Date: 31 Aug 2015

As we all are aware that future is unpredictable and rather, uncertain. Any person can
meet with illness, bodily injury or any accident due to some unfortunate or unexpected
events at any point of time. A lot of expenses are incurred due to such events like
hospital stay, medicines, surgery, doctor’s visit and other medical expenses.

Health insurance provides coverage towards all or few of such healthcare needs medical
expenses incurred by a person.

Definition:

Health insurance is a way to distribute the financial risk associated with the variation of
individual’s health care expenditures by pooling costs over time (pre-payment) and over
people (pooling).

This definition explains how the health insurance system works. The health insurance
insures an individual from expenses incurred due to any variation in their health. It
collects an upfront contribution (“Premium”) from an individual and pools it over many
people. Thus it works very similar to all the other types of insurance in the market, the
only difference being that it primarily covers health expenses of an individual.
Health insurance is based on the concept of morbidity. Here morbidity is defined as the
likelihood and risk of person becoming ill or sick thereby requiring treatment or
hospitalisation. Therefore, to an extent, morbidity is influenced by age and also
increased due to various other adverse factors, such as overweight, underweight,
personal history of certain past present diseases or ailments, personal habits like
smoking, current health status and also if the occupation undertaken is known to be
hazardous. Conversely, morbidity also decreases due to certain favorable factors.

Definition:
Underwriting is the process of assessing the risk appropriately and deciding the terms on
which the insurance cover is to be granted. Thus, it is a process of risk selection and risk
pricing.
 Need of Underwriting ?

Underwriting is backbone of an insurance company.

 Acceptance of risk indiscriminately or inadequate premium will lead to insurer’s

insolvency.

Being to selective or conservative will restrain insurance company from creating

a big pool so as to spread the risk uniformly.

Underwriting is very critical to strike an appropriate balance between risk and

business thereby maintaining the competitiveness and yet profitability for the
insurance company.

Underwriters job is to classify the risk decide the terms of acceptance at

appropriate price. It is therefore important to note that acceptance of risk is like
giving a promise of future claim settlement to the insured.
What is Morbidity

 An illness or an abnormal condition or quality.

 In statistics -
The rate at which an illness or abnormality occurs, calculated by
dividing the number of people who are affected within a
group by the entire number of people in that group.

 The rate at which an illness occurs in a particular area or population

 Number of persons contracting a disease during a given time period
per 1000 population at risk
 Refers only to new cases during a defined period
 Incidence Rate - Example of Incidence for malaria:
No of person developing malaria during a given time period
-------------------------------------------------------------------------------- X 100
Population at risk

1,000
------------------------------------------------------------------------------------ X100
100,000

Incidence Rate: 1%
Which Factors affect morbidity ?

 Age
 Gender
 Habits
 Occupation
 Family history
 Build
 Past illness or injury
 Current health status and other factors or impairments
 Environment and residence
 Utmost good faith (Uberrima fides)

 Insurable Interest

 Indemnity

 Contribution

 Proximate Cause
 Utmost Good Faith (Uberrima fides)

 Insured must mention all relevant facts in his knowledge to insurer.

 Material fact means insured must declare his health condition, past medical
history, age while taking health insurance.

 Insurer needs to provide correct information relating to the Insurance

contract and observe good faith during handling the contract, whether
relating to underwriting or claim.
 Insurable Interest

 Insurable interest is that relationship between the person and the

property/interest/liability, where by the person stands to gain by it’s preservation and
stands to lose by loss/damage/destruction.

 In case of health, we all are aware that the greatest wealth or asset of a person is his
own health. Therefore, a person has a legal right to insure his health by taking a
health insurance policy

Example:
Employers buy health insurance plan for their employees because they are deemed
to have an insurable interest in the health of their employees in a pecuniary sense.
 Indemnity

 The principle of indemnity states that the insured person should be placed
in a “pre-loss” position.

 Health Insurance: indemnity = reimbursement of the medical expenses

incurred up to the sum insured of the policy

 Example:
Mr. Ashok Kumar has taken a indemnity policy for a cover of Rs. 100,000 and has
incurred hospitalisation expenses due to a minor accident of Rs. 40,000. In This
case, he will be compensated for the actual cost incurred, i.e. Rs. 40,000 an not the
sum insured, i.e. 100,000. The balance of Rs. 60,000 will remain in his account which
he can use for his future coverage.
 Contribution

 Contribution: IRDA’s regulation states that in case of health, insured

has the right to approach one of the insurer to get his benefits.
Insurer cannot apply contribution clause unless the claim exceed
the sum insured under the policy.
 Proximate cause
 The principle of proximate cause is applied to determine as to whether the loss was caused by a
risk covered, not covered or excluded in the policy.

 The rule referred to as “cause proxima non remora spectator” which means that the proximate
and not the remote cause have to be looked into. If the cause of the loss is a peril insured against,
the assured can recovered the amount of the loss from the insurer.

 Another interpretation is that the proximate cause is the dominant cause and does not have to be
the first.

 If there are several causes operating, the proximate one will be dominant one or the most forceful
one operating to bring the result.

 Risk excluded are usually mentioned in the policy under “exclusions”. If the loss is directly or
proximately caused by an excluded risk, the claim is not payable.

 Example: Peter has taken basic mediclaim policy for a cover of Rs. 100,000 in the event of
hospitalisation. One day he was admitted to the hospital due to several abdominal pain. After all
the necssary check-ups and tests, the doctor diagnosed that his liver is damaged due to
excessive alcohol consumption and he will have to stay in the hospital for around two weeks for
recovery.
When Peter claimed from his insurance company for the hospitalisation expenses, they denied to
the insurer, the proximate cause for hospitalisation was excessive alcohol drinking which was
specifically excluded under the contract; therefore it was not liable to pay any losses.
 Proposal form

This document is the base of the contract where all the critical information pertaining to be the
health and personal details of the proposer (i.e. age, occupation, built, habits, health status,
income, premium payment details etc.) are collected. This could range from a set of simple
questions to a fully detailed questionnaire according to product and the needs / policy of the
company, so as to ensure that all maternal facts are disclosed and the coverage is given
accordingly. Any breach or concealment of information by the insured shall render the policy
void.

Age proof

Premiums are determined on the basis of the age of the insured. Hence it is imperative that the
age disclosed at the time of enrollment is verified through submission of an age proof.

Example: in India, there are many documents which can be considered as age proof but all of
them are not legally acceptable. Mostly valid documents are divided into two categories.
a) Standard age proof: School certificate, passport, domicile certificate, PAN card, Aadhar card
etc.

b) Non-standard age proof: Ration card, voter ID, Gram panchayat certificate etc.

Continue….
Financial documents

Knowing the financial status of the proposer is particularly relevant for benefit products and to
reduce the moral hazard. However, normally the financial documents are only asked for in cases
of high sum assured coverage or where the stated income and occupation or vis a vis the
coverage sough show a mismatch.

Medical reports

Requirement of medical reports is based on the norms of the insurer, and usually depends upon
the age of the insured and sometimes on the amount of cover opted. Sometimes, the proposal
form may also contain some information that leads to medical reports being necessitated.

Sales reports

Sales personnel can also be seen as grassroots level underwriters for the company and the
information give by them in their reprot could form an important consideration. However, as the
sales personnel have an incentive to generate more business, there is a conflict of interest
which has to be watched our for.
Medical Underwriting

Non Medical Underwriting

Numerical rating method

Medical underwriting

 Not all proposers in insurance need medical examination.

 The tests conducted have a cost to the Company.

 Companies usually create a “MEDICAL GRID” to indicate at what age

should the medical underwriting be done and the non medical limits are
carefully designed so as to strike an appropriate balance between business
and risk.

 Medical underwriting basically looks at Past Illness or Surgery, Current

Health Status and other factors or Impairments and evaluates the prognosis
of the ailment for the life to be insured.
Non-medical underwriting

 Most of proposers which apply for health insurance do not need medical
examination.

 Companies usually creates “medical grid” to indicate at what age and stage should a
medical underwriting be done.

 Insurance companies are coming up with some medical policies where the proposer
is not required to undergo any medical examination.

 These non-medical limits are carefully designed so as to strike an appropriate

balance between business and risk.
 Numerical rating method

This is a process adopted in underwriting, wherein numerical or percentage assessments

are made on each component of the risk.

 A process adopted in underwriting wherein numerical or percentage assessments are

made in each component of risk.

 Factors like age, sex, occupation, residence, environment, build, habits, family and
personal history are examined and numerically scored based on pre determined criteria.

 Basis of Numerical Rating System is very logical: Debit or give a minus score to the
unfavorable aspects of the risk and credit or give a positive score to the favorable ones.

 Some combination of debits is much more unfavorable than their numeric summation e.g.
Tuberculosis and Underweight, Albumin high + High Blood Pressure, Heart Murmur +
Rheumatism History.

 In the above examples, a supplementary debit for the association is added or the
combination is treated as a unit and conjoined debit is applied as per known experiences.
Advantages of numerical rating method

In decentralized system, the obvious advantages are:

 Consistency in decisions and hence more uniform treatment of risk

 Liability of error is reduced and hence this eliminates personal prejudice

 Less reliability on Medical expert as there are trained underwriters

 Helps in careful analysis of difficult or doubtful cases

 Increases the speed to handle large business

 Facilitates the work of building new statistics

 Underwriting becomes as easy as application of a formula, no need of experts

 Easy understanding/reviewing the logic behind the underwriting decision

 Deficiency of numerical rating method

 Unable to fix the percentage of increased claim experience for all adverse features.
Hence, the need to refer to Medical Specialist for such proposals on the basis of
special reports obtained.

 Every adverse feature results in a constant addition to the morbidity rate and the
process of equating the adverse with favorable features will give the net extra
morbidity are not always correct.

 Fixing of extra percentage for each adverse feature is arbitrary, though it is also
consistent.
Underwriting decisions

 Accept risk at standard rates

 Accept risk at an Extra Premium

 Post pone the cover for a specified period/term

 Decline the cover

 Counter Offer ( restrict or deny a part of the cover)

 Levy Permanent exclusions under the Policy

Use of general or standard exclusions
The majority of policies impose exclusions that apply to all their members. These are
known as standard exclusions or sometimes referred to as general exclusions.
Insurers limit their exposure by the implementation of standard exclusions.

Example of standard exclusions in most health policies include;

 All disease / injuries which are pre-existing when the cover incepts for the first time.

 Any disease contracted by the insured person during the waiting period form the
commencement date of the policy.

 One-year or two-year exclusions (waiting periods) for expenses on treatment of

diseases such as Cataract, Benign Prostatic Hypertrophy, Congenital internal
disease, Fistula in anus, Piles, Sinusitis and related disorder are not payable until the
first or second year of the policy from the time of policy commencement.

 War and kindred perils and nuclear weapons materials.

Continue….
 Circumcision unless necessary for treatment of a disease.

 Vaccination or inoculation or change of life or cosmetic or aesthetic treatment of any

description plastic surgery other than as may necessitated due to an accident or as a part
of any illness.

 Cost of spectacles and contact lenses, hearing aids. These may be termed as normal
maintenance expenses.

 Dental treatment of surgery of any kind unless requiring hospitalisation.

 Convalescence, general debility, run down condition or rest cure, congenital external
disease, or defects or anomalies, sterility, venereal disease, intentional self-injury and use
of intoxicating drugs / alcohol.

 Any treatment related to HIV, AIDS or sexually transmitted diseases.

 Charge incurred at hospital or nursing home primarily for diagnostic, X Ray or laboratory
examinations or other diagnostic studies not consistent with or incidental to the diagnosis
and treatment or the positive existence or presence of any ailment, sickness or injury for
which confinement is required at a hospital / nursing home or at home under domiciliary
hospitalisation as defined.

Continue….
 Expenses of vitamins and tonics unless forming part of treatment for injury or disease
as certified by the attending physician.

 Treatment arising from or traceable to pregnancy, childbirth including caesarean

section (can be deleted, if maternity benefit is covered) and also voluntary medical
termination of pregnancy during the first 12 weeks from date of conception.

The above list is not meant to be exhaustive. Also, it is not meant to be specific to
any one insurer. Each insurer will structure its products in such a way as to offer an
apparent competitive advantage over products available from its competitors.
Whenever more information becomes available on the risk presented by the general
incidence of particular medical conditions, insurers will consider whether to add or
remove those medical conditions from its range of standard exclusions. Such
decisions are based on their estimation of the risks and the ability to price the
products accordingly.
Underwriting Process flow chart
Group health insurance

Standard underwriting process for the group health insurance

 Type of group ( voluntary or compulsory)

 Size of the Group

 Type of industries

 Eligible lives for coverage

 Level of coverage – whether uniform or stratified

 Composition of the group in terms of gender, age, single or multisite locations, cadre
of the employees, employee turnover rate,

 whether premium paid entirely by the group holder or members are required to
participate in premium payment
Group health insurance

Standard underwriting process for the group health insurance

 Number of dependants including age and sex distribution ( if proposed to be

covered).

 Number of dependent children ( if proposed to be covered).

 Difference in healthcare cost across regions in case of multisite locations

spread in different geographical locations.

 Determining preference of the group holders for administration of the group

insurance by a third party administrator or by insurer itself.

 Past claims experience of the proposed group.

Summary
 Health insurance is based on the concept of morbidity which is defined the risk of a
person falling ill or sick.

 Underwriting is the process of risk selection and risk pricing.

 Underwriting is required to strike an appropriate balance between risk and business

thereby maintaining the competitiveness and yet profitability for the organisation
(insurer).

 Some of the factors which affect a person’s morbidity are age, gender, habits,
occupation, built, family history, past illness or surgery, current health status and
place of residence.

 The core principles of underwriting are: utmost good faith, insurable interest,
indemnity, contribution and proximate cause.

 The key tools for underwriting are: proposal form, age proof, financial documents,
medical reports and sales reports.

 Continue…
 Medical underwriting is a process which is used by the insurance companies to
determine the health status of an individual applying for health insurance policy.

 Non-medical underwriting is a process where the proposer is not required to undergo

any medical examination.

 Numerical rating method is a process adopted in underwriting, wherein numerical or

percentage assessments are made on each component of the risk.

 The underwriting process is completed when the received information is carefully

assessed and classified into appropriate risk categories.

 Group insurance is mainly underwritten based on the law of averages, implying that
when all members of a homogenous group are covered under a group health
insurance policy, the individuals constituting the group cannot anti-select against the
insurer.
 Test yourself
A. Underwriting is the process of ___________________

I. Marketing insurance product

II. Colleting premiums from customers
III. Risk selection and risk pricing
IV. Selling various insurance products

B. The principle of utmost good faith in underwriting is required to be followed by

___________________.

I. The Insurer
II. The insured
III. Both the insurer and insured
IV. The medical examiners
C. Insurable interest refers to ___________________

I. Financial interest of the person in the asset to be insured

II. The asset which is already insured
III. Each insurer’s share of loss when more than one company covers the same loss
IV. The amount of the loss that can be recovered from the insurer

D. Which of the following statements about medical underwriting is incorrect ?

___________________.

I. It involves high cost in collecting and assessing medical reports

II. Current health status and age are the key factors in medical underwriting for health
insurance
III. Proposers have to undergo medical and pathological investigations to assess their
health risk profile
IV. Percentage assessment is made on each component of the risk
E.
1. In a group health insurance, any of the individual constituting the group
could anti-select against the insurer.
2. Group health insurance provides coverage only to employer-employee
groups.

I. Statement 1 is true and statement 2 is false

II. Statement 2 is true and statement 1 is false
III. Statement 1 and statement 2 are true
IV. Statement 1 and statement 2 are false
Answers to test yourself

A. Option III - Underwriting is the process of risk selection and risk pricing

B. Option III – The principle of utmost good faith in underwriting has to be followed
by both insurer and the insured

C. Option I – Insurable interest refers to the pecuniary or the financial interest of a

person in the asset he is going to get insured and can suffer financial loss in the
event of any damage to such asset.

D. Option IV – Percentage and numerical assessment is made on each

component of the risk in numerical rating method, and not medical underwriting
method.

E. Option IV – In a group health insurance, when all members of a group are

covered under a group health insurance policy, the individuals constituting the
group cannot anti-select against the insurer.
In addition to employee-employer groups, insurer have provided group health
insurance coverage to varied type of group such as: labour unions, trusts and
societies, professional associations, clubs and other fraternal organisations.
Thank You