Underwriting

Speculative Risk

Involves the opportunity for either loss or gain (e.g. gambling). These types of risk are not insurable.

Underwriting

The risk selection and classification process in which an insurance company determines whether or not a particular applicant is insurable, and if so, what premium to charge.

Medical Info and Consumer Reports

Two options for medical reports: 1. The insurer may only request a *paramedical report* which is completed by a paramedic or a registered nurse; and 2. The underwriter may require an *Attending Physician's Statement (APS)* from a medical practitioner who treated the applicant for a prior problem

Medical Information Bureau (MIB)

- MIB is a membership corporation owned by member insurance companies. It is a *nonprofit trade organization* which receives adverse medical info from insurance companies and maintains confidential medical impairment info on individuals. - It provides a way for companies to compare info they have collected with with info that other insurers may have found. - Can only be used as an aid in helping insurers know what areas of impairment they might need to investigate further - An applicant cannot be refused simply because of some adverse information discovered through MIB

Declined Risks

Applicants who are rejected. Examples of reasons for rejection are: 1. no insurable interest 2. potential for loss is so great that it does not meet the definition of insurance 3. Insurance is prohibited by public policy or is illegal

Consumer Reports

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

Preferred Risks

Those individuals who meet certain requirements and qualify for lower premiums than standard risk. These applicants have a superior physical condition, lifestyle, and habits

Valid Insurable Interest

Exists between the policyowner and the insured when the policy is insuring any of the following: 1. Policyowner's own life; 2. The life of a family member (spouse or close blood relative); or 3. The life of a business partner, key employee, or someone who has a financial obligation to the policyowner (such as a debtor or creditor)

Pure Risk

Refers to situations that can only result in a loss or no change. There is no opportunity for financial gain. Pure risk is the only type that insurance companies are willing to accept.

Field Underwriter (Agent)

Responsibilities include: 1. Helping prevent adverse selection; 2. The proper solicitation of applicants; 3. Completing the application; 4. Obtaining the required signatures; 5. Collecting the initial premium and issuing the receipt, if applicable; 6. Delivering the policy

1. Insurable Interest

The possibility of losing money or something of value in the event of a loss. In life insurance, insurable interest must exist between the policyowner and the insured *at the time of application*. However, once the life insurance policy has been issued, the insurer must pay the policy benefit, whether or not an insurable interest exists.

Fair Credit Reporting Act

- Investigative Consumer Report cannot be made unless the consumer is advised in writing about the report within 3 days of the date the report was requested. -Consumer must be advised that they have a right to request additional info about the report, and the insurer or reporting agency has 5 days to provide that extra info - A person who knowingly and willfully obtains info on a consumer from a consumer reporting agency under false pretenses may also be fined and/or imprisoned for up to 2 years. -An individual who *unknowingly* violates the Fair Credit Reporting Act is liable in the amount equal to the loss of the consumer, as well as any reasonable attorney fees incurred -An individual who *willfully* violates this Act enough to constitute a general pattern or business practice will be subject to a penalty of up to $2,500 -If a policy is declined or modified because of information in either a consumer or investigative report, the consumer must be advised and provided with the name and address of the reporting agency. -*the consumer has the right to know what was in the report* -The consumer also has a right to know the identity of anyone who has received a copy of the report during the past year -If the consumer challenges any of the information in the report, the reporting agency is required to reinvestigate and amend the report -If a report is found to be inaccurate and is corrected, the agency must send the corrected info to all parties to which they had reported the inaccurate info within the last 2 years -Information prohibited from being contained in a consumer report if the life insurance policy or credit transaction is for less than $150,000: bankruptcies more than 10 years old, civil suits, records of arrest or convictions of crimes, or any other negative information that is more than 7 years old -negative information includes info regarding a customer's delinquencies, late payments, insolvency, or any other form of default

2. Sources of Underwriting Information

1. Application 2. Agent's Report 3. Investigative Consumer Report (Inspection): underwriter may order an inspection report on the applicant from an investigating firm or credit agency, which covers financial and moral info. 4. Consumer Report 5. Paramedical Report 6. Attending Physician's Statement 7. Medical Information Bureau (MIB) report

Substandard (High Exposure) Risks

Applicants that are not acceptable at standard rates because of physical condition, personal or family history of disease, occupation, or dangerous habits. These policies are also referred to as "rated" because they could be issued with the *premium rated-up*.

Federal Credit Reporting Act

Established procedure that consumer-reporting agencies must follow in order to ensure records are confidential, accurate, relevant, and properly used. Also *protects consumers* against the circulation of inaccurate or obsolete info.

Standard Risks

Persons who, according to a company's underwriting standards, are entitled to insurance protection without extra rating or special restrictions. Standard risks are representative of the majority of people at their age and with similar lifestyles. They are average risk.

Investigative Consumer Report

- General reports of the applicant's finances, character, work, hobbies, and habits. -Must comply with Fair Credit Reporting Act - They *differ* from consumer reports in that the info obtained is gained through an investigation and interviews with associates, friends, and neighbors of the consumer.

3. Risk Classification

- Home Office underwriting department will look at the applicant's past medical history, present physical condition, occupation, habits, and morals. - If the applicant is acceptable, the underwriter must determine the risk or *rating classification* to be used in deciding whether or not the applicant should pay a higher or lower premium. - A prospective insured can be rated at 3 classifications: 1. Standard 2. Substandard 3. Preferred