CH 10 Health Insurance Underwriting

Risk cont.

* Lower risks tend to have lower premiums * If an applicant is too risky, the insurer will decline coverage * Besides outright rejection, there are three techniques commonly used by insurers in issuing health insurance policies to substandard risks

-----------------POLICY ISSUE AND DELIVERY--------------------

---------------POLICY ISSUE AND DELIVERY----------

Premiums are tax deductible

--If paid before your paycheck is taxed or removed from your taxable income when you file taxes --In this case the benefits will be taxed ( because you are already saving taxes on the premiums)

Policy Delivery - Personal Delivery

-Allows the producer to explain the coverage to the insured (such as the riders, provisions, and options -Builds trust and reinforces the need for the coverage

Suitability Form

-Ensures that the customer is best suited for the policy they are purchasing -Prevents the sales of unnecessary insurance for example a customer on Medicaid would not be suited for a Medicare Supplement policy because Medicare Supplement policies are typically expensive, and the customer is already receiving Medicaid due to financial need

MORAL HAZARDS

-Habits or Lifestyles of applicants -Personalities and attitudes may draw attention in the underwriting process. Moral hazards include: * Excessive drinking and use of drugs * Applicants seen as accident prone or potential malingerers (feigning a continuing disability in order to collect benefits) * Dishonest business practices

Policy Delivery

-Mailing Policy to agent -Mailing policy to the applicant -Personal delivery by the agent

Information Used in Underwriting

1. Application

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Post-Selection Activities

Activities conducted by the underwriting department

Applicant Ratings and Classifications

After applicant information is reviewed, the underwriter will utilize several different types of information in determining the insurability of this individual and the risk that the applicant poses to the insurer. This evaluations is known as risk classification. The producer must provide a privacy notice to an applicant if personal information about that applicant is disclosed and is passed along to the insurer and its affiliates.

Part III Agents Report

Agent reports personal observations about the proposed insured. Agent provides additional information about the applicant's financial condition and character, the background and purpose of the sale, and how long the agent has known the applicant.

Substandard Risk

An applicant or insured who has a higher than normal probability of loss, and who may be subject to an increased premium.

Physical Conditions

An applicant's present physical condition is of primary importance when evaluating health risks

Credit Report

An applicants credit history is sometimes used for underwriting and to determine the likelihood of making premium payments. 1. Applicant must be notified by mail that a report is being pulled 2. Must be notified if premium is increased because of credit rating

Preferred Risk

An insurance classification for applicants who have a lower expectation of incurring loss, and who, therefore, are covered at a reduced rate. Characteristics that contribute to a preferred risk rating include not smoking, weight within an ideal range, and not drinking

RISK FACTORS AND CLASSIFICATIONS

Applicant Ratings and Classifications

Premium Receipt

Applicant who pay a premium deposit with the application are entitled to a premium receipt. It is the type of receipt given that determines exactly when and under what conditions an applicant's coverage begins. The two major types of receipts are conditional receipts binding receipts.

Standard Risk

Average Risk - No Extra Ratings or Restrictions - Standard terms and rates An applicant or insured who is considered to have an average probability of a loss based on health, vocation and lifestyle.

Date Premium Factors

Besides risk factors, there are many other standard items that impact the cost of premium for a health insurance policy.

Avocations

Certain hobbies like skydiving or mountain climbing may increase his or her risk to the insurer

Medical Cost Management

Four General Approaches 1. Mandatory second opinions 2. Precertification review 3. Ambulatory surgery 4. Case Management

Age

Generally, the older an applicant, the higher the risk Health insurance claims costs tend to increase with the aging paitient

Policy Issued

Happens when insurer "approves" the application, they are "issuing the policy" Technically a policy could be ISSUED and not delivered for days or weeks later

Standard's and Guidelines for Insurability

Helps the underwriter review and evaluate information about an applicant

Substandard Risk

High Risk - Rated Up - higher premiums or restricted coverage - chronic conditions, insulin diabetes, heart disease An applicant or insured who has a higher than normal probability of loss, and who may be subject to an increased premium.

Change of Occupation provision

If Insured changes to: more hazardous job - benefits reduced; less hazardous job - premiums reduce.

Expenses to Insurer

Insurer must carry its proportionate share of the costs for employees' -salaries - -agent's commissions -rent or mortgage payments, maintenance costs, and other administrative expenses

Inspection Reports Detailed

Insurer's obligation involving he disclosure of an insured's nonpublic information is to give notice, explain and allow opting out Inspection reports are not requested on applicants who apply for smaller policies.If an insurance company obtains an inspection report on a prospective insured, it must inform the prospect that it is permitted to do so under The Fair Credit Reporting Act

Interest

Interest is a major element in establishing health insurance premiums. A large portion of every premium received is invested to earn interest. The interest earnings reduce the premium amount that otherwise would be required from policyholders

Preferred Risk

Low/Better than average risk - Lower Premiums-non smoker, weight in ideal range, non drinker An insurance classification for applicants who have a lower expectation of incurring loss, and who, therefore, are covered at a reduced rate.

Changes on the Application

Must be completed accurately, honestly and thoroughly, and it must be signed by the insured and witnessed. When an applicant makes a mistake in the information given to an agent in completing the application, the applicant can have the agent correct the information, but the applicant must initial the correction. If there are mistakes by the applicant, the agent corrects them and has the applicant initial the changes.

Declined/Uninsurable

Not insurable-potential of loss to insurance company is too high -terminal illness, too many chronic conditions

Applicant Ratings

Once the information about an applicant is reviewed, the underwriter seeks to classify the risk that the applicant poses to the insurer. This evaluation is known as risk classification. In some cases the applicant represents a risk so great that the applicant is considered uninsurable, and the application will be rejected. However, the majority of insurance applicants fall within an insurer's underwriting guidelines and accordingly will be classified as a preferred risk, standard risk, or substandard risk

What are the 3 parts of the insurance application

Part 1-General Part II-Medical Part III - Agent's Report

OCCUPATION

Premium rates may be effected by their occupation * Occupations involving heavy machinery, strong chemicals, or high electrical voltage, represent a high degree of risk

Representation

Statements that are made by applicants that are substantially true to the best of their knowledge, but not warrantied as exact in every detail

Policy Design

The design of structure of a policy and its provisions can have an impact on an insurer's cost containment efforts --Higher deductible will help limit claims --Coinsurance is another important means of sharing the cost of medical care between the insured and the insurer --Shortened benefit periods can also prove beneficial from a cost containment standpoint

Warranties

Warrananties are statements that are guaranteed to be literally true. A warranty that is not literally true in every detail, even if made in error, is sufficient to render a policy void.

ambulatory surgery

includes outpatient, same-day, or short-stay surgery that does not require an overnight hospital stay

Adverse Selection

the situation in which one party to a transaction takes advantage of knowing more than the other party to the transaction

Inspection Reports - Detailed

· The Fair Credit Reporting Act of 1970 regulates the way credit information is collected and used to protect the rights of consumers for whom an inspection or credit report has been requested. · It established procedures for the collection and disclosure of information obtained on consumers for whom an inspection or credit report has been requested. · If an insurance company requests a credit report, the consumer must be notified in writing · This report provides information about the applicant's character, lifestyle, and financial stability. · When an investigation consumer report is used in connection with an insurance application, the applicant has the right to receive a copy of the report

Policy Delviery - Contructive Delivery

-- Occurs if the insurance company intentionally relinquishes all control over the policy and turns it over to someone acting for the policyowner, including the company's own agent --Mailing the policy to the agent for unconditional delivery to the policyowner also constitutes constructive delivery, even if the agent never personally delivers the policy --If the company instructs the agent not to deliver the policy unless the applicant is in good health, there is no constructive delivery

Claims Experience

--Before realistic premium rates can be established for health insurance, the insurer must know what can be expected as to the dollar amount of the future claims --The most practical way to estimate the cost of future claims is to rely on claims tables based on past claims experience. --Experience tables have been constructed for hospital expenses based on amounts paid out in the past for same types of expenses --Experience tables have been developed for surgical benefits, covering various kinds of surgery based on past experience

Effective Date of Coverage

--Identifies when coverage is effective and establishes the date by which future annual premiums must be paid --If the initial premium is collected at the time of application, the effective date is dependent on the type of receipt given to the applicant --In some cases, the insurer requires the agent to collect a statement of good health from the insured at time of delivery --If the initial premium is not submitted with the application, the policy effective date is The date the policy is delivered to the applicant, premium collected, and statement of good health signed. Coverage will not be in effect until all of these things happen

Benefits

--The number and kinds of benefits provided by a policy affect the premium --The greater the benefits, the higher the premium. The greater the risk to the insurer, the higher the premium

Inspection Reports

Companies are allowed to obtain inspection reports under the FCRA

Policy Summary

Provides specific information about the policy purchased, such as the premium and benefits.Mom calls you excited because she bought new health insurance. This allows you to quickly see what "health insurance" specifically did she buy.

Application Errors

- If an agent realizes that an applicant has made an error or an application, the agent must correct the information and the applicant initial the changes - An incomplete application will be returned to the agent The agent can NEVER change the application without the customer present to initial changes

USA Patriot Act

- The USA Patriot Act was enacted in 2001 It requires insurance companies to establish formal anti-money laundering programs. The purpose of the act is to detect and deter terrorism.

Signatures

- The agent and the applicant are required to sign the application - If the applicant is someone other than the proposed insured-except for a minor child-the proposed insured must sign the application. Having an applicant that is different from the insured (parent and minor child) is considered third party ownership

Medical History

--Medical history may point to the possibility of a reaccurance of a certain health condition --An applicant's family history may reflect a tendency toward a certain medical condition or health impairments

Premium Mode (Mode of Premium Provision)

--The Policy feature that permits the policyowner to select the timing of premium payments --If the policy holder chooses to pay premium more than once per year, there may be additional charges because the company will have additional charges in billing and collecting the premium payments --For health insurance, premium payment options include: -Annual -Semi-annual -Quarterly -Monthly Unlike life insurance, there is no Single-Pay option for health insurance

The parts of the insurance policy covered in Part 1?

-Type of policy -Amount of insurance -Name and relationship of the beneficiary -Other insurance the proposed insured owns -Additional insurance applications the insured has pending Other infomation sought may indicate possible exposure to hazardous hobby, foreign travel, aviation activity, or military service. Whether the proposed smokes is indicated in Part 1

Applicant Statements

-Warranties -Representation

What are three techniques commonly used by insurers in issuing health insurance policies to substandard risks

1. Attaching an exclusion (or impairment) rider or waiver to a policy 2. Charging an extra premium 3. Limiting the type of policy or coverage issued 4. The insurance company will NEVER alter the PROVISIONS of an insurance policy due to risk

concurrent utilization review

A Health insurance company's opportunity to review a request for medical treatment to confirm that the plan provides coverage for your medical services --Health care is reviewed as it is being provided --Involves monitoring the appropriateness of the care, the setting, and the length of time spent in the hospital --This ongoing review is direct at keeping costs as low as possible and maintaining effectiveness of care by determining if the recommended treatment is appropriate

CASE MANAGEMENT

Also referred to as Utilization Review --Involves a specialist within the insurance company, such as a registered nurse, who reviews a potentially large claim as it develops to discuss treatment alternatives with the insured --The purpose of case management is to let the insurer take and active role in the management of what could potentially become a very expensive claim --Most of these services are preformed on a prospective basis, a concurrent basis, a retrospective basis or a combination of all three --A prospective review involves analyzing a case before admission to determine what type fo treatment is necessary. --Concurrent Review involves the monitoring of a hospital stay by a nurse while a patient is in the hospital to determine when they will be released, if they require home health care or if a transfer to another facility such as a hospice center is warranted --Retrospective review Involves an analysis of care, after the fact, to determine if it was necessary and appropriate. The purpose of this review is not to deny claims but to monitor trends regarding treatment so that future actions may be taken to reduce or eliminate unnecessary helath care costs, especially in high cost areas.

Standard Risk

An applicant or insured who is considered to have an average probability of a loss based on health, vocation and lifestyle.

The Medical Report

An insurer's request for an attending physician's statement report (APS) must be accompanied by a copy of the signed authorization. Medical reports must be completed by a qualified person, but that person does not necessarily have to be a physician. Many companies accept reports completed by a paramedic or registered nurse. When completed the report is forwarded to the insurance company, where it is reviewed by the company's medical director or a designated associate.

Proper Solicitation

As a representative of the insurer, an agent has the duty and responsibility to solicit good business. This means that an agent's solicitation and prospecting efforts should focus on cases that fall within the insurer's underwriting guidelines and represent profitable business to the insurer. At the same time, the agent has a responsibility to the insurance-buying public to observe the highest professional standards when conducting insurance business

Application

Basic source of insurability information. Application is the first source of information to be reviewed and will be evaluated thoroughly. It is the agent's responsibility to see the applican'ts answers to questions are fully and accurately recorded. There are 3 basic parts to the typical life insurance application

Initial Premium

Best for agent and insured to have first premium payment paid with application to the insurer o For the agent, this will help solidify the sale and may accelerate the payment of commissions on the sale o If the premium is NOT paid with the application, the agent should submit the application to the insurance company without the premium The policy will not become effective until the initial premium is collected even if it is approved and issued

Changes in the Application

Changes in the Application Must be completed accurately, honestly and thoroughly, and it must be signed by the insured and witnessed. When an applicant makes a mistake in the information given to an agent in completing the application, the applicant can have the agent correct the information, but the applicant must initial the correction. If there are mistakes by the applicant, the agent corrects them and has the applicant initial the changes.

Binding Receipt

Coverage is guaranteed until the insurer formally rejects the application --This may also be described as Insurer is bound to coverage until the application is formally rejected --Even if the proposed insured is ultimately found to be uninisurable, coverage is still guaranteed until rejection of coverage

Buyer's Guide and Policy Summary

In many states, the agent is required to deliver to the applicant a Buyer's Guide and a Policy Summary. The documents are usually delivered BEFORE the agent accepts the applicant's initial premium. Typically, the buyers guide is a generic publication that explains the life and health insurance so that average consumers can understand. The policy summary addresses the specific product being presented for sale. It identifies the agent, insurer, the policy, and each rider. It includes information about premiums, dividends, benefit amounts, and insurance costs indexes of the specific policy being considered. an insurer must provide these to any prospective purchaser upon request or prior to accepting the applicant's initial premium or premium deposit unless there is a 14 day free-look provision.

Morbidity Rates

Mortality rates show the average number of persons within a larger group of people who can be expected to die within a given year at a given age, Morbity rates show the expected incidence of sickness or disability within a given group during a given period of time

PREMIUMS, RECIPTS, and EFFECTIVE

PREMIUMS, RECIPTS, and EFFECTIVE

Part 1-General

Part 1 asks general questions about the proposed insured, including name, age, address, birth date, sex, income, marital status, and occupation. Details about the requested insurance coverage are also covered in Part 1

Part II Medical

Part II ask questions about proposed insureds' health history. The individual may be required to take a medical exam/or provide blood test or urine sample

Fair Credit Reporting Act (FCRA)

Protects privacy of background information and ensures that information supplied is accurate.

TAX TREATMENT OF HEALTH INSURANCE PREMIUMS

TAX TREATMENT OF HEALTH INSURANCE PREMIUMS

Pre-Selection Underwriting Activities

The Process by which an agent completes the initial application. (1) Obtaining complete detailed policy application questions, and personal physician information. (2)Providing insite with regard to possible underwriting rating services. (3) stressing the importance of answering all questions honestly. The agent submits the application information to the insurer's underwriting department

Backdating

The point of Backdating a policy is to make it effective at an earlier date to preserve a slightly lower premium at that reduced age. Policies cannot be backdated more than 6 months from the date of issue

Underwriting

The process of Risk Selection to decide who can be insured and to determine applicable rates that will be charged for premiums

Conditional Receipt

The producer issues a conditional receipt to the applicant when the application and premium are collected. O The conditional receipt denotes that the coverage will be effective once the applicant proves to be insurable either on the date the application was signed or the date of the medical exam O This is described as "when the conditions of they receipt are met O If the insurer accepts the coverage as applied for, the coverage will take effect from the date of the application or medical exam, which ever is later

Precertification Review

To control hospital claims, many policies today require policy owners to obtain approval from the insurer before entering a hospital or elective surgery --A pre-hospitalization authorization program (pre-certification) determines whether the requested treatment is medically necessary --Pre-admission, pre-hospitalization, and pre-certification are all common names used for this particular type of managed care --Pre-certification occurs before the treatment is provided --Pre-admission testing, also known as pre-admission certification, usually involves evaluating an individual's overall helath prior to being hospitalized for surgery --Preadmission testing helps control health care costs primarily by reducing the length of hospitalization --Failure to obtain a preadmission certificate in non-emergency situations reduces or eliminates the health care provider's obligation to pay for services rendered

Underwriting II

Underwriting: The process of risk selection 1. The process used by an insurance company to determine whether or not an applicant is insurable and if so, how much to charge for premiums -Material facts can affect an applicant being accepted or rejected. - One of the main responsibilities is to protect the INSURER against adverse selection -The underwriting process involves reviewing and evaluating information about the applicant and establishing individual against the insurer's standards and guide lines for insurability and premium rates.

Medical Report

Used for underwriting policies If information in the medical section warrants further investigation into the applicants medical conditions, the underwriter may needs an attending physician statement (APS)

Community Rating

insurance rates set the same for all eligible individuals and families based on the previous expenses in a defined community or geographic area

Statement of Good Health

verifies that the insured has not become ill, injured or disabled during the policy approval process (time between submitting application and delivery of the policy), or did not submit the initial premium with the application. --Is used when applicant did not submit the initial premium with the application --In such cases, common company practice requires that, before leaving the policy, the agent must collect the premium and obtain from the insured a signed statement attesting to the insured's continued good health. --Also used when reinstating policy

Medical Information Bureau

· The MIB is a nonprofit trade organization which maintains medical information about individuals. ·· This helps insurance companies from: adverse selection by applicants, as it detects misrepresentations, dentify fraudulent information controls the cost of insurance helps underwriters evaluate risk · Information received from the Medical Information Bureau (MIB) about a proposed insured may be released to the proposed insured's physician. An insurance company would NOT notify the MIB if an application is declined

Mandatory Second Opinions

--A provision to reduce unnecessary surgery, many health policies contain a provision requiring the insured to obtain a second opinion before receiving elective surgery --Under the mandatory second surgical provision, an insured typically will pay more out-of-pocket expenses for surgeries for which only one opinion was obtained --The mandatory second surgical option provision can help contain the cost of group medical plan

Point-of-Service Plans

--Allows insured to choose either an in-network or out-of-network provider at the time care is needed -- With in-network coverage, the insured receives care through a particular network of doctors and hospitals participating in the plan --All care is coordinated by the insured's primary care physician, which includes referrals to specialists --An insured receiving out-of-network care usually pays more of the cost than if in-network (Except for Emergencies)

Taxation of Medical Expense Insurance

--Incurred medical expenses that are reimbursed may not be deducted from an individual's federal income tax --Incurred medical expenses that are not reimbursed by insurance may only be deducted to the extent they exceed 7.5% of the insured's adjusted gross --Benefits received by an insured under a medical expense policy are not included in his gross income because they are paid to offset losses he incurred --For self-employed individuals, 100% of their health insurance premium is tax deductible (as of 2003)

SEX

--Men show a lower rate of disability than women, except in the upper ages --Women are sometimes required to undergo more expensive testing like PAP test, which is used in detecting cerviccal cancer --Women have a longer life expectancy than men

Premiums are NOT tax deductible

--Paid after your paycheck is taxed and are not removed from your taxable income -- In this case, the benefits of the policy woul be tax free

Taxation of Disability Income

--Pemiums paid for personal disability income insurance are NOT DEDUCTIBLE by the individual insured, but the disability benefits are tax-free to the recipient --When a group disability income insurance plan is paid for entirely by the employer and benefits are paid directly to the individual employees who qualify, the premiums are deductible by the employer. The benefits, in turn, are taxable to the recipient --If an employee contributes to any portion of the premium, her benefit will be received tax-free in proportion to the premium contributed

Group Insurance Premium Taxation

--Premiums paid by an employer for the benefit of employees ARE Tax Deductible to the EMPLOYER --Premiums paid by the employer are nor are they taxable to the employees

Insurable Interest

--occurs if applicant is in a position to suffer a loss should the insured incur medical expenses or be unable to work due to disability. --Insuraable interest is a prerequisite for issuing a health insurance policy --You have insurable interest in yourself --A producer may be the beneficiary of an applicant's policy if the producer has insurable interest on an insured

Receipts

-Agents should should make effort to collect initial premium with application --Agent issues the applicant a premium receipt upon collecting the initial premium --The only time a customer will receive a receipt is if they pay their initial premium at the time of application. No receipt will be given at any other time. --There are types of premium receipts that determine when coverage will begin

Field Underwriting Procedures

As field underwriters, agents help reduce the chance of adverse selection by: - Application is filled out completely and correctly - Collect the initial premium - Forwarding the application to the insurer in a timely manner - Seeking additional information about the applicant's medical history if requested - Notifying the insurer of any suspected misstatements in the application - Delivering the policy Policies may be issued as applied for by the applicant or they may be amended or modified by the insurer when issued. If they are amended or modified when issued, they are generally rated-up as well. This means that the premium will be higher than the standard rate.