants. The two important factors for the necessary of underwriting are

Anti selection Persistency

Anti selection: The tendency of people who suspect or know they are more likely than average to experience loss to apply for or renew insurance protection to a greater extent than people who lack such knowledge of probable loss. The possibility of anti selection makes underwriting an important task. Anti selection can be said to exist when a risk (an individual) or group of risks that are insured is more likely than the average corresponding group to experience a loss. As a basic example, let's say that in a randomly-selected group of 1,000 25-year-old individuals, only two might be expected to die in any given year. However, human nature is generally such that many healthy 25year-old young adults do not typically regard the need to buy life insurance, and therefore prefer to spend their money on other things. It's usually only those 25-year-olds who are ill or perhaps employed in dangerous occupations that are likely to purchase insurance. The underwriter's job is to ensure that an inordinate number of these poorer-than-average risks aren't accepted or the insurance company will lose more

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Persistency: Persistency is the retention of business that occurs when a policy remains in force. To improve persistency, underwriters must approve amounts of coverage that customers can afford.

The underwriting process

The underwriting process is various steps carried out by an underwriter while underwriting a policy. For this the underwriter uses underwriting philosophy. An underwriting philosophy 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. An insurer's underwriting philosophy shapes its underwriting guidelines, which specify the parameters within which proposed insured may be assigned to one of an insurer's risk classes established for each insurance product. The underwriting process is different for both individual and group insurance. The underwriting process for individual life insurance products: Perform field underwriting Review the application Gather additional information to make a sound underwriting decision Make an underwriting decision

The underwriting process for group life insurance products: Reviews the characteristics of the proposed group Evaluates the insurance coverage and services requested Assesses any previous claims and premium experience for the group

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Field underwriting: Field underwriting is the process in which a producer screens an applicant for life insurance and gathers initial information about the proposed. To assist a producer during field underwriting, most insurers develop a field underwriting manual. A field underwriting manual is a document that has specific guidance for a producer's assessment of the risks represented by proposed insureds and guides the producer in assembling and submitting the evidence of insurability, which is documentation that the proposed insured appears to be an insurable risk. A key element in the underwriting process is the role of the insurance producer, or agent. It may even be argued that the producer is the most important part of the risk selection process. This is due to the fact that the producer is in a position to actually see and talk to the proposed insured, to ask the questions contained on the application and gauge the responses, and too accurately and completely records the answers to those questions. Thus, one of the most important functions of the producer is to oversee the completion of the insurance application. Much of the information reported on the document becomes the basis upon which to accept or reject the proposed risk. The most essential element of this process for the producer is the display of accuracy, thoroughness, and honesty when completing the application. Answers to questions must be recorded with exactness and totality, along with frankness and sincerity. The producer may not omit pertinent information or report it inaccurately in order to facilitate the policy's issuance. The ethical conduct of the producer with regard to the underwriting process must be, in all instances, above reproach. Additionally, the producer can also help to expedite the underwriting process by the prompt submission of the application, by scheduling the applicant for any necessary physical exams, and by

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assisting the home office underwriter with other requirements such as obtaining an Attending Physician's Statement. Finally, if the applicant is rated or declined for coverage, it's the producer's role as a field underwriter to explain the reasons for the underwriting action. Seldom is an individual totally declined for life insurance, but it does happen that he or she may be classified as substandard and thus receive a rated (or substandard) policy in place of the one originally applied for. When this occurs, the producer must be prepared to not only explain the reasons for the substandard rating but also to explain the rated policy that the company has countered with.

Risk classes in underwriting

A risk class is a group of insured that represent a similar level of risk to an insurance company. The risk classes defined according to the mortality rates. Mortality risk, for life insurance, is the likelihood that a person will die sooner than statistically expected. The rate at which death occurs among a defined group of people during a specified period, typically one year is know mortality rates. Generally, the higher the mortality rate, the higher the benefit cost and the higher the premiums for life insurance. To evaluate the degree of mortality rate presented by a proposed insured, the underwriter looks at information about impairments. Impairment is any aspect of a proposed insured's current health, health habits, medical history, or family medical history that could increase his expected mortality risk. According to the mortality rates the risk classes are divided in to four. Preferred class: Proposed insured whose anticipated mortality is lower than average and who represent the least degree of mortality risk. The underwriter will approve the policy without further investigation. Nowadays companies added another preferred class known

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as super preferred class. True, the lowest rates offered today are these "Super Preferred" rates. However, please understand when comparing policies is that even if you're in very good health, there is a good chance you won't qualify for the best rates. In fact, only about 25% of all applicants get this "Super Preferred" rate. About 60% can qualify for the "Preferred" rate and the rest fall in the "Standard" or below category. Standard class: Proposed insured whose anticipated mortality is average. It refers to persons who have had some minor health impairments in their lifetime. An example of Standard risk would be someone taking medication for high blood pressure, or a borderline diabetic. In some cases, we have been able to get better rates for those with very well controlled high blood pressure Substandard class Proposed insured whose anticipated mortality is higher than average, but who are still considered to be insurable. It refers to people who are having more than minor health problems. Companies charge them additional premiums depending on the risk factors involved. Declined class: Proposed insured whose impairments and anticipated extra mortality are so great that the insurer cannot provide coverage at an affordable cost or whose mortality cannot be predicted because of recent medical conditions. The underwriter will decline the application in most of the cases for this class or very high premium to such applications. The below table represent the various classes of risks with examples Category Blood Pressure Blood Pressure Super Preferred Preferred No current or history No current or history of blood pressure of blood pressure treatment treatment No current or history of No current or history of blood pressure readings blood pressure readings Standard Currently controlled Average readings in the past 2 years

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Readings

Family History

Driving History

Nicotine Cholesterol/ HDL Ratio Alcohol/ Substance Abuse

in excess of: 140/85 Age 60 or younger 150/90 Age 61 or older No cardiovascular disease or internal Cancer in either parent or siblings before age 60 Not more than 1 moving violation in the last 2 years. No DUI in the past 5 years Usually 5 years no nicotine Cannot exceed 5.0 No alcohol or substance abuse history

in excess of: does not exceed: 140/90 Age 60 or 155/95 Age 60 or younger younger 150/90 Age 61 or older 160/95 Age 61 or older Not more than one No cardiovascular or cardiovascular or internal Cancer death Cancer death in either parent in parents before age 60 before age 60 Not more than 1 Not more than 1 moving violation in moving violation in the last 2 years. the last 2 years. No DUI in the No DUI in the past 5 years past 2 years Usually 3 years Usually 1 year no nicotine no nicotine Cannot exceed 6.0 No alcohol or substance abuse in past 10 years Cannot exceed 8.0 No alcohol or substance abuse in past 7 years

Risk assessment factors:

Underwriters typically divide risk factors into three categories, they are Medical risk factors: For underwriting individual life insurance include build, which is the shape or form of the person's body, including the relationships among height, weight, and the distribution of weight. Medical risk factors also include personal medical history, family medical history, tobacco use, and alcohol and substance abuse. The table below explains the medical risk factor. Height Weight Weight Weight Weight

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Super Super Preferred Standard Preferred Preferred Male/ Male/ (Male) (Female) Female Female 5' 0" 5' 1" 5' 2" 5' 3" 5' 4" Personal risk factors: 145 149 153 158 162 130 133 135 138 140 161 165 170 175 180 189 193 197 204 209

For underwriting individual life insurance include moral hazard, which is the likelihood that a person involved in an insurance transaction may be dishonest in that transaction. Personal risk factors also include occupation, avocations and hobbies, aviation activities, international residence, and driving history. The below table will explain the personal risk factor.

Category Super Preferred No cancer history Cancer (except certain History skin cancers) Private pilots will Aviation have extra premium or exclusion Available, possible extra Avocation premium depending on avocation Financial risk factors:

Preferred No cancer history (except certain skin cancers) Private pilots will have extra premium or exclusion Available, possible extra premium depending on avocation

Standard No cancer history (except certain skin cancers) Private pilots may have extra premium or exclusion Available, possible extra premium depending on avocation

The underwriter ensures that the amount of insurance is not excessive. In addition, most jurisdictions require that, at the time of policy issue, the applicant or beneficiary must have an insurable interest in the risk that is insuredthat is, the applicant or beneficiary must be likely to suffer a genuine loss or detriment should the event insured against occur. An underwriter has a more difficult time assessing insurance interest in a

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third-party application, which is an application submitted by a person or party other than the proposed insured.

Sources of underwriting:
The underwriter has a number of resources that can be called upon to provide the necessary information for the risk selection process. These sources include:

The policy application Medical examinations Inspection reports The Medical Information Bureau (MIB)

The Application: The application is an absolutely crucial document because it's usually attached to and incorporated as an integral part of the insurance contract. The producer must therefore take special care with its accuracy in the interests of both the insurance company and the insured. The application is divided into sections, with each designed to obtain specific types of information. Although the form of the application may differ from one company to another, most provide for submission of the following data: Part 1 (General Information), Part 2 (Medical Information), the Agent's Statement or Report, and the proper signatures of all contractual parties. Part 1 of the application requests the insured's general or personal data, such as name and address, date of birth, business address and occupation, Social Security number, marital status, and other insurance that may be owned. Additionally, if the policy applicant and the insured are not the same person, the applicant's name and address would also be required in this section.

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Part 2 of the application is designed to provide information regarding the insured's past medical history, current physical condition, and personal morals. If the proposed insured is required to take a medical examination, Part 2 is usually completed as part of the physical exam. After reviewing the medical information contained in the application and the medical exam, the underwriter may also request an Attending Physician's Statement, or APS, from the proposed insured's doctor. The APS is typically used to obtain more specific information about a particular medical problem or issue. The Agent's Statement, which is part of the application, requires that the insurance agent provide certain information regarding the proposed insured. This generally includes information regarding the agent's relationship to the insured, data about the proposed insured's financial status, habits, general character, and any other information that may be pertinent to the risk being assumed by the insurance company. Medical examinations: Medical exams and tests, when required by the insurance company, are conducted by physicians or paramedics at the expense of the insurer. Such exams usually aren't required for health insurance. The medical exam requirement is much more common for life insurance underwriting than for health insurance. As a side note, simplified issue life insurance requires no medical examination and the application asks only very basic health-related questions. This type of coverage is usually only available in low face amounts to reduce the insurance company's subjection to the hazard of adverse selection. Inspection reports To supplement the information on the application, the underwriter may order an inspection report on the applicant from an independent investigating firm or credit agency, which provides financial and lifestyle choices information. This data is used only to help determine the insurability of the applicant. If the amount of insurance being applied for is average, the inspector will typically write a general description about the applicant's finances, health, character, occupation, hobbies, and other habits. When larger

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amounts of coverage are requested, the inspector will provide a more detailed report. This information is based on interviews with the applicant's associates at home including neighbors and friends, at work, and elsewhere. Such "investigative consumer reports" may not be made unless the applicant is clearly and accurately told beforehand about the report in writing. This consumer report notification is usually part of the application. At the time that the application is completed, the producer will separate the notification and present it to the applicant. The Medical Information Bureau Another source of information that may aid the underwriter in determining whether or not to underwrite a particular risk is the Medical Information Bureau, or MIB, which is located in Massachusetts. The MIB is a nonprofits trade association that maintains medical information on applicants for life and health insurance. It consists of well over six hundred member companies that write more than eighty percent of the health insurance and over ninety-eight percent of the life insurance policies in the United States and Canada. The MIB maintains an extensive database of medical information and occupational risks on applicants for life and health insurance. For every ten insurance applicants, the MIB will have a file on one or two of them. Medical Information Bureau data is reported to member companies in code form so as to preserve the confidentiality of the file's contents. The database contains no details about the individual. The codes simply alert companies to the fact that there was information obtained and reported by a member company on a particular medical impairment or vocational risk. Furthermore, the report does not disclose any action taken by other insurers, nor does it indicate the amount of insurance that was requested. Underwriters use the MIB by comparing its file against the information contained in the prospective insured's application. If the MIB file contains a code for a condition that should be listed on the application but is not, the underwriter would then inquire more specifically about that area. For example, an MIB file might contain a code indicating that an applicant suffers from high levels of cholesterol, while the application indicates

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that he or she has no ongoing medical conditions. This discrepancy would prompt the underwriter to investigate whether the applicant has misrepresented his or her health status, or perhaps alternatively has recovered completely from the condition.

Underwriting decision
When making an underwriting decision, an underwriter generally has one of three choices. Approve the coverage as applied. Rate the application; Rating is the process of increasing the premium rate or modifying the type or amount of coverage to approve a risk. If the both didnt happen the underwriter will 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. If the underwriting decision is to approve the coverage, the underwriter releases the file to the policy issue department. Policy issue is the insurance company functional area that prepares the insurance contract and facilitates the delivery of the policy to the policy owner, usually by way of the producer who sold the insurance.

Conclusion
Underwriting is the base of all insurance industry. If the underwriters access the risk properly and rate the policy according to the underwriting principles and policies, the business will give great success other wise it will be great risk for the insurance industry. The modern technique made the insurance underwriting so easier.

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References
en.wikipedia.org/wiki/Underwriting www.finweb.com/insurance/the-basics-of-underwriting-insurance.html http://www.insurancedirectonline.com/low-cost-life-insurance-underwriting.htm LOMA290 manuals

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