UNDERWRITING

CHAPTER 5

Underwriting :U :- Understanding N :- Necessary D :- Details & E :- Evolving R :- Rational W :- Weightage of R :- Risk & I :- Important T :- Truths I :- Influencing N :- Normal G :- Grade

What is Underwriting?

The assessment or verifying the level of risk is called selection or underwriting.

What is the need for underwriting ?

Underwriting

is needed to assess the risk & to decide whether risk is acceptable at Standard rate or with extra premium or with some restrictions or to decline the risk. Once the nature of insured lives is decided premiums will be charged accordingly.

What will happen if the risk is wrongly assessed?

Premiums will be charged either less or more
A lower premium affects the solvency of the fund & cost of additional risk have to be borne by the rest of the policyholders. i.e. If lower premium is charged, Insurers claim experience will not be as anticipated & it will have adverse effect on Insurers funds to meet the additional claims & profits.

Contd.

A higher premium charged would not be fair to the proposer. Insurance cover will not be allowed to proposer at appropriate rate.

Insurance may be given to a person who is uninsurable (Anti selection)

Terms of acceptance
If there are no additional risk factors (adverse features) affecting mortality then the proposal would be accepted at Ordinary Rate (O.R.) or Standard Rates.
If there are additional risk factors (adverse features) proposal will be accepted with suitable extra premium/restrictions (modified terms) or declined.

Classification of Risks
Hazards These are the factors which
affect the risk. They are as follows.

Premiums are based on age & as age increases probability of death increases. Therefore age is an important factor. eg. Person aged 25 years will be at lesser risk compared to person of 50 years age.

1) Age

Physical Hazards

Overweight at advanced age & underweight at young age need careful assessment.
eg. Proposer aged 20 years & underweight will be at higher risk of death due to Tuberculosis or Asthma compared to proposer aged 40 years & underweight. eg. If proposer is 50 years old, overweight & having cardiac problem then risk is more than person who has cardiac problem but not overweight.

Contd.

Certain risk increase with age & certain risk decrease with age. eg. Risk on the life of an underweight person at younger age is of decreasing type.

2) Sex
Mortality of female lives is greater than male lives at younger ages. eg. This is due to the inadequate care in maternity cases among poor & uneducated sections.

Contd.

Tuberculosis

3) Build It reflects the health of the proponent. eg. If a proposer is underweight then chances of is high & if a proposer is overweight then chances of Hypertension or Heart problem is high.

4) Physical condition Medical Report provides the data regarding blood pressure, pulse etc. which will reveal the condition of important systems of the body.
eg. Hypertension may result into Paralytic Stroke or Heart attack. eg. High Pulse rate suggests the tendencies towards heart problem.

5)

Physical impairments

Contd.

These are the hazards which affect the mortality (probability) of the death. eg. If proposer is Blind, Deaf, Paralysed or having poliomyelitis then he is prone to accident. 6)

Personal history

Gives the information about health & life style of person. eg. If proposer is a habitual smoker then the chances of his suffering from Lung disease are higher compared to eg. Similar is the case with an alcoholic whose chances of suffering from Kidney & Liver problems are more.

non-

smoker.

Contd.

7)

Family History

Reveals the hereditary diseases like diabetes & cardiac illnesses. eg. If proposers parents had Diabetes then his chances of suffering from Diabetes are greater.

Occupational Hazard
It arises out of ones occupation. eg. 1) Flight duties on aircraft. Proponents involved in above jobs are prone to accident.
Nature & place of job have effects on the worker. eg. 1) Inhalation of dangerous fumes. Therefore people working in chemical factories are likely victims of various respiratory diseases such as Tuberculosis or Asthma. 2) people working with high voltage electricity are prone to electrocution & burns. 3) People working in mine industries 2) Working at heights. 3) Working with high speed machine.

Suitable extra premiums are charged.

MORAL HAZARD
It refers to the intentions of the proposer. It exists when the intention is to take undue advantage. It has to be judged with reference to life style, income,

reputation , need for insurance etc.

It is not measurable.

If moral hazard is suspected suspect no amount of extra premium will be appropriate & the proposal has to be

declined.

Examples of moral hazard

1) First insurance for large amount at advanced age.

2) Large insurance with inadequate income.

3) widow with no income & having major children.

4)Insurance proposed by someone on the life of another without insurable interest.

5) Nomination in favour of a stranger. 6) Medical examination at place other than residence or office place.

FINANCIAL UNDERWRITING

Assessment of proposers financial standing.

It is necessary to check whether income is sufficient to support the insurance. The source of income, age & amount of insurance plays a vital role.

Contd.

We calculate the allowable insurance after multiplying the average of last three financial years income by age related factors.
Age group of the Proponent Cover as a multiple of Average of 3 years Annual Income 22 times 17 times 12times 10 times

Age up to 30 years Age up to 40 years

Age up to 50 years Age 51 years & above

DATa OF UNDERWRITING
1) Proposal form provides the information about
proposer, his health, habits, personal history & family history & income.

2) Medical Report It provides the information about the proposers physical condition. 3) Agents confidential report & Moral Hazard report

4) In case of large Sum Assured, special reports & Special Moral Hazard Report containing information about life style, Social status, health, habits, occupation & income from senior officials are called for.

Contd.

Depending on the sum proposed the proposal will be underwritten at different levels as follows. ( Standard Life)

Sum proposed Up to 10 lacs Up to 25 lacs

Level Branch office Divisional office

Up to 60 lacs Above 60 lacs

Zonal office Central office

ASSESSMENT OF RISK
For assessing the risk underwriter has to avail of assistance of doctor called medical referees. Medical referees have specialised knowledge about the effect of various impairments & diseases on mortality. In case of large Sum Assured, proposal is referred to the reinsurer. The assessment of risk is a matter of individual judgement. However the underwriter has to follow Numerical Rating System.

Numerical Rating System

Standards are laid down for each factors such as height, weight, pulse etc. Variations are given values. Values are then grouped & tabulated showing the extra mortality. Depending on the extra mortality extra premium is charged. Variation up to 20% - Standard or First Class 20% to 35% - Class I 40% to 60% - Class II & so on.

Types of Decision
Acceptance at Ordinary Rates or Standard Rates
Standard life & tabular rates of premium. eg. Proposer has no adverse features & hence proposal is accepted at standard rates.

Acceptance with Extra

Substandard life & the premium is increased by the amount of extra eg.If proposer is having Diabetes then depending on the values of fasting blood sugar & post lunch blood sugar suitable extra premium is charged.

Contd.

Acceptance with Lien

Substandard life. The risk is not permanent throughout the term. it is going to decrease after few years. Sum Assured would be reduced to the extent of lien, if death occurs within the specified period. Lien could be constant or decreasing.

Contd.

Acceptance with Modified Terms

Life is substandard. Proposed plan & term is not allowed. A different plan or term or reduced S. A. or a combination of these is allowed. Certain plans are accepted without risk cover eg. Jeevan Suraksha eg. If proposer has deformity due to disease & two limbs are affected. Then Risk plans are not allowed. Simple Endowment plan can be offered with some restriction according with the nature of deformity.

Contd.

Acceptance with Clause

Here clause is imposed to restrict the risk cover if death occurs due to specific reasons. e.g. First pregnancy, Full Medical Report at vesting, Suicide clause, clause 4 B. e.g. Female proponent under Cat III, housewife up to age 30 clause 4B is imposed so that if death occurrs as a result of internal self injury, suicide or attempted suicide, insanity, accident other than an accident in public place or murder at any time on or after the date on which risk on the policy has commence before the expiry of 3 years from the date of this policy, then only premiums will be refunded.

Contd.

Postpone
Proposal is not be accepted at present but can be reconsidered in near future. Fresh Medical Report & other special reports will required if reports are not valid at future date. eg. If proposer who is pregnant for more than 24 weeks then proposal will be postpone until 3 months from date of delivery if menstruation has started.

Decline
Risk on the life of proposer is too heavy to be insured. eg. If proposer is suffering from Cancer, AIDS, Quadriplegic having income arising out of farming.

Non-Medical Underwriting
Why insurance is allowed under Non Medical?
Even after medical examination more than 90% proposals are accepted at Ordinary Rates Unavailability of Qualified doctors. The insurer will save on medical fees & devise some standard format of Proposal Form which will elicit major information relating to his Income, Personal & Family History, Health & Habits which will help the underwriter to assess the risk & safeguard from adverse selection.

Non Medical General

Classes of Lives
Professionals such as Doctors, Lawyers, Teachers etc. Major males & literate females with own income

Age

Maximum Sum Assured

Rs. 3 lacs

Up to 45 years Rs. 6 lacs 46 50 years

Up to 40 years Rs. 2 lacs 40 - 45 years 46-50 years Rs.1 lacs Rs. 40000 Rs. 1 lacs

Self employed Women 40 years (category III)

Non Medical Special

Classes of Lives Age Max. Sum Assured
Rs. 8 lacs Literate major males & up to SSC passed females 45 working in Government, years Quasi Government, 46 50 Industrial undertaking years etc. with length of service 1 year Commissioned officer in Up to armed forces not below 45 medical category A-I & years length of service of 46 50 atleast 1 year years

Rs. 2 lacs

Rs. 10 lacs

Rs. 4 lacs

Scheme
Applicable to undertakings operating for minimum period of 3 years. Average turn over of Rs. 50 crore. Submission of leave record for the last 3 years is necessary. Maximum Sum under consideration is Rs. 10 lacs. Scheme is applicable to LIC employees also.

Why High Sum Assured for NMS?

Employment in reputed organisation. eg. Bank, LIC, GIC etc.

Leave records are maintained.

Medical check up at entry.

INSURANCE ON FEMALE LIVES

Female category I
Working & educated females. Professionals such as Doctors, Lawyers, C.As etc. Treated on par with males i.e no limit on insurance.

Female category II

Income through business Unearned income attracting Income tax. eg. Income from House property, Share, Bonds etc. Maximum insurance allowed is Rs. 1 crore.

Contd.

Female Category III

Single women, Widows are covered.
self employed women such as vegetable vendor, fisher women etc. are covered. Married women are covered for 10 lacs if husbands are adequately insured.

Women observing pardah are not considered.

Underwriting by Agent
Agents are called primary underwriter because they are in direct contact with the proposer. Agent must disclose all facts which are material to the risk & see to it that the proposer also discloses all material facts. Agents confidential report is the first Moral Hazard Report which safeguard insurer from Moral Hazard. Underwriter will use the data from Agents report & Proposal form. Agent owes the responsibility to the insurer & the insured.

Recent Trends
Advances in medical sciences. Many dreaded diseases of the past are controllable. eg. Polio, Diabetes etc. New diseases have surfaced. eg. AIDS which have to be declined. Persons who would not have been allowed insurance in past are now insurable. eg. Proponent with Cardiac diseases such as Bypass operation etc. Underwriters find that most of the proposers have the habits of drinking & smoking.Insurers charge extra premium for drinking & smoking

Always remember that - - - - - - - The contract of Insurance is based on Uberrima Fides i. e. the principle of Utmost Good Faith whereby proposer is required to disclose all the information in full in the proposal form for proper assessment.

Glance

contd

U/W ;- Underwriting P.F.Q. :- Personal Financial Questionnaire I.T.R. :- Income Tax Return O.R. :- Ordinary Rates Phy. :- Physical Cond. :- Condition N.M.G. :- Non Medical General N.M.S. :- Non Medical Special N.M. Exp. :- Non Medical Express P.F. :- Proposal Form A.C.R. :- Agents Confidential Report F.M.R. :- Full Medical Report Spl. Reports :- Special Reports

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