What’s Underwriting ?

We may recall underwriting is the process of assessing and classifying the degree of risk represented by a proposed insured or group and making a decision to accept or decline that risk. An underwriter is an insurance company employee who evaluates risks, accepts or declines life insurance applications, and determines the appropriate premium rate to charge acceptable risks.

Underwriting Initiation 

When a customer decides to take a life insurance policy, in general, he or she submits an application to the producer. The Application form is used to gather information that will be used by underwriters.  All applications ask for the details like name and address of the applicant and the date when coverage would begin. The rest of the application form contains questions specifically relating to the type and amount of insurance being requested.

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

Underwriting Parameters 

Parameters considered during the underwriting decision process are:

 Impairment

It 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.

Mortality

It is the likelihood that a person will die sooner than statistically expected. To evaluate the degree of mortality risk presented by a proposed insured, the underwriter looks at information about impairments.

Anti-selection

The tendency of people who  suspect or know they are more likely than average to experience loss  to apply for insurance protection to a greater extent than people who lack such knowledge of probable loss.

Risk Classes

A risk class is a group of insureds that represent a similar level of risk to an insurance company. General risk classes include:

Preferred class

Proposed insureds whose anticipated mortality is lower than average and who represent the least degree of mortality risk. In such cases, underwriters usually offer discount in standard premium.

Standard class

Proposed insureds whose anticipated mortality is average. Standard premium rates are applied here.

Substandard class

Proposed insureds whose anticipated mortality is higher than average, but who are still considered to be insurable. In such risks, premium rates are slightly jacked up.

Declined class

Proposed insureds 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. In normal underwriting practice, such risks are declined.

Risk Assessment Factors for Individual Underwriting

Individual underwriting takes care of individuals and their family members. In such cases, Insurers typically divide risk factors into three categories:

Medical risk factors

They include build, which is the shape or form of the person’s body, including the relationships among height, weight, and the distribution of weight – Body mass index (BMI). Medical risk factors also include personal medical history, family medical history, tobacco use, and alcohol and substance abuse.

Personal risk factors

They 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, driving history, etc.

Financial risk factors

While its evaluation, the underwriter ensures that the amount of insurance sought is not excessive. In addition, at the time of policy issue, the applicant or beneficiary must have an insurable interest in the risk that is insured—that is, the applicant or beneficiary must be likely to suffer a genuine loss or detriment should the event insured against occur.

Risk Assessment Factors for Group Underwriting

 Group underwriting takes care of members and their families of a group, e.g. employees of a company, members of an organization, etc. The risk assessment factors that most insurers consider for groups are the:

• Proposed coverage
• Reason for the group’s existence
• Nature of the group’s business and group size
• Geographic location of the group
• Age and sex distribution of the group members
• Stability of the group
• Level of participation
• Classes of employees
• Expected persistency and prior experience