INTRODUCTION

TO
UNDERWRITING
CHAPTER 6

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

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

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.

Physical Hazards
1) Age
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.
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.

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.

3) Build
It reflects the health of the proponent.
eg. If a proposer is underweight then chances of
Tuberculosis
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.

Contd.

5)

Physical impairments

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 nonsmoker.

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.
2) Working at heights.
3) Working with high speed machine.
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

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.of
Age group
Cover as a multiple
the Proponent of Average of 3
years Annual
Income
Age up to 30
years
Age up to 40
years
Age up to 50
years

25 times
20 times
12times

DATE 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

Level

Up to 20 lacs

Branch office

Up to 40 lacs

Divisional office

Up to 150 lacs
Above 150 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

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

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

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 Business

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.

Underwriting At 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

THANK YOU

M. J. MALIK
S.B.A.
836 B.O.
AHMEDABAD D.O.
09879094925
lic.malik@gmail.com