Chapter 2) Insurance underwriting
Medical Report and Attending Physician Statement (APS)
A medical report is sometimes used for underwriting policies with higher face amounts. If the information in the medical section warrants further investigation into the applicant's medical conditions, the underwriter may need an attending physician statement (APS). Once the medical report is completed, it is sent to the insurer for use in underwriting.
Insurable Interest
An individual's valid concern for the continuation of the life or well-being of the person insured, which must be present at the time of application.
Sources of Underwriting Information The sources used to gather information during the underwriting process include:
Application, Medical Report, Attending Physician Statement, Investigative Consumer (inspection) report, Credit report, Medical Information Bureau, Medical examinations and lab tests and Special questionnaires.
Part II of the life insurance application includes: Select one: a. The agent's statement or report b. Medical Information c. General Information d. Inspection Statement
B
Consumer Reports
Consumer reports provide information about the applicant's: Character, Lifestyle, and Financial stability. Consumer reports are generally only used for policies with large coverage amounts because the reports increase underwriting expenses. There are two types of consumer reports: Inspection reports and Investigative reports
Which of the following best describes the process used to select and classify risks? Select one: a. Rating b. Discrimination c. Risk classification d. Underwriting
D
Declined
Declined risks are uninsurable. These individuals are too risky for an insurer, and are declined coverage.
HIV and AIDS
Each state has its own laws regarding HIV testing. However, most states allow insurers to include a question on the application asking if the applicant has tested positive for AIDS. Insurers are also permitted to request applicants undergo an HIV test as part of the application requirements, at the insurer's expense.
Selection Criteria and Unfair Discrimination
If an underwriter determines that the risk does not meet the criteria for at least standard issue, the company may: Choose to decline to accept the risk, Issue the policy with an exclusion rider, or Issue the policy with a higher than standard premium. Unfair discrimination includes discrimination against the blind and the physically or mentally impaired, or based on sexual orientation.
Health Insurance Premium Factors; Interest
In health insurance, premiums are paid in advance before a claim is made. These premiums are invested to earn interest. Higher interest rates allow insurers to charge lower premiums.
In life insurance there is only one claim - payment of the death benefit upon the insured's death.
In life insurance there is only one claim - payment of the death benefit upon the insured's death.Health insurance, on the other hand, may have many claims for one insured. Since there are more claims made on a health insurance policy, it is crucially important those policies are underwritten correctly and risks are classified accurately.
Inspection reports
Inspection reports are performed by a credit-reporting agency. Insurers must abide by the rules of the Fair Credit Reporting Act (FCRA).
An insurance application has three basic parts:
Part I General Information, Part II Medical Information, and Part III Agent's Report.
Applicant
The applicant is the person applying for the policy who fills out the application to be submitted to the insurer.
Application
The application is the primary source of insurability information used in underwriting. The person who applies for coverage must complete and submit the application. In most cases, the application is attached to, and becomes part of, the contract.
Underwriting Risk Factors For Life Insurance
The following are risk factors that are considered when underwriting life insurance: -Age -Gender -Lifestyle -Smoking -Hobbies -Hazardous Occupations -Medical History -Family Health and History -Aviation
Policyowner
The policyowner (synonymous with policyholder) is the person who has all ownership rights under the policy (such as assignment and naming beneficiaries), pays premiums and accepts the policy when delivered. In most cases, the policyowner is the applicant.
underwriters
They select, classify and rate risks.
Third party ownership
Third party ownership is when a person other than the insured applies for a policy. This frequently occurs when a person applies for a policy for a family member or as part of a business or debt agreement. If the applicant is not the insured, the agent must verify that the applicant has an insurable interest in the insured.
Major Risk Factors for Underwriting Health Insurance
it is crucially important those policies are underwritten correctly and risks are classified accurately. Underwriters aren't simply accepting or declining coverage; they are analyzing the applicant's degree of risk. The most important factors in underwriting a health insurance policy are: Physical condition, Moral hazards, and Occupation.
Third Party Ownership
A person other than the insured is the owner of the policy.
Delivery
A policy is delivered after the insurer approves the application and issues the policy for delivery.
This employee of the insurer assigns risk categories to applicants: Select one: a. Broker b. Agent c. Underwriter d. Actuary
D
Adverse Selection
Tendency for poorer than average risks to seek insurance.
Rates for insurance policies are based on: Select one: a. Marital status and age b. Sex, age and marital status c. Sex and age d. Sex only
C. Marital status cannot be used as the basis for insurance premiums. The correct answer is: Sex and age
Medical Information Bureau (MIB) notes
Member insurers supply the MIB with confidential information about an applicant for insurability purposes. This information is collected from insurance applications and claims. Information collected includes underwriting information such as an individual's hazardous activities and impairments to insurability; however, the MIB does not collect claims information or how much coverage an individual has. Insurers may access MIB information on an applicant only if needed for additional investigation. Insurers cannot refuse to issue policies solely on information supplied by the MIB.
Renewability
Provision of policy specifying the insured's and insurer's rights to renew or terminate a policy during or after the expiration of the original policy term.
Substandard
Substandard risks are termed extra risks or rated risks because they pose a higher risk to the insurer than standard risks. This rating may be due to the applicant's: Physical condition, Disease history, Hazardous occupation, Dangerous hobbies or Habits. A stunt pilot or a chain smoker would be considered substandard risks. Substandard risks pay higher premiums because their life expectancy is shorter. Also an insurer might issue the policy with exclusion.
Insured
The insured is the person who is covered under the policy.
Unearned Premium
Insurance premium paid in advance which is used for future coverage.
Health Insurance Premium Factors; Expenses
Insurers' expenses are called loading. These are the daily expenses of operating an insurance company. Loading includes the following costs: Acquisition Costs: cost of effectuating insurance policies, of which a producer's first year commission makes up the greatest portion Overhead: insurer's salaried staff, rent, and furniture Contingency Funds: additional premium may be required if original premium is insufficient - only some insurers (i.e., assessment insurers) have the right to charge additional premium Immediate Claims Payments: insurers assume that all claims are paid at the end of the year when establishing rates, when in reality claims are paid all year
Medical Examinations and Lab Tests
Medical examinations are more often required for life insurance policies, but some health insurance policies may also require a medical examination. A life insurance policy that does not require a medical examination is referred to as "simplified issue life insurance" or "non-medical application." A medical examination may be required for whole and term life policies, especially those with higher face amounts. Medical exams may be required because an applicant's health affects his life expectancy, and consequently the underwriting of a life insurance policy. Insurers pay the cost of medical examinations. Insurers pay the cost of medical examinations
Underwriting Process
Once the underwriter establishes that an applicant is insurable, the underwriting process begins. The underwriter will: 1.Evaluate information about the applicant and 2.Select a risk classification and premium rate that matches the degree of risk undertaken. After the application clears underwriting, the insurer will issue the policy for delivery, and the insurance producer will deliver the policy to the policyowner.
Medical Information Bureau (MIB)
The Medical Information Bureau is a nonprofit trade organization that maintains medical information about individuals that is used by life and health insurers.The main purposes of the MIB include: -Preventing misrepresentation and fraud, -Providing insurers with tools to assess risk and -Holding down the cost of life insurance.
Consumer Reports
They are any written, oral, or other communication of information by a consumer reporting agency about a consumer's credit worthiness, character, general reputation, personal characteristics or mode of living which are used to determine a consumer's eligibility for credit, insurance, employment, or other authorized purposes.
Which of the following best describes the MIB? Select one: a. Nonprofit trade organization that supplies insurability information to member companies b. Government agency that collects information about individuals' life and health insurance policies c. State organization that catalogs individuals' life and health insurance claims d. Group of federally-appointed physicians that monitor the medical treatments received by individuals insured by private companies
A
Credit Report
An applicant's credit history is sometimes used for underwriting. The Fair Credit Reporting Act (FCRA) requires the applicant be notified at the time of application that a credit report may be requested, regardless if a credit report will be requested or not. Consumers must also be informed that they have the right to request additional information about the report, such as the name of the company that provided the report. Such additional information must be provided to consumers within five days, if requested. Note, however, that the insurance company cannot tell the client what was in the report or why the client has been denied. The FCRA requires the applicant be notified: In writing if a credit report will be used and If the premium is increased because of a credit rating.
Major Risk Factors for Underwriting Health Insurance; Physical Condition
An applicant's physical condition is the most important factor in evaluating health risks. The underwriter must know if the applicant has any medical conditions. While past surgeries and other physical conditions of the insured do materially affect the insurer's decision to accept or decline a risk, any childhood diseases the insured had do not materially affect the insurer's decision.
Which of the following is the primary source of information used in underwriting an insurance policy? Select one: a. Attending physician statement b. Application c. Agent report d. Medical Information Bureau
B
Gerald has a chronic medical condition. What will his risk classification be? How will his premium be affected? Select one: a. Gerald's risk classification will be preferred. His premium will be higher. b. Gerald's risk classification will be standard. His premium will be lower. c. Gerald's risk classification will be substandard. His premium will be higher. d. Gerald will be denied coverage.
C
All of the following are involved in the collection of an applicant's medical history, EXCEPT: Select one: a. The application for the insurance policy b. The attending physician statement c. The agent report d. The consumer report
D
Insurance agent Margaret receives life insurance applications from Tim and Tom, who are identical twins, and are each applying for the exact same type of policy with the same face amount. The insurance company issues the policies as applied for, but charges Tom a 15% higher premium. Which of the following best explains the higher premium charged to Tom? Select one: a. Longer free look period b. Insuring clause c. Tom had to undergo a medical examination d. Tom's risk classification
D
Health Insurance Premium Factors
Health insurance premiums are based on three factors: Morbidity (rate of accident or sickness), Interest, and Expenses.
Major Risk Factors for Underwriting Health Insurance; Occupation Classification
Insurance companies classify occupations into five classes: AAA, AA, A, B, and C. The AAA class is for professional workers and those who work in an office. The lower classes (B and C) are for more hazardous occupations.The premium for health insurance policies is directly affected by an occupation's degree of hazard. Applicants with less hazardous occupations have lower premiums. Applicants with more hazardous occupations have higher premiums.If the applicant changes to a less hazardous occupation, the insurance company will return excess unearned premium. If the applicant changes to a more hazardous occupation, the insurance company will reduce the benefits proportionately, but the premium will stay the same.
Selection Criteria and Unfair Discrimination
Insurers are in the business of selecting good risks that will not jeopardize the financial stability of the company. Insurers use discrimination to determine good risks. However, insurers cannot unfairly discriminate against individuals who are part of the same risk class and have the same life expectancy in any policy condition or coverage.
Investigative reports
Investigative reports are based on interviews with friends and neighbors, employers and coworkers, and other individuals who know the insured. Investigative reports cannot be made unless the insured is notified of the report in writing.
Health Insurance Premium Factors; Morbidity
Morbidity is the rate people are expected to become disabled from accident or sickness in a year. Morbidity data helps insurers estimate how many people will become disabled, and the duration of disabilities.
Primary Beneficiary
Naming beneficiaries by succession. The first person to receive policy proceeds upon the insured's death.
insurance application; Part II - Medical Information
Part II of the application covers the applicant's medical history. Information includes the applicant's: Diagnoses, Diseases, Visits to the doctor, Treatments, Surgeries, Drug and alcohol use, Dangerous hobbies, Family health history. The name and address of the applicant's physician(s) are also included here. Life insurance for coverage that is larger than $100,000 usually requires that the prospective insured undergo a medical examination performed by a paramedic or physician. The insurer pays the medical examination
Simplified Issue Life Insurance
Simplified Issue Life Insurance A life insurance policy that does not require the prospective insured to undergo a medical examination.
Other factors that affect health insurance premiums are: Policy benefits Past claims experience Age Gender Occupation Hobbies
Some policies provide very limited benefits while others provide broad coverage. Both the type and amount of benefits will affect the premium. Policies with limited benefits are likely to have lower premiums than those with more coverage. Policies that provide a greater amount of protection are likely to have higher premiums. The insurer's claim experience also has an impact on premiums. The more claims an insurer has, the more premium it must charge to pay future claims.Finally, more hazardous occupations and hobbies subject the insurer to greater risk, and require a higher premium.
Beneficiary
The beneficiary is the named person or persons who receive policy benefits. Beneficiaries can be primary or contingent. Primary beneficiaries are first to receive any benefit payouts, while contingent beneficiaries are beneficiaries that receive benefits in the event the primary beneficiary is unable to do so (i.e. had predeceased the insured).
Underwriting
The process that insurers use to select, classify and rate risks so that they accurately reflect the amount of risk undertaken.
Classification of Risks
Underwriters at the insurer's home office classify risks by analyzing applicants': Medical history, Hobbies, Occupation, and Character. The following rating classification system is used to categorize the favorability of a given risk: Preferred, Standard, Substandard, and Declined. Lower risks tend to have lower premiums, and higher risk tend to have higher premiums.Lower Risk = Lower Premiums Higher Risk = Higher Premiums
Which of the following best describes a life insurance policy in which the proposed insured is not required to undergo a medical examination? Select one: a. Easy policy b. Simply-issued policy c. Simplified issue d. Standard coverage policy
C
Loss Ratio
Loss ratio is the proportion of losses incurred by an insurer with respect to the total dollar value of premiums received (total losses divided by total premiums). Expense ratio is the insurer's expenses divided by the total premiums received. If the sum of an insurer's loss and expense ratio is: 100%, then the insurer has broken-even. Greater than 100%, the insurer has a loss. Less than 100%, the insurer has a gain. Underwriters keenly analyze loss ratios to determine the renewability of insurance contracts and the adequacy of premiums. Loss Ratio = Losses/Premiums Expense Ratio = Expenses/Premiums
Special Questionnaires
Special questionnaires are used for applicants involved in special circumstances, such as: Aviation, Military service, Hazardous occupations or Hobbies. The questionnaire provides details on how much of the applicant's time is spent in these activities. Individuals who indicate on their life insurance application that they are commercial or private pilots will be asked to complete an aviation questionnaire. The purpose of the questionnaire is to provide the insurer with information regarding the individual's piloting schedule and FAA ratings before making a decision on what policy restrictions to apply.
Other factors that affect an applicant's underwriting for health insurance include:
Age, Sex, Medical history, Family history, and Hobbies.Older applicants tend to represent higher risks and have higher premiums. Insurance companies typically limit an insured's coverage under an individual health insurance plan to age 65. Women tend to have higher disability rates than men. Medical and family history is often a good indicator for the reemergence of health problems. Finally, dangerous hobbies an applicant pursues, such as cave diving, heli-skiing and bull riding increase the insurance company's risk.
Major Risk Factors for Underwriting Health Insurance; Moral Hazards
An applicant's lifestyle and habits also have an effect on risk selection and classification. A careless or accident-prone person may pose a higher risk to the insurer. Alcohol abuse and drug use are red flags for the insurer.
Major Risk Factors for Underwriting Health Insurance; Occupation
An applicant's occupation is important for predicting the likelihood and severity of a disability. Some occupations, such as office jobs, pose little threat for disability. Insurance companies classify occupations into five classes: AAA, AA, A, B, and C.
Major Risk Factors for Underwriting Health Insurance
In life insurance there is only one claim - payment of the death benefit upon the insured's death.Health insurance, on the other hand, may have many claims for one insured. Since there are more claims made on a health insurance policy, it is crucially important those policies are underwritten correctly and risks are classified accurately.
Preferred
Preferred risks are individuals who are above average in terms of physical condition and lifestyle and present a less than average risk to the insurer. These risks have lower premiums than standard risks. In life insurance, these are healthy non-smoking individuals with long life expectancies.
insurance application; Part III - Agent's Report
The third part of the application is the agent's report, which is used for underwriting, but does not become part of the contract. Here, the agent records: Their observations of the applicant, Information about the applicant's financial condition, The applicant's background, The applicant's character, and A disclosure of the agent's relationship to the applicant. The agent will note whether or not the proposed coverage is replacing existing coverage. If so, the policy application is considered a replacement, to which the agent must comply with certain regulatory steps for submitting the application. An agent should complete the agent's report before sending the completed application to the insurer's home office.
HIV and AIDS notes
This is typical of life insurance with higher face amounts. The requirement is fair as long as all individuals of a class are required to undergo the test, and the test is in compliance with all state and federal laws. Insurers cannot target a population based on sexual orientation, marital status or geographic location as the basis for an HIV test. In some states, an insurer may be permitted to deny coverage based on a positive HIV test; however, coverage issued to individuals who have tested positive for HIV cannot contain special policy limits or exclusions for losses due to HIV or AIDS. Insureds must sign a consent form before the HIV test may be performed. HIV test results are confidential, and the insured must sign a release form if the results are to be disclosed to a non-entitled party. If there is a positive result, the applicant and the insurer's underwriter will be notified.If the applicant has not indicated a physician to receive positive test results, then the state Department of Health will receive the information, including the name and address of the lab reporting the results. Insurers may provide HIV test information to the MIB, but may only indicate that the insured has "abnormal blood test results."
Standard
Standard risks are individuals in average physical condition with average lifestyles and habits for people of their respective sex and age group. Standard risks are the average risks of an insurer.
insurance application; Part I - General Information
This part of the application contains general information about the applicant such as: The applicant's name, Date of birth, Age, Sex, Social Security number, Smoking status, Marital status, Address, Occupation and Income. Part I also: States the type of insurance policy for which the applicant is applying, States the amount of coverage requested, Includes information about existing policies if the proposed coverage is intended to replace existing coverage, States the beneficiary. The agent's name and license number, as well as the name of the insurance company, are required to appear on the first page of the application.
