health insurance underwriting -7

USA Patriot Act

requires insurance companies to establish formal anti-money laundering programs. purpose to detect and deter terrorism.

The Application

source of underwriting, the basic source of insurability information Regardless of what other sources of information the underwriter may draw from, the application is the first source of information to be reviewed and will be evaluated thoroughly. Thus, it is the agent's responsibility to see that an applicant's answers to questions on the application are fully and accurately recorded. There are three basic parts to a typical life insurance application: Part I-General, Part II-Medical, and Part III-Agent's Report.

the insurer's expenses to acquire the policy cannot be recovered in a short period of time. It is possible that home office underwriters will refuse to insure persons who have failed to pay their bills or who appear to be applying for more life and health insurance than they reasonably can afford.

An insurance company can lose money on a policy that is quickly lapsed, because..

Substandard Risk

A substandard risk is one below the insurer's standard or average risk guidelines. An individual can be rated as substandard for any number of reasons: poor health, a dangerous occupation, or attributes and habits that could be hazardous. Some substandard applicants are rejected outright. Others will be accepted for coverage but with an increase in their policy premium.

Part II-Medical

part of the application, focuses on the proposed insured's health and asks a number of questions about the health history. This medical section must be completed in its entirety for every application. Depending on the proposed policy face amount, this section may or may not be all that is required in the way of medical information. The individual to be insured may be required to take a medical exam and/or provide a blood test or urine specimen.

The medical Report

source of underwriting, Quite often, a policy is issued on the basis of the information provided in the application alone. If the application's medical section raises questions specific to a particular medical condition, the underwriter may also request an attending physician's statement (APS) from the physician who has treated the applicant. An insurer's request for an attending physician's report must be accompanied by a copy of the signed authorization. The statement will provide details about the medical condition in question. Medical reports must be completed by a qualified person, but that person does not necessarily have to be a physician. Many companies accept reports that are completed by a paramedic or a registered nurse. When completed, the medical report is forwarded to the insurance company, where it is reviewed by the company's medical director or a designated associate.

Medical Cost Management

Defined as the process of controlling how policyowners utilize their policies. There are four general approaches insurers use for cost management: mandatory second opinions, precertification review, ambulatory surgery, and case management.

Expenses

Every business has expenses that must be paid and the insurance business is no different. Each health insurance policy an insurer issues must carry its proportionate share of the costs for employees' salaries, agents' commissions, utilities, rent or mortgage payments, maintenance costs, supplies, and other administrative expenses.

Most applicants will not remember everything they should about their policies after they have signed the application. This is another reason agents should deliver policies in person. Only by personally delivering a policy does the agent have a timely opportunity to review the contract and its provisions, exclusions, and riders. In fact, some states (and most insurers) insist that policies be delivered in person for this very reason. Explaining the policy and how it meets the policyowner's specific objectives helps avert misunderstandings, policy returns, and potential lapses. Agents sometimes may have a chance to prepare applicants in advance when it appears that policies may be rated as substandard, which normally requires an extra premium.

Explaining the Policy and Ratings to Clients

the prospect that it is permitted to do so under The Fair Credit Reporting Act.

If an insurance company obtains an inspection report on a prospective insured, it must inform..

company rules vary as to the sizes of policies that require a report by an outside agency.

Inspection reports ordinarily are not requested on applicants who apply for smaller policies, although..

Physical Condition

An applicant's present physical condition is of primary importance when evaluating health risks.

lose money

Applicants who have questionable credit ratings can cause an insurance company to

allow their policies to lapse within a short time, perhaps even before a second premium is paid

Applicants with poor credit standings are likely to..

Initial Premium and Receipts

It is generally in the best interests of both the proposed insured and the agent to have the initial premium paid with the application and forwarded to the insurer. For the agent, this will usually help solidify the sale and may accelerate the payment of commissions on the sale. However, if a premium is not paid with the application, the agent should submit the application to the insurance company without the premium. The policy will not become valid until the initial premium is collected. Recall that one of the requirements for a valid contract is consideration. In the case of an insurance contract, the consideration is the first premium payment plus the application. An insurer will not allow an applicant to possess a policy without receipt of the initial premium.

preferred risk classification.

Many insurers reward good risks by assigning them to a...

In some instances, the initial premium will not be paid until the agent delivers the policy. In such cases, common company practice requires that, before leaving the policy, the agent must collect the premium and obtain from the insured a signed statement attesting to the insured's continued good health.The agent then is to submit the premium with the signed statement to the insurance company. Because there can be no contract until the premium is paid, the company has a right to know that the policyowner has remained in reasonably good health from the time the policyowner signed the application until receiving the policy. In other words, the company has the right to know if the policyowner represents the same risk to the company as when the application was first signed.

Obtaining a Statement of Insured's Good Health

risk classification

Once all the information about a given applicant has been reviewed, the underwriter seeks to classify the risk that the applicant poses to the insurer.This evaluation is known

generally receive lower rates than standard risks, reflecting the fact that people in this class have a better-than-standard risk profile

Preferred risks applicants..

► Annual ► Semi-Annual ► Quarterly ► Monthly

Premium Payment Options:

Taxation of Disability Income Insurance

Premiums paid for personal disability income insurance are not deductible by the individual insured, but the disability benefits are tax-free to the recipient • When a group disability income insurance plan is paid for entirely by the employer and benefits are paid directly to individual employees who qualify, the premiums are deductible by the employer. The benefits, in turn, are taxable to the recipient • If an employee contributes to any portion of the premium, the benefit will be received tax-free in proportion to the premium contributed

inspection Reports

The purpose of these reports is to provide a picture of an applicant's general character and reputation, mode of living, finances, and any exposure to abnormal hazards. Investigators or inspectors may interview employees, neighbors, and associates of the applicant, as well as the applicant. When an investigative consumer report is used in connection with an insurance application, the applicant has the right to receive a copy of the report. An insurer's obligation involving the disclosure of an insured's nonpublic information is to give notice,explain, and allow opting out.

reviewing and evaluating information about an applicant and applying what is known of the individual against the insurer's standards and guidelines for insurability and premium rates.

The underwriting process is accomplished by

comprehensive and diligent the underwriting research.

The larger the policy, the more...

Point-of-Service Plans

A point-of-service plan allows the insured to choose either a network or an out-of-network provider at the time care is needed. • With in-network coverage, the insured receives care through a particular network of doctors and hospitals participating in the plan • All care is coordinated by the insured's primary care physician, which includes referrals to specialists • An insured receiving out-of-network care usually pays more of the cost than if it had been in-network (except for emergencies)

The Medical Information Bureau

Another source of underwriting information that specifically focuses on an applicant's medical history is the Medical Information Bureau (MIB). The MIB is a nonprofit central information agency that was established years ago by a number of insurance companies to aid in the underwriting process. The bureau is formed by more than 700 member insurance companies. Its purpose is to serve as a reliable source of medical information concerning applicants and to help disclose cases where an applicant either forgets or conceals pertinent underwriting information, or submits erroneous or misleading medical information with fraudulent intent. The MIB report will also identify life insurance in force with other carriers. The MIB operations help to hold down the cost of life and health insurance for all policyowners through the prevention of misrepresentation and fraud. Information received from the Medical Information Bureau (MIB) about a proposed insured may be released to the proposed insured's physician. This is how the system works. If a company finds that one of its applicants has a physical ailment or impairment listed by the MIB, the company is pledged to report the information to the MIB in the form of a code number. By having this information, home office underwriters will know that a past problem existed should the same applicant later apply for life and health insurance with another member company. The information is available to member companies only and may be used only for underwriting and claims purposes. Information received from the Medical Information Bureau (MIB) about a proposed insured may be released to the proposed insured's physician.

Claims Experience

Before realistic premium rates can be established for health insurance, the insurer must know what can be expected as to the dollar amount of the future claims • The most practical way to estimate the cost of future claims is to rely on claims tables based on past claims experience • Experience tables have been constructed for hospital expenses based on the amounts paid out in the past for the same types of expenses • Experience tables have also been developed for surgical benefits, covering various kinds of surgery based on past experience

Preferred Risk

Companies issue preferred risk policies with reduced premiums with the expectation of better than normal mortality or morbidity experience. Characteristics that contribute to a preferred risk rating include not smoking, weight within an ideal range, and not drinking.

Premium Mode

Health insurance policies are typically paid monthly, quarterly, semi-annually, or annually. Single premium is not used when paying for health insurance policies.

applicant's age, sex, medical and family history (An applicant's medical history may point to the possibility of a recurrence of a certain health condition. Likewise, an applicant's family history may reflect a tendency toward certain medical conditions or health impairments.), and avocations (Certain hobbies an applicant may have (such as skydiving or mountain climbing) may increase his/her risk to the insurer) (Men show a lower rate of disability than women, except at the upper ages.)

Other Risk Factors:

Part I-General

Part of the application asks general questions about the proposed insured, including name, age, address,birth date, sex, income, marital status, and occupation.Details about the requested insurance coverage are also included: ► Type of policy ► Amount of insurance ► Name and relationship of the beneficiary ► Other insurance the proposed insured owns ► Additional insurance applications the insured has pending Other information sought may indicate possible exposure to a hazardous hobby, foreign travel, aviation activity, or military service. Whether the proposed insured smokes is also indicated in Part I.

are usually issued a policy at standard terms and rates

Standard risk applicants...

(those who pose a higher-than-average risk for one or morereasons) are treated differently. The insurer can either: reject the risk, charge a higher premium (called a rating), or attach a rider excluding specified coverages

Substandard risk applicants...

Ambulatory Surgery

The advances in medicine now permit many surgical procedures to be performed on an outpatient basis where once an overnight hospital stay was required. These outpatient procedures are commonly referred to as ambulatory surgery.

Changes in the Application

The application for insurance must be completed accurately, honestly, and thoroughly, and it must be signed by the insured and witnessed. When an applicant makes a mistake in the information given to an agent in completing the application, the applicant can have the agent correct the information, but the applicant must initial the correction. If the company discovers a mistake, it usually returns the application to the agent. The agent then corrects the mistake with the applicant and has the applicant initial the change.

Secondary Premium Factors

The benefits provided under the policy • Past claims experience • The age and sex of the insured • The insured's occupation and hobbies

Policy Design

The design or structure of a policy and its provisions can have an impact on an insurer's cost containment efforts. • A higher deductible will help limit claims and contain costs • Coinsurance is another important means of sharing the cost of medical care between the insured and the insurer • Shortened benefit periods can also prove beneficial from a cost containment standpoint

Moral Hazards

The habits or lifestyles of applicants also can flash warning signals that there may be additional risk for the insurer. Personalities and attitudes may draw attention in the underwriting process. (Excessive drinking and the use of drugs) Applicants who are seen as accident prone or potential malingerers (feigning a continuing disability in order to collect benefits) likewise might be heavy risks, particularly those applying for disability income insurance • Other signals of high moral hazard can be a poor credit rating or dishonest business practices

Conditional Receipts

The most common type of premium receipt. this indicates that certain conditions must be met in order for the insurance coverage to go into effect. provides that when the applicant pays the initial premium, coverage is effective on the condition that the applicant proves to be insurable either on the date the application was signed or the date of the medical exam.If the applicant proves to be uninsurable as of the date of application or of the medical exam, no coverage takes effect and the premium is refunded.

Benefits

The number and kinds of benefits provided by a policy affect the premium rate The greater the benefits, the higher the premium. To state it another way, the greater the risk to the company, the higher the premium.

as a preferred risk, a standard risk, a substandard risk, or an uninsurable risk.

There are four ways to classify the applicant and their request for health coverage:

Community Rating

This concept requires health insurance providers to offer health insurance policies within a given geographical area at the same price to all individual or group plans without medical underwriting, regardless of their health status.

Precertification Review

To control hospital claims and prevent unnecessary medical costs, many policies today require policy owners to obtain approval from the insurer before entering a hospital for elective surgeries • A pre-hospitalization authorization program (pre-certification) determines whether the requested treatment is medically necessary • In an emergency situation, hospital pre-admission certification typically requires notification be given after the patient is admitted to the hospital • Pre-admission, pre-hospitalization, and pre-certification are all common names used for this particular type of managed care • Pre-admission testing usually involves evaluating an individual's overall health prior to being hospitalized for surgery

the size of the requested policy and the risk profile developed after an initial review of the application

Underwriters have several sources of underwriting information available to help them develop a risk profile of an applicant. The number of sources checked usually depends on several factors, most notably..

Morbidity

Whereas mortality rates show the average number of persons within a larger group of people who can be expected to die within a given year at a given age, morbidity rates show the expected incidence of sickness or disability within a given group during a given period of time.

Proper Solicitation

an agent's solicitation and prospecting efforts should focus on cases that fall within the insurer's underwriting guidelines and represent profitable business to the insurer. At the same time, the agent has a responsibility to the insurance-buying public to observe the highest professional standards when conducting insurance business. As in many states, an agent is required to deliver to the applicant a Buyer's Guide and a Policy Summary. These documents are usually delivered before the agent accepts the applicant's initial premium. Typically, the buyer's guide is a generic publication that explains life and health insurance in a way that average consumers can understand. It speaks of the concept in general terms and does not address the specific product or policy being considered. The policy summary addresses the specific product being presented for sale. It identifies the agent, the insurer, the policy, and each rider. It includes information about premiums, dividends, benefit amounts, and insurance cost indexes of the specific policy being considered.

Applicant Ratings

an applicant represents a risk so great that the applicant is considered uninsurable, and the application will be rejected. However, the majority of insurance applicants fall within an insurer's underwriting guidelines and accordingly will be classified as a preferred risk, standard risk, or substandard risk.

Insurable Interest

exists if the applicant is in a position to suffer a loss should the insured incur medical expenses or be unable to work due to a disability, prerequisite for issuing a health insurance policy

Interest

interest is a major element in establishing health insurance premiums. A large portion of every premium received is invested to earn interest. The interest earnings reduce the premium amount that otherwise would be required from policyowners.

Constructive Delivery

is accomplished technically if the insurance company intentionally relinquishes all control over the policy and turns it over to someone acting for the policyowner, including the company's own agent. Mailing the policy to the agent for unconditional delivery to the policyowner also constitutes constructive delivery, even if the agent never personally delivers the policy. However, if the company instructs the agent not to deliver the policy unless the applicant is in good health, there is no constructive delivery.

Standard Risk

is the term used for individuals who fit the insurer's guidelines for policy issue without special restrictions or additional rating. These individuals meet the same conditions as the tabular risks on which the insurer's premium rates are based.

Special Questionnaires The most common of these is the aviation questionnaire required of any applicant who spends a significant amount of time flying.

may be required for underwriting purposes to provide more detailed information related to aviation or avocation, foreign residence, finances, military service, or occupation.

Occupation

occupations involving heavy machinery, strong chemicals, or high electrical voltage, for example, represent a high degree of risk for the insurer. According to the change of occupation provision, if the insured changes to a less hazardous job, the insurer will return any excess unearned premium. However, if the change is to a more hazardous occupation, the benefits are reduced proportionately and the premium remains the same

Part lll-Agent's Report

part of the application, is often called the agent's report. This is where the agent reports personal observations about the proposed insured. Because the agent represents the interests of the insurance company, the agent is expected to complete this part of the application fully and truthfully. the agent provides additional information about the applicant's financial condition and character, the background and purpose of the sale, and how long the agent has known the applicant. The agent's report also usually asks if the proposed insurance will replace an existing policy. If the answer is "yes," most states demand that certain procedures be followed to protect the rights of consumers when policy replacement is involved.

Binding Receipts

receipt, coverage is guaranteed until the insurer formally rejects the application. Even if the proposed insured is ultimately found to be uninsurable, coverage is still guaranteed until rejection of the application. Since the underwriting process can often take several weeks or longer, this can place the company at considerable risk. these are often reserved only for a company's most experienced agents. typically stipulates a maximum amount that would be payable during the special protection period. Once issued, the insurance contract is sent to the sales agent for delivery to the applicant

Premium Mode

refers to the policy feature that permits the policyowner to select the timing of premium payments. Insurance policy rates are based on the assumption that the premium will be paid annually atthe beginning of the policy year and that the company will have the premium to invest (interest factor)for a full year. If the policyowner chooses to pay the premium more than once per year (example monthly, quarterly, semi- annually) there normally will be an additional charge because the company will have additional charges in billing and collecting the premium payments. Sometimes referred to as the Mode of Premium provision.

Inspection Reports Insurance companies normally obtain inspection reports from national investigative agencies or firms.

usually are obtained by insurance companies on applicants who apply for large amounts of life and health insurance. These reports contain information about prospective insureds, which is reviewed to determine their insurability

Case Management

• Case management involves a specialist within the insurance company, such as a registered nurse, who reviews a potentially large claim as it develops to discuss treatment alternatives with the insured • The purpose of case management is to let the insurer take an active role in the management of what could potentially become a very expensive claim

Mandatory Second Opinions

• In an effort to reduce unnecessary surgical operations, many health policies today contain a provision requiring the insured to obtain a second opinion before receiving elective surgery • Under the mandatory second surgical opinion provision, an insured typically will pay more out- of-pocket expenses for surgeries for which only one opinion was obtained • The mandatory second surgical option provision can help contain the cost of a group medical plan

Taxation of Medical Expense Insurance

• Incurred medical expenses that are reimbursed by insurance may not be deducted from an individual's federal income tax • Incurred medical expenses that are not reimbursed by insurance may only be deducted to the extent they exceed 7.5% of the insured's adjusted gross income • Benefits received by an insured under a medical expense policy are not included in his gross income because they are paid to offset losses he incurred • For self-employed individuals, 100% of their health insurance premium is tax deductible