insurance 4

Medical Examinations and Testing

. If the amount of insurance applied for is relatively high, the proposed insured is usually required to take a medical examination, in which case the medical portion of the examination will be completed by the doctor as part of the medical exam. Medical examinations, when required by the insurance company, are conducted at the company's expense.

Loading consists of four main items:

Acquisition costs,General overhead loading,Loading for contingency funds,Immediate payment of claims

three factors used in determining insurance rates:

Mortality (life insurance rates) or morbidity (health insurance rates) Interest Expenses

Loading for contingency funds

Once a level premium policy has been issued, the premium can never be increased. However, unforeseen contingencies could make the rate inadequate.

most applications consist of the following:

Part I—General Information Part II—Medical Information The agent's statement or report Proper signatures of all parties to the contract

claim frequency rate

but also how much it will cost when they do. Insurers look at how frequently claims happen among a particular population

aggregate claim

claim frequency rate, as well as the average dollar amount per claim. These two figures are multiplied to create the aggregate claim amount, which is a primary element in calculating health insurance rates.

Morbidity

likelihood that a person will suffer an accident, contract a disease, or otherwise require medical care

insured

the individual whose life is covered by the policy

underwriter may request an Attending Physician's Statement (APS)

from the proposed insured's doctor. Usually, the APS is designed to obtain more specific information about a particular medical problem revealed in the application or during the medical examination.

net premium.

he premium without expense loading

final step in the underwriting process

rating of the risk or the determination of the premium

The Underwriter's Job

An underwriter's job is to select risks that can be assumed by the insurance company at a reasonable price and to reject other risks. Part of an underwriter's job is to protect the insurance company against something known as adverse selection. The goal is to achieve a profitable distribution of exposures—a broad base of risks where average losses fall within a normal range.

Agent's Statement

Generally, this includes information regarding the agent's relationship to the proposed insured and general knowledge about the proposed insured's financial status, habits, general character, and any other information that may be pertinent to the risk being assumed by the insurer. Signatures of both the applicant and agent are usually required at the time of completion of the application. If the applicant is not to be the insured, the signature of the proposed insured may be required as well.

Expenses

If the cost of mortality is calculated (discounting for interest), there is enough money to pay claims, but the insurance company has no money with which to pay operating expenses. The premium without expense loading is a net premium. An expense loading is added to the net premium to: cover all expenses and contingencies; have funds for expenses when needed; and spread cost equitably among insureds.

Immediate payment of claims

In rate making, it is assumed that all claims are paid at the end of the year. This is not literally true, of course. Relying on the law of large numbers, it is safe to assume that claims will be spread throughout the year. Allowance must be made for this loss in the expense loading.

Medical Information Bureau (MIB)

This is a non-profit trade association that maintains medical information on applicants for life and health insurance. Applicants who are denied coverage due to information in an MIB report must be given explanations and an opportunity to challenge information about their medical history that may be inaccurate.

Selection Criteria and Unfair Discrimination

While insurers must use actuarially sound principles to determine whether to insure a risk and at what premium, they cannot impose underwriting criteria that unfairly discriminate among members of the same or similar actuarial class.

AIDS Considerations

insurance applications for life or health insurance cannot ask applicants questions that are designed to elicit information for the purpose of determining sexual preferences or lifestyles. Sexual orientation cannot be used in the underwriting process or to determine insurability. However, applicants may be asked questions relating to their having or having been diagnosed as having AIDS or ARC (AIDS-related complex) if the questions are factual and intended to determine the existence of the condition. Insurers may require that applicants take the test, at the insurer's expense. When an applicant is asked to take an AIDS-related test for an in surance application, the insurer must tell the applicant how the test will be used and obtain the applicant's written consent. If an applicant undergoes an AIDS-related test, the results are kept confidential. Applicants can designate individuals who they want the results to be shared with. For example, an applicant can request that positive results be reported to a particular physician or medical provider. Results are reported to the insurer, who may not release this information. Positive results will be reported to the MIB that the individual has abnormal blood test results but not the presence of AIDS antibodies.

Sources of Underwriting Information

the insurance application; medical exams and history; the attending physician's statement; consumer reports (general or investigative); Medical Information Bureau (MIB); a federal credit report; and an agent report.

mortality table

the table is based on statistics kept by insurance companies over the years on mortality by age, sex, and other characteristics.

Changes in the Application

Any changes made to an insurance application after it is completed must be initialed by the applicant. Some insurers require that the agent also initial application changes. The reason an insurer would require initialing is to protect itself in the event a dispute arises and the applicant and the agent do not recall the changes that were made.

Once the prospect has agreed to purchase the insurance contract, three important functions take place.

The underwriting process begins. The application will be submitted, and the policy will be issued (or declined). The producer will deliver the policy to the policyowner.

Premium mode

The premium mode is simply the frequency with which a policy premium will be paid. The most common premium modes for life insurance are annual, semi-annual, quarterly, and monthly. The more payments the insured wishes to break the premium into, the higher the total premium will be. For example, the cost of 12 monthly premiums (gross annual premium) will be slightly higher than a single annual premium (net single premium) for the same policy. Because the insurance company will not receive as much money in advance and must bill more frequently, it must charge something extra to offset the interest it would have earned on the full premium as well as its increased administrative expenses.

Adverse selection

exists when the group of risks insured is more likely than the average group to experience loss. The potential for adverse selection exists because people who perceive that they have a higher risk of loss have a greater tendency to apply for insurance, and to apply for higher limits of coverage, than those who perceive that they have very little chance of loss. For example, if there were no underwriting controls, a disproportionate number of people with serious health problems or diseases would apply for life, health, and disability insurance, and the insurance companies would lose money.

applicant

he individual who fills out the application and applies for the insurance.

investigative consumer report

information on a consumer's character, general reputation, personal habits, and mode of living that is obtained through investigation (i.e., interviews with associates and friends and neighbors of the consumer). Such reports may not be made unless the consumer is clearly and accurately told about the report in writing.

Declined Risks

one that an insurer has decided not to insure. The insurer declines the application for insurance. Insurers rarely do this; rather, they seek to insure for a higher premium, and/or by limiting or excluding certain losses.

Underwriting

the process of selection, classification, and rating of risks. The risk selection process consists of evaluating information and resources to determine whether a risk is acceptable. If a risk is acceptable, it will then be classified accordingly.

Incomplete Applications

Any incomplete applications sent to the underwriting department will be returned to the agent for completion. This means that a delay in the underwriting process will ensue, requiring that the applicant wait to have the proper protection issued. If an insurance company accepts an application that is incomplete, then it waives its right to that information. In the event of a claim, the insurance company cannot deny that claim based on missing information in the application.

Field Underwriting

As a field underwriter, the agent initiates the process and is responsible for many important tasks, including: making proper solicitation; ensuring the suitability of the product being underwritten; completing the application with the applicant; obtaining all proper signatures; explaining the sources of insurability; disclosures at point of sale; collecting the initial premium and issuing a receipt; completing the agent's report; and delivering and explaining the policy.

Interest

Because premiums are paid in advance of claims, insurance companies have money to invest to earn interest. This interest helps to lower the premium rate.It is assumed that all premiums are paid at the beginning of the year and all claims are paid at the end. Therefore, it becomes necessary to determine how much should be charged at the beginning of the year, assuming a given rate of interest, to have enough money at the end of the year to pay all claims.

Required Signatures

Several signatures are required to complete a life insurance application. Required signatures include the applicant, the proposed insured (if different from the applicant), and the agent soliciting the insurance.The agent's report must be completed and signed by the agent only. The Fair Credit Reporting Act Notice of Disclosure ("Notice to the Applicant") is also to be completed with the appropriate signatures.

Inspection Reports

To supplement the information on the application, the underwriter orders an inspection report on the applicant from an independent investigating firm or credit agency, which covers financial and moral information. If the amount of insurance applied for is average, the inspector will write a general report in regard to the applicant's finances, health, character, work, hobbies, and other habits. The inspector will make a more detailed report when larger amounts of insurance are requested. This information is based on interviews with the applicant's associates at home (neighbors and friends), at work, and elsewhere.

policyowner

he individual who pays the premium, accepts the policy when it is delivered by the agent, and has the special owner's rights, such as designating beneficiaries.The policyowner is usually, but not necessarily, also the applicant.

expense ratio

determined by dividing an insurer's operating expenses (including commissions paid) by total premiums. When the combined loss and expense ratio is 100%, the insurer breaks even. If the combined ratio exceeds 100%, an underwriting loss has occurred. If the combined ratio is less than 100%, an underwriting profit, or gain, has been realized.

Loss Ratios

determined by dividing losses by total premiums received. Loss ratios are often calculated by account, by line of insurance, by book of business (all accounts placed by each producer or agency), and for all business written by an insurer. Loss ratio information may be used to make decisions about whether to renew accounts, whether to continue agency contracts, and whether to tighten underwriting standards on a given line of insurance.

Part I

general or personal data regarding the insured. This would include such information as name and address, date of birth, business address and occupation, Social Security number, marital status, and other insurance owned. In addition, if the applicant and the insured are not the same person, the applicant's name and address will be included in Part I.

gross annual premium,

or the amount the policyowner actually pays for the policy, equals the mortality risk discounted for interest, plus expenses. By definition, the net premium is the mortality risk discounted for interest, without any expense adjustment. By formula: gross premium = mortality − interest + expenses; net premium = mortality − interest.

third-party ownership

refers to a situation where the policy is owned by someone other than the insured. For example, in a business situation, a corporation may apply for insurance on the life of a key employee. In this case, the corporation is the applicant and the policyowner, and the key employee is the insured. The corporation would also be the beneficiary.

The process of underwriting

reviewing the background information and medical history of the applicant. This information permits an insurance company to determine whether to accept or reject an applicant for coverage. In addition, this information also determines whether the insurer will charge standard or modified premium rates.

mortality rate

which is defined as the number of deaths per 1,000 people, is taken from the mortality table and is converted into a dollar and cents rate.

Acquisition costs

All costs in connection with putting the policy on the books are charged as incurred in the insurance accounting. In most cases, these costs will be so proportionately high compared with those for ensuing years that they must be amortized over a period of years. One of the highest acquisition costs is the producer's first-year commission. This is the reason a policy that lapses during the first two or three years creates a loss for the insurer. It has not yet recovered acquisition costs.

Reserves

By law, a portion of every premium must be set aside as a reserve against the future claim under the policy as well as other contractual obligations, such as cash surrender and nonforfeiture values. Reserves are accounting measurements of an insurer's liabilities to its policyholders. Theoretically, the reserve is the amount, together with the interest to be earned and future premiums to be paid, that will exactly equal all of the company's contractual obligations. The extent to which an insurer's assets exceed its liabilities is known as surplus. Policy dividends are paid out of an insurer's surplus.

General overhead loading

Clerical salaries, furniture, fixtures, rent, management salaries, and so forth must be considered when determining expenses.

HIPAA Disclosures

The Health Insurance Portability and Account ability Act (HIPAA) imposes specific requirements on health care providers with respect to the disclosure of insureds' health and medical informa tion or protected health information. Health care providers must preserve patient confidentiality and protect this information. If this information is inadvertently disclosed, providers must mitigate the harm to patients. Insurers and producers are under similar requirements when dealing with the protected health information of applicants and insureds.

The Application

The application is a vital document because it usually is attached to and made a part of the contract. The producer must take special care with the accuracy of the application in the interest of both the company and the insured.

National Do Not Call Registry

The registry is managed and enforced by the Federal Trade Commission (FTC), the Federal Communications Commission (FCC), and state officials.Calls from or on behalf of political organizations, charities, and telephone surveyors are still permitted, as well as calls from companies that have the express written permission of the consumer. Calls are also permitted to consumers with whom the company has established a business relationship, as follows. A consumer can establish a business relationship with an insurer by requesting information from it or submitting an application to it. In this case, the business can call for three months from the date of inquiry or application. A company with which a consumer has an established business relationship may call for up to 18 months after the consumer's last purchase or last delivery, or last payment, unless the consumer asks the company not to call again.

Part II

insured's medical history, current physical condition, and personal morals. If the insurance applied for qualifies as nonmedical (no physical exam required), the producer and the insured will complete Part II of the information. In some cases, the proposed insured is required to take a medical examination and Part II of the application is completed as part of the physical exam. In addition, Part II requires information regarding the current health of the insured by asking for current medical treatment for any sickness or condition and types of medication taken. The name and address of the insured's physician are also required. Usually Part II of the application also will include questions regarding alcohol and drug use by the insured. Avocations and high-risk hobbies are also usually reported in Part II. Generally, plans for a prolonged trip or stay in a foreign country also are reported in Part II.

beneficiary

the individual or individuals who the policyowner has named to receive the benefits of the policy. Most of the time, the applicant, policyowner, and the insured are the same person. For example, a person who applies for insurance on his own life will be the insured and most often will also be the policyowner.

level premium

was devised to solve the problem of increasing premiums. Mathematically, the level premiums paid by the policyowner are equal to the increasing sum of the premiums caused by the increased risk of mortality. Accordingly, in the early years of the policy, the level premiums paid are actually more than the amount necessary to cover the cost of mortality. Conversely, in the later years of the policy, the premiums paid are less than the amount necessary to cover the increased cost of mortality. This shortage in the later years of the policy is accounted for by the overcharges (plus interest earned) in the early policy years.