Chapter: Completing the Application, Underwriting, and Delivering the Policy

Elements of Insurable Risk

1. Due to chance (accidental/not premeditated or intentional) 2. Definite and measurable 3. Status ally predictable (compare person to other risks) 4. Not catastrophic (not so much risk - insurance companies are businesses and need to be profitable as well) 5. Randomly selected/large loss exposure (random/not planned)

Within how many days of requesting an investigative consumer report must an insurer notify the consumer in writing that the report will be obtained?

3 days

Speculative Risk

A chance of loss or gain; not insurable (ex. Gambling in Las Vegas)

Which of the following documents delivered to the policyowner includes information about premium amounts, cash values, surrender values and death benefits for specific policy years?

A policy summary

Pure Risk

A risk that presents the chance of loss but no opportunity for gain (insurable)

Who is a field underwriter?

Agent/Producer

Elements of a Legal Contract

Agreement, consideration, competent parties, legal purpose

Handling Risk

Avoidance (never drive nor learn), Retention (self insuring/shoulder the burden of all risk), Sharing (similar to transferring), Reduction (reduce risk by not smoking or losing weight/ reducing health risk), Transfer (have insurance - transfer risk to insurance company)

When a change needs to be made on the application for insurance, which is the best method for correcting the information?

Complete a new application or ask the applicant to initial the correction on the original application

Hazards

Conditions that increase the probability of an insured loss

Which of the following reports will provide the underwriter with the information about an insurance applicant's credit?

Consumer report Consumer reports include written and/or oral information regarding a consumer's credit, character, reputation, or habits collected by a reporting agency from employment records, credit reports, and other public sources.

An applicant is denied insurance because of information found on a consumer report. Which of the following requires that the insurance company supply the applicant with the name and address of the consumer reporting company?

Fair Credit Reporting Act

Attending Physician's Statement (APS)

Form sent out to physicians that are taking your client. Gives a much clearer picture on the amount of risk that the proposed insured obtains. Greater risk, need to obtain medical information, helps determine likelihood of claims, less expensive than a medical exam.

Buyer's Guide

Generic information about insurance policies and usually provided at the time of application. Includes: Basic information about similar policies & cost comparison for similar policies.

Relationship of Perils to Loss

Hazards (conditions that increase the probability of an insured loss) -> Perils (causes of loss) -> Loss (reduction of value/basis for a claim)-> Insurance (transfer of loss/protection)

Physical Hazard

Individual characteristics that increase the chances of the cause of loss Ex. You have been smoking since 16 years old and putting yourself at more risk to have health problems. This is a physical hazard.

The Medical Information Bureau (MIB) was created to protect...

Insurance companies from adverse selection by high risk persons. The MIB makes information available to underwriters to assist them in the underwriting process.

Law of Large Numbers

Insurance is spreading risk among a large pool of people with similar exposure to loss. The larger the amount of people with similar risk, the more predictable the risks are.

Adverse Selection

Insuring of risks that are more prone to losses than the average risk. Insurers protect themselves against adverse selection by refusing or restricting coverage for bad risks or charging a higher rate. Ex. Insurer could limit that they will not insure for a specific thing or increase premium because of the higher risk presented.

What are the three main instances when insurable interest exists in life insurance?

Insuring your own life, the life of a family member, or the life of a business partners or someone who has a financial obligation to the policyowner

Fraud

Intentional misrepresentation of a material fact, made with intent to deceive; an act of deceit or cheating

Concealment

Intentional withholding of information of a material fact that is crucial in making an underwriting decision.

What report is used to assess risk associated with a health insurance applicant's lifestyle and character?

Investigative consumer report

What type of report provides information about the applicant's hobbies, habits and financial status?

Investigative consumer report

What is a definition of a unilateral contract?

One-sided: only one party makes an enforceable promise

Parts of the Application

Part 1: General Information Part 2: Medical Information Agent's report: more information on the potential insured Required signatures: agent+applicant+owner (if not the applicant) All questions need to be answered and application needs to be completely filled out for a policy to be issued.

What is adverse selection?

People who are more likely to submit insurance claims are seeking insurance more often than preferred risks.

What risk classification would typically qualify for lower premiums?

Preferred risk

What are the three types of risk rating classifications in life insurance?

Preferred risk, standard risk, and substandard risk

Most agents try to collect the initial premium for submission with the application. When an agent collects the initial premium from the applicant, the agent should issue the applicant a...

Premium receipt

If an insurer needs to obtain information about the applicant from investigators, what is the insurer required to do?

Provide the applicant a Disclosure Authorization Notice

What is the main responsibility of a company's underwriting unit?

Risk selection

Process of Issuing a Insurance Policy

Solicitation and sales presentations, underwriting: field and company (out taking the application), premium determination, and policy issue and delivery Agent is involved in every level.

Policy Summary

Specific information about policy being issued. Usually provided prior to or at policy delivery Includes: agent's name & address, insurer's full name, general name of policy, premium, each rider, living benefits and surrender values.

Morale Hazard

State of mind that causes indifference toward loss Ex. A person knows they should not be drinking or driving, but they act reckless because they know they have insurance.

Conditional Receipt

States that coverage will be effective either on the date of application or the date of the medical exam, whichever occurs last, as long as the policy is issued as applied for *Medical exam always tends to come last.

Moral Hazard

Tendencies toward increased risk; related to an individuals ethical or moral code Ex. Did the individual lie on their application. Make sure people are being truthful on their application or else they could be presenting a moral hazard.

What is the purpose of the agent's report during the application process?

The agent's report discusses the agent's personal observations about the proposed insured that may help in the underwriting process.

Peril

The cause of a loss Ex. On a life insurance, the cause of a loss is death.

Utmost Good Faith

The insured is expected to provide accurate information on the application for insurance, and the insurer must clearly and truthfully describe policy features and benefits, and must not conceal pertinent information or mislead the insured. Both parties are expecting honesty from each other.

What is underwriting?

The process of risk selection and classification

Premium Receipt

The type of receipt issued when premiums are collected with the application

How is the information obtained for an investigative consumer report?

Through interviews with the applicant's associates, friends and neighbors

During which stage in the insurance process do insurers evaluate information that identifies adverse selection risks?

Underwriting

What is the name of the process that insurance companies use to determine whether or not an applicant is insurable?

Underwriting

In forming an insurance contract, when does acceptance usually occur?

When the insurer approves a prepaid application

When does an insurance policy go into effect?

When the policy is delivered and the premium is paid

If a policy includes a free-look period of at least 10 days, the Buyer's Guide may be delivered to the applicant no later than...

With the policy.

Material Fact

a fact that would lead to a different underwriting decision had the insurer known about it