Individual Underwriting by the Insurer

Substandard risk classification

An applicant who presents a high risk of loss to the insurer is classified as a substandard risk. An applicant can receive this rating for a number of reasons, including poor health, bad habits, a dangerous job, or a high number of early major illnesses in the family. Applicants with a substandard risk rating pay higher premiums for the amount of coverage issued.

In which of the following areas may a life insurance underwriter discriminate in determining policy eligibility and coverage limits? Physical defects Race Sexual orientation Personal health history

Personal health history State laws permit underwriting discrimination that is based on statistical data that distinguish one applicant's risk from another's, including personal health history.

Selection Criteria and Unfair Discrimination

When reviewing applications and applying underwriting standards, insurance companies are required to use the same selection criteria with all applicants. State laws prohibit discrimination against any individual on the basis of race, creed, religion, gender, sexual orientation, or physical defects (including blindness) when determining eligibility, setting coverage limits, setting deductibles, identifying exclusions, or settling claims. Instead, insurers are expected to establish their selection criteria based on statistical data.

Sources of Underwriting Information

issued as requested and applied for; issued as a rated (substandard) policy; issued with a different amount of coverage; or declined. Underwriters rely on many sources of information in deciding whether to accept, decline, or rate a risk, including: the application the agent's report an attending physician's statement (APS) an inspection, credit, or consumer report the Medical Information Bureau (MIB) report a medical exam (including an electrocardiogram, or EKG; treadmill test; or other examination by a physician) Department of Motor Vehicle (DMV) report Hazardous activity questionnaires (concerning activities related to aviation; SCUBA diving; racing of autos

Application

The application is the first source of information an underwriter reviews. It furnishes crucial information about the applicant and the insured; requested insurance coverage; and insured's health. The application must be signed by the applicant, the insured (if different from the applicant), and usually the producer before being sent to the insurer. The signed application becomes part of the contract between the insurer and the policyowner

Uninsurable/declined risk classification

Applicants with a very high substandard risk rating are declined coverage altogether. Only 2 percent of life insurance applicants are rejected as uninsurable.

Standard risk classification

An applicant with a standard risk rating is one who meets the insurer's guidelines as an acceptable risk. A policy in this category does not require special conditions or higher rates based on the proposed insured's health, habits, job, or family history. Applicants rated as a standard risk pay standard premium rates.

Genetic testing

The Genetic Information Nondiscrimination Act (GINA), which became law in 2008, prohibits U.S. insurance companies and employers from discriminating on the basis of information derived through genetic test, regardless of the source of the test data.

MIB

Another source of underwriting information is the MIB Group, Inc. (MIB). Formerly called the Medical Information Bureau, the MIB is a cooperative data exchange formed by North American insurance life and health insurance companies. Its purpose is to facilitate underwriting and reduce adverse selection by identifying applicants who might have previously applied for a policy. The MIB maintains a database of confidential medical information on applicants for life and health insurance who have been underwritten by a member insurer and found to have an identified medical impairment. A key purpose for the MIB is to help insurers guard against adverse selection by identifying applicants who may "shop around" for insurance without fully disclosing preexisting medical conditions. Member insurers are obligated to report all impairments to the MIB, regardless of whether the insurer accepts, rates, or declines the risk. To help protect the confidential nature of the information, impairments are identified as numeric codes, with no personal details. Insurers do not report their underwriting decision to the MIB. Furthermore, an insurer cannot decline or rate an application based solely on the contents of the MIB report. Instead, the insurer must use other information (e.g., an APS) to justify an adverse underwriting decision. Applicants must grant approval for insurers to access and use MIB information pertaining to them. In fact, the rules regarding insurers' use of the MIB are enforced by the Fair Credit Reporting Act

Privacy and the Gramm-Leach-Bliley Act

The Gramm-Leach-Bliley (GLB) Act of 1999 bars a financial institution from disclosing a consumer's nonpublic personal information to an unaffiliated third party unless it provides consumers with notice and the ability to opt out. It requires that financial institutions provide customers with a privacy notice at the start of the customer relationship and annually thereafter. Also, GLB requires that each federal regulatory agency establish standards by which the financial institutions implement administrative, technical, and physical safeguards. To ensure that privacy policies are followed, a company must successfully communicate its policies to employees and train its staff regarding privacy policies and practices—particularly employees who collect and have access to personal information. Whenever a company makes substantive changes to its policy, all employees should read and sign a copy of the new policy.

Frank, an applicant for life insurance who is a substandard risk, can expect to pay a premium that is best described as which of the following? generally higher premiums than for a standard risk generally lower premiums than for standard risks generally the same premiums as for standard risks, but over a shorter period of time generally the same premiums as for standard risks

generally higher premiums than for a standard risk

Preferred risk classification

An applicant who presents a very low risk of loss to the insurer is classified as a preferred risk. A person typically qualifies as a preferred risk if he or she enjoys excellent health—e.g., the applicant's cholesterol levels, blood pressure, and weight are well within acceptable limits; does not have risky habits—e.g., the applicant does not smoke, drink, or engage in dangerous hobbies; works in a low-risk job; and has no family history of heart disease or cancer at an early age. Applicants with a preferred risk rating usually pay lower-than-standard premiums

Medical exams and lab tests

Medical exams and lab tests may be requested by an insurer based on information found in the application. The need for a medical exam or lab test is typically determined by the type or amount of the proposed insurance; the age of the applicant; or the health of the applicant. While a medical exam is always conducted by a qualified professional person, that person does not have to be a doctor. It can also be done by a registered nurse or paramedic. Insurance companies pay for medical exams or lab tests that they request.

Underwriting methods

Underwriters generally use either the judgment method or the numerical method in conducting the underwriting process. The judgment method was the basis of the risk classification process in the early years of the life insurance industry. Under this underwriting method, clerks reviewed all routine applications. If the proposed insured's application presented no concerns, then the application was approved. Based on the underwriter's judgment, the risk was approved at standard rates, declined, or rated. Some insurers continue to use the judgment method of risk classification. The method seems to work best when the proposed insured presents only a single factor that must be considered. When many adverse factors are present in the classification of a proposed insured, the judgment method is much less effective. Because of this flaw in the judgment method, insurers developed a numerical rating system of underwriting risks, which is used by most insurers today. Under the numerical rating system, weights are assigned to selected factors (typically ten factors) that have the greatest impact on the risk. The proposed insured is evaluated according to each of the selected factors. Then an underwriter assigns numerical debits for those factors that are unfavorable. He or she also assigns numerical credits for those factors that favorably impact mortality. After each of the factors has been considered, the debits are added together and the credits subtracted. The resulting number is added to 100. Usually, if the numerical rating system produces a rating number between 75 and 125, then the proposed insured is considered a standard risk. If the number is higher, the risk is deemed substandard. In extreme cases, the risk is uninsurable.

What happens to Peter's signed application after it has been submitted to the insurer? It becomes part of the contract between the insurer and the policyowner. It becomes the insurer's property and is filed away. It is destroyed. It becomes property of the state.

it becomes part of the contract between the insurer and the policyowner.

Fair Credit Reporting Act

This information obtained by insurers through consumer and credit reports must be held in strict confidence to comply with the Fair Credit Reporting Act (FCRA). The FCRA sets procedures that credit reporting agencies must follow to ensure confidentiality, accuracy of reporting, and proper use of the information. The FCRA also requires businesses (including insurers) that seek a credit report to notify the applicant about the request, usually within three days. The requestor must disclose to the applicant what the report will cover and notify the applicant that he or she may request a summary of what the requestor learned in the credit report. If the applicant requests the summary, it must be provided within five business days of the request. If an insurance company makes an adverse underwriting decision based on information obtained in a credit report, it is obligated by the FCRA to notify the applicant of that fact. It is not required to provide the applicant with a copy of the credit report but is required to report the name, address, and telephone number of the CRA that produced the report. The applicant can request the contents of the report directly from the CRA (not the insurance company) and may contest any inaccurate information contained in the report.

Agent/Producer report

An important appendage to the application is the agent's report (or producer's report). This report is written from the producer's perspective. It includes information that the producer knows about the client that would be useful to the underwriter. For example, the producer might include information about the applicant's personal character, habits, and/or other insurance policies held. If the new policy being applied for is to replace an existing policy, then the producer must provide information about the prior policy. Although the agent report is important to the underwriting process, it does not become a part of the insurance contract.

Risk classifications

Applicants are classified by the risk they represent to the insurer. Every applicant is ultimately assigned a risk classification that determines if they are accepted at standard (or even preferred) premium rates; assigned to one of the various substandard rating classifications; or rejected. The underwriter evaluates all of the information received about the proposed insured and decides whether to accept the risk. To be as fair as possible to all applicants, an underwriter's decision to decline an applicant or to apply a substandard rating is reviewed by another underwriter. More than 90 percent of applications for life insurance historically receive standard or preferred issue.

Investigative consumer report

In addition to the application and an APS, the underwriter may want to view more personal information about the applicant's lifestyle and/or finances. Public records such as motor vehicle reports, bankruptcies, judgments, and criminal records are all available for inspection. Each offers details that help the underwriter to properly evaluate the risk that the proposed insured represents. Insurers may also order an inspection report to help evaluate an applicant's lifestyle, most typically done with applicants seeking very high amounts of life insurance. Inspection reports may also be requested when the underwriter requires more information about the applicant's occupation and personal habits. These details are obtained by qualified inspectors questioning friends, neighbors, co-workers, and others known to the applicant. Credit reports are commonly used when the applicant's finances are a concern. Produced by credit reporting agencies (CRAs), a credit report assesses a consumer's credit worthiness

HIV testing

Insurers are permitted to test for the presence of the human immunodeficiency virus (HIV). Most states regulate the manner in which insurers may use the information obtained with an HIV test. The state law section of this course will explain your state's requirements if they are covered on your state insurance license exam.

Which one of the following best describes the restrictions an insurer must operate under when using information from the Medical Information Bureau (MIB)? Insurers must rate or decline a life insurance risk based on MIB information. Insurers cannot rate or decline a life insurance risk based solely on MIB information. Insurers can rate, but cannot decline, a life insurance risk based solely on MIB information. Insurers cannot rate, but can decline, a life insurance risk based solely on MIB information.

Insurers cannot rate or decline a life insurance risk based solely on MIB information.

Attending physician statement

After reviewing the application and agent's report, the underwriter may feel that more information is needed. For example, the underwriter might want to know more about a past health issue mentioned on the application. In this case, a request for an Attending Physician's Statement (APS) might be made. The APS is completed by the applicant's doctor. When requesting an APS, the underwriter generally asks for specific details about any medical conditions found in the health section of the application.