Underwriting Basics

Health Insurance Portability and Account ability Act (HIPAA)

imposes specific requirements on health care providers with respect to the disclosure of insureds' health and medical informa tion or protected health information. Health care providers and insurers must preserve patient confidentiality and protect this information. If this information is inadvertently disclosed, providers must mitigate the harm to patients.

Investigative Consumer Report

includes information on a consumer's character, general reputation, personal habits, and mode of living that is obtained through investigation (i.e., interviews with associates and friends and neighbors of the consumer). Such reports may not be made unless the consumer is clearly and accurately told about the report in writing.

Immediate payment of claims

In rate making, it is assumed that all claims are paid at the end of the year. This is not literally true, of course. Relying on the law of large numbers, it is safe to assume that claims will be spread throughout the year. Allowance must be made for this loss in the expense loading

Mortality Table

The table is based on statistics kept by insurance companies over the years on mortality by age, sex, and other characteristics.

Part I - General Info

This would include such information as name and address, date of birth, business address and occupation, Social Security number, marital status, and other insurance owned. In addition, if the applicant and the insured are not the same person, the applicant's name and address will be included in Part I.

Medical Information Bureau

another source of information which may aid the underwriter in determining whether or not to accept a risk. This is a non-profit trade association that maintains medical information on applicants for life and health insurance

Loss ratio

is determined by dividing losses by total premiums received. They are often calculated by account, by line of insurance, by book of business (all accounts placed by each producer or agency), and for all business written by an insurer.

Level premium

premiums paid by the policyowner are equal to the increasing sum of the premiums caused by the increased risk of mortality

Gross annual premium

= mortality − interest + expenses; the amount the policyowner actually pays for the policy, equals the mortality risk discounted for interest, plus expenses

Net premium

= mortality − interest; the mortality risk discounted for interest, without any expense adjustment

Interest

Because premiums are paid in advance of claims, insurance companies have money to invest. This helps lower the premium

Application parts

General Information , Medical Information , The agent's statement or report , Proper signatures of all parties to the contract

three factors used in determining insurance rates:

Mortality (life insurance rates) or morbidity (health insurance rates) , Interest , Expenses

Loading for Contingency Funds

Once a level premium policy has been issued, the premium can never be increased. However, unforeseen contingencies could make the rate inadequate.

Net Premium

The premium without expense loading

Adverse Selection

exists when the group of risks insured is more likely than the average group to experience loss.

Part II - Medical Info

information regarding the insured's medical history, current physical condition, and personal morals. In addition, this part requires information regarding the current health of the insured by asking for current medical treatment for any sickness or condition and types of medication taken. The name and address of the insured's physician are also required. This part of the application also will include questions regarding alcohol and drug use by the insured. Avocations and high-risk hobbies are also usually reported. Generally, plans for a prolonged trip or stay in a foreign country also are reported

Declined risks

insurer has decided not to insure.

Surplus

insurer's assets exceed its liabilities. This is used to pay policy dividends

Attending Physician's Statement (APS)

is designed to obtain more specific information about a particular medical problem revealed in the application or during the medical examination. Medical examinations, when required by the insurance company, are conducted at the company's expense.

Beneficiary

the individual or individuals who the policyowner has named to receive the benefits of the policy

Acquisition Costs

All costs in connection with putting the policy on the books are charged as incurred in the insurance accounting.

An expense loading is added to the net premium to:

cover all expenses and contingencies; have funds for expenses when needed; and spread cost equitably among insureds.

Inspection Reports

covers financial and moral information. If the amount of insurance applied for is average, the inspector will write a general report in regard to the applicant's finances, health, character, work, hobbies, and other habits. The inspector will make a more detailed report when larger amounts of insurance are requested. This information is based on interviews with the applicant's associates at home (neighbors and friends), at work, and elsewhere.

Insured

the individual whose life is covered by the policy.

General Overhead Loading

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

Expense Ratio

determined by dividing an insurer's operating expenses (including commissions paid) by total premiums.

Required Signatures

include the applicant, the proposed insured (if different from the applicant), and the agent soliciting the insurance. In situations where a corporation is the policyowner, one or more of the partners or officers must sign the application. A minor may not sign for a juvenile policy; the guardian is required to sign for that policy. The agent's report must be completed and signed by the agent only. The Fair Credit Reporting Act Notice of Disclosure ("Notice to the Applicant") is also to be completed with the appropriate signatures.

Agent's responsibilities in underwriting

making proper solicitation; ensuring the suitability of the product being underwritten; completing the application with the applicant; obtaining all proper signatures; explaining the sources of insurability; disclosures at point of sale; collecting the initial premium and issuing a receipt; completing the agent's report; and delivering and explaining the policy.

Third-party Ownership

refers to a situation where the policy is owned by someone other than the insured. For example, in a business situation, a corporation may apply for insurance on the life of a key employee. In this case, the corporation is the applicant and the policyowner, and the key employee is the insured. The corporation would also be the beneficiary

Preferred Risks

reflect a below average risk of loss. These risks may be insured at discounted premium rates due to favorable risk factors (such as healthy lifestyle, favorable medical history, or low-risk occupation)

Standard risks

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

Applicant

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

Changes in the application

Any changes made to an insurance application after it is completed must be initialed by the applicant. Some insurers require that the agent also initial application changes. The reason an insurer would require initialing is to protect itself in the event a dispute arises and the applicant and the agent do not recall the changes that were made

Reserves

By law, a portion of every premium must be set aside as a reserve against the future claim under the policy as well as other contractual obligations, such as cash surrender and nonforfeiture values. Theoretically, this is the amount, together with the interest to be earned and future premiums to be paid, that will exactly equal all of the company's contractual obligations

National do not call registry exceptions

Calls from or on behalf of political organizations, charities, and telephone surveyors are still permitted, as well as calls from companies that have the express written permission of the consumer. Calls are also permitted to consumers with whom the company has established a business relationship

Incomplete Applications

If an insurance company accepts an application that is incomplete, then it waives its right to that information. In the event of a claim, the insurance company cannot deny that claim based on missing information in the application.

National do not call registry - Registered consumers

Telemarketers and sellers are required to search the registry at least once every 31 days and drop from their call lists the phone numbers of consumers who have registered. A consumer who receives a telemarketing call despite being on the registry will be able to file a complaint with the FTC either online or by calling a toll-free number. Violators could be fined up to $11,000 per incident.

National do not call registry

a list of phone numbers from consumers who have indicated their preference to limit the telemarket ing calls they receive. The registry is managed and enforced by the Federal Trade Commission (FTC), the Federal Communications Commission (FCC), and state officials.

Claim Frequency Rate

how frequently claims happen among a particular population

Aggregate Claim

how frequently claims happen among a particular population as well as the average dollar amount per claim. These two figures are multiplied

Substandard risks

reflect an above average risk of loss (due to health, occupation, habits, or some other factor), but are still within an acceptable range. The underwriter must use some rating technique in order to obtain a relatively higher premium for these risks (flat additional charge, rating at a higher age, or other adjustment of premium or benefits).

Premium mode

the frequency with which a policy premium will be paid. The more payments the insured wishes to break the premium into, the higher the total premium will be

Policyowner

the 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.

Underwriter's sources

the insurance application; medical exams and history; the attending physician's statement; consumer reports (general or investigative); Medical Information Bureau (MIB); a federal credit report; and an agent report.

When an applicant is asked to take an AIDS-related test for an in surance application

the insurer must tell the applicant how the test will be used and obtain the applicant's written consent.

Morbidity

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

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

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 then be classified accordingly.

Agent's Statement

this includes information regarding the agent's relationship to the proposed insured and general knowledge about the proposed insured's financial status, habits, general character, and any other information that may be pertinent to the risk being assumed by the insurer.