Underwriting Basics

National Do Not Call Registry- pertaining to ins-

-If a consumer has established a relationship w/insurer by requesting info or submitting application a business can call for 3 months from the date of the inquiry or application. -if a consumer has established business relations w/ a co. they can call for up to 18months after the consumer's last purchase or delivery, payment, unless the consumer asks them not to call. Violating the Do Not Call Registry comes with an $11,000 fine per incident.

Field Underwriting - responsibilities-

-Making proper solicitations -Ensuring the suitablity of the product being underwritten -completing the application w/ 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 -delivering and explains the policy

National Do Not Call Registry

A list of phone numbers from consumers who have indicated their preference to receive less telemarking calls. This registry is managed and enforced by the Federal Trade Commission (FTC), Federal Communications Commission (FCC) and state officials.This included Ins.

Medical Information Bureau (MIB)

A source of information which may aid the underwriter in determining it is an acceptable risk. It is a non profit trade assoc. that maintains medical info on applicants for life and health ins. If denied coverage due to info provided by MIB the applicant will be an explanation and opportunity to challenge info possibly inaccurate.

Substandard Risk

Above Average Risk of loss , but are still within an acceptable range. The underwriter will use a rating technique to order a relatively higher premium (flat additional charge, rating at a higher age, or adjustment of premium or benefit)

Loading Consists of 4 Main Items:

Acquisitions Costs General Overhead Loading Loading for contingency funds Immediate Payment of Claims

Expense Loading

Added to net premium. Covers: Expenses and contingencies Funds for expenses when needed Spread cost equitably amount insureds

Standard Risks

Average exposures and fall in to a normal range. Can be insured for standard rates and premiums

Attending Physicians Statement (APS)

Can be requested as a result of medical problems revealed on application

Changes in the Application

Changes made after completed must be initialed by applicant. Sometimes the Agent must initial as well.

General Overhead Loading

Clerical salaries, furniture, fixtures, rent, management slurries, and so forth

Level Premium

Concept divided to solve the problem of increasing premiums. Level Premiums = Paying more than necessary in the early years + interest and Paying less than necessary in the later years.

Acquisitions Costs

Costs connected w/ putting policy on the books. High to begin with but amortized over the period of years. High acquisition cost is producers first year commission for this reason a policy that lapses in the first 1-2 years is a loss for ins co. Has not recoup money.

Loss Ratios

Determined by dividing losses by total premiums received. Losses /Premiums = Loss Ratio

Expense Ratio

Dividing insurer's operating expenses(including commissions paid) by total Premiums Operating expenses/Premiums = Expense Ratio

Required Signatures

Include: -Applicant -Proposed Insured (if different from applicant) -Agent soliciting the ins. -*Corp (one of more of partners/officers must sign) -*Minor (guardian) -Agents Report must be completed and signed by the agent only. -The Fair Credit Reporting Act Notice of -----Disclosure (Notice to applicant) Completed and signed.

Investigative Consumer Report

Includes information on a consumer's character, general rep, personal habits and mode of living obtained through investigation. Report may not be produced w/o consumer clearly being made aware.

Sources of Underwriting information (7 sources)

Ins application; medical exams and history; attending physicians statement; consumer reports (general or investigative); Medical information bureau (MIB); Federal credit report; agent report

Interest

Insurance companies invest premiums received to earn money and help lower rates. Premiums paid at beginning and claims paid at the end. Question becomes how much should be charged at the beginning to, assuming the given rate of interest, to have enough money at the end for claims.

Declined Risk

Insurer decided not to ensure. Rarely happens

Selection Criteria and Unfair Discrimination

Insurers can not impose underwriting criteria that unfairly discriminates among members of the same or similar actuarial class.

HIPAA Disclosures (Health Ins. Portability and Account ability Act

Insures and Producers, much like healthcare providers, Must preserve patient confidentiality and protect information. If information is disclosed, it must midigate the harm to patients. When examining application for underwriting all medical ins must remain confidential. The applicant must be given full notice of the insurer's practices w/ respect to treatment of info, applicants rights to privacy and to refuse dissemination of info

Underwriter's Job

Is to select risks that can be assumed by the ins co at a reasonable price and reject other risks. Part of the underwriters job is to protect the ins co from "adverse selection". the goal is to achieve profitable distribution of exposures.

Incomplete Applications

It is the agents responsibility to assure application is complete. If sent to underwriting it will be returned causing a delay. If ins co accepts incomplete application they waive their right to that information. they can not deny a claim based on missing information.

Determining Premiums or Rating Considerations (3 factors)

Mortality (life) or Morbidity (health) Interest Expenses

Mortality Rate - Premium components

Mortality - Interest + Expense Acquisition Costs General Overhead Contingency Fund Immediate Payment of Death Claims

Net Premium

Mortality Risk Discounted for Interest Premium without expense load ***Mortality Risk - Interest ***

Loading for Contingency Funds

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

Aggregate Claim amount

Primary element in calculating health ins rates. It is claim frequency rate x average dollar amount be claim.

Mortality

Records kept by ins co. have resulted in a mortality table. The Mortality Rate is defined as deaths per 1,000pp. taken from the mortality table and converted into dollars and cents rate. "the charge for the expected number of deaths per 1,00 insured based on the insured's attained age"

Third party ownership

Refers to a situation where the policy is owned by someone other than the insured. ex a corp may apply for life on a key employee. In this case the corp is the applicant and policy owner the employee is the insured. corp would be beneficiary

Preferred Risks

Reflects a Below average risk of loss. These risks can be insured at preferred or discounted premiums due to good risk factors

Expenses

Since cost of mortality is calculated (discounting for interest) there is enough money to pay claims but no operating money. Premium without expense load is called Net Premium

Classifciations of Risk - 3 Classifications (PSSD)

Standard Risk Substandard Risk Preferred Risks Declined Risks

Adverse Selection

Tendency for poor risks to seek and be covered by ins more often than average risks

Gross Annual Premium

The amount the policy owner actually pays for the policy. Gross Annual Premium = ***Mortality Risk - Interest + Expense***

Premium Mode

The frequency in which a policy will be paid. The most common premium modes for life ins. are annual, semi annual, quarterly and monthly. More payments cause for an increase in premium as the ins co does not receive as much in advance plus higher administrative fees.

Underwriting

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

After Prospect Agrees to Buy: (3 functions)

The winder writing process begins, The application will be submitted and policy issued or declined, Producer will deliver the policy to policyowner.

Agents Statement

This includes general information regarding the agents relationship to the applicant and general finalancials, habits, character or other info pertaining to the risk being assumed by the insurer. Signature from agent and applicant and insured(if different) are required.

Inspection Reports

Underwriting orders this from an independent investigation firm or credit agency, which covers Financial and Moral habits. The amount of coverage being applied for dictates the how detailed the report is. Info is based interviews w/ applicants associates at home, work and elsewhere.

Medical Examinations and Testing

Usually required when high amounts of ins are being purchased, in which case the medical portion of will be completed by the doctor as part of the exam. Ins co pays for the expense is it their requirement.

Reverses

by law a portion of every premium must be set aside as a reserve against future claims under the policy, other contractual obligations(cash surrender, nonforfeiture value)

Loss & Expense Ratio combined =

combined = 100% = break even combined = >100% = loss for underwriting combined =<100% = gain/profit for underwriting

Adverse selection

exists when the group of risks insured is more likely than the average group to experience loss.

The application (4 parts)

important as it is usually attached and made a part of the contract. Consists generally of : Part1 general information; Part2 Medical information; the agents statement or report; the proper signature of all parties to the contract

Aids considerations

in general ins applications elicit information to determine sexual preference or lifestyles. Sexual orientation cannot be used in underwriting process. Applicants can be asked factual q's relating to AIDS or ARC (aids related complex) to determine existence of condition. applicants may be required to take test at own expense. if positive will be reported to MIB "abnormal blood test" but not speficially AIDS antibodies.

Part 1 General Information

includes general or personal data of the insured: name address, DOB, business address and occupation, SS#, Maritial status, other ins. owned

Underwriting Life and health ins pol.

includes reviewing background info and medical history of applicant. This determines acceptance or denial and standard or modified premium rates.

Applicant

individual who fills out the application and applies for insurance.

Policyowner

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

Insured

is the individual whose life is covered by the policy

Beneficiary

is the individual(s) who the policy owner has named to receive the benefits of the policy

Immediate Payments of Claims

it is assumed that all claims are paid at the end of the year, this is not true. Relying of the law of lg numbers, it is safe to assume claims will be spread thought the year. Allowance must be made for this loss in expense loading.

Part 2 Medical Information

medical history of insured including: current physical condition, personal morals. If the ins. applied for qualifies as non medical (no physical exam req.) the producer and the insured will complete part 2. If required part 2 will be completed at the medical exam. Also req current medical health , any treatments, sickness, or medication, name of physician and address. Usually includes drug and alcohol q's . Acovations and high risk hobbies and prolonged foreign trips.

Moridity

used in health ins. which is a much more complex statistic to determine. insurers utilized Claim Frequency( how often claims happen) as well as average dollars amount per claim. These two figures are multiplied to create at the aggregate claim