Life & Health Insurance CH 4

Loading consists of what four main items?

1. Acquisition costs 2. General overhead loanding 3. Loading for contingency funds 4. Immediate Payment of Claims

Why is expense loading added to net premium? (3)

1. Cover all expenses and contingencies 2. Have funds for expenses when needed 3. Spread cost equitably amont insures

Factors in determining insurance rates:

1. Mortality (life insurance rates) or Morbidity (health insurance rates) 2. Interest 3. Expenses

What 4 sections do most applications for insurance consist of?

1. Part I - General Information: Name, address, date of birth, business address, occupation, SSN, marital status, other insurance owned. 2. Part II - Medical Information: including current physical condition and personal morals (sometimes need to take a medical examination), alcohol and drug use, and high risk hobbies 3. The agent's statement or report - usually contains information relating to the agent's relationship to the proposed insured and general knowledge about insured's financial status, habits, general character, and any other information that may be pertinent. 4. Proper signatures of all parties to the contract

Classifications of Risk (4)

1. Standard Risk 2. Substandard Risk 3. Preferred Risks 4. Declined Risks

Inspection Reports

An independent firm or credit agency, which covers financial and moral information. Usually in regard to applicant's financies, health, character, work, hobbies and other habits when larger amounts of insurance are requested. Based on interviews with applicants associates at home, work, and elsewhere.

Mortality Table

Based on statistics kept by insurance companies of the years or mortality by age, sex and other characteristics

Gnereal Overhead Loading

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

Attending Physician's Statement (APS)

Designed to obtain more specific information about a particular medical problem revealed in the application or during the medical examination.

Policy Owner

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.

Immediate Payment of Claims (in rate making)

It is assumed that all claims are paid at the end of the year. Not literally true, but allowance for loss must be made in expense loading

Premium Components

Mortality - Interest + Expense (acquisition costs, general overhead, contingency fund, immediate payment of death claims)

Loading for contingency funds

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

Net Premium

Premium without expense loading. Premium = mortality - interest

Third Party Ownership

Refers to a situation where the policy is owned by someone other than the insured.

Aids Considerations (in life insurance underwriting)

Sexual orientation cannot be used in the underwriting process or to determine insurability, however applicants may be asked questions relating to their having been diagnosed as having AIDS or ARC if the questions are factual and used to determine the existence of the condition. Insurers may require that applicants take the test, at the insurer's expense.

HIPAA Disclosures

The Health Insurance Portability and Accountability Act - imposes specific requrements on health care procides with respect to the disclosure of insureds' health and medical ifnormation or protected health information.

Gross Annual Premium

The amount the policy owner actually pays for the policy, equals the mortality risk discounted for interest, plus expenses. Gross premium = mortality - interest + Expenses

Mortality Rate

The number of deaths per 1,000 people, is taken from the mortality table and is converted into a dollar and cents rate. Simply, the expected number of deaths per 1,000 insureds based on the insured's attained age.

Premium Mode

The premium mode is simply the frequency with with 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.

What is an underwriters job?

To select risks that can be assumed by the insurance company at a reasonable price and to reject other risks. It is to protect the insurance company against something known as adverse selection.

Adverse Selection

When the group of risks insured is more likely that the average group to experience loss. People who perceive they have a higher risk of loss have a greater chance to apply for insurance.

Declined Risks

A risk that an insurer has decided not to insure. They rarely do this, but instead seek to insure for a higher premium, and/or by limiting or excluding certain losses.

What are the sources of information for the underwriter of life insurance? (7)

1. The insurance application 2. Medical exams and history 3. The attending physician's statement 4. Consumer Reports 5. Medical Information Bureau (MIB) 6. A federal credit report 7. An agent report

Preferred Risks

A below average risk of loss. May be insured at a preferred or discounted premium rates due to favorable risk factors. Examples: healthy lifestyle, favorable medical history, or a low-risk occupation.

Acquisition Costs

All costs in connection with putting the policy on the books are charged as incurred in insurance accounting. These costs are proportionately high cmopared with those for ensuing years that they must be ammortized over a period of years. One of highest acquisition costs is producers first year commision. When a policy lapses in the first 2 or 3 years it creates a loss for the insurer because they have not recovered acquisition costs.

Reserves

By law, a portion of every premium must be set adde as a reserve against the future claim under the policy as well as other contractual obligations, such as cash surrender and nonforfeiture values.

Investigative Consumer Report

Includes information on a consumer's character, general reputation, personal habits, and mode of living that is obtained through investigation. May not be made unless consumer is clearly and accurately told about the report in writing.

Beneficiary

Individual or individuals who the policy owner has named to receive the benefits of the policy.

Aggregate Claim Amount

Primary element in calculating health insurance rates. Claim Frequency Rate x Average Dollar Amount per claim = Aggregate Claim

Standard Risks

Reflect average exposures and fall into a normal range. These risks can be insured for standard rates and premiums.

Surplus

The extend to which an insurer's assets exceed its liabilities. This is where policy dividends are paid out of.

Applicant

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

Level Premium Funding Method

The insurance plan (used by all regular life insurance companies) under which, instead of annually increasing premium that reflects the increasing chance of death, an equivalent level premium is paid. Reserves that accumulate from more than adequate premiums paid in the early years supplement inadequate premiums in later years.

Morbidity

The likelihood that a person will suffer an accident, contract a disease, or otherwise requrie medical care.

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 be classified accordingly.

Medican Information Bureau

A non-profit trade association that maintains the 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.

Substandard Risk

Reflect an above average risk of loss (due to health, occupation, habits...), but are still within an acceptable range. Use a rating technique to obtain a higher premium for these risks.

Insured

The individual whose life is covered by the policy