2 - Life/Health Insurance Underwriting

AIDS Considerations

--Applicant's sexual orientation cannot be used in underwriting process or to determine insurability. But specific questions about being diagnosed with AIDS (Acquired Immune Deficiency Syndrome) or ARC (AIDS-related complex) to determine a medical condition can be asked. --Testing can be required with applicant's written consent. Must be informed about purpose of test and that results are reported to insurer. --If positive results, report is sent to Medical Information Bureau (MIB) that individual has abnormal test results. --Information is never revealed and can only be released to persons designated by applicant. --If applicant does not designate a medical provider, state law may require the results to be forwarded to the state's Department of Health. --AIDS tests are paid by the insurer.

Underwriting Sources of Information

--Application - primary source --Medical exams and testing --Attending physician statements (APS) --AIDS testing Medical --Information Bureau --Consumer reports --Investigative reports

Classification of Risk

--Each insurance company has different underwriting guidelines that determine what risk class an individual qualifies for. --Company looks at the applicant's personal medical history, smoker status, height/weight profile, medical exam results, family history, motor vehicle record and any hazardous activities.

Selection Criteria and Unfair Discrimination

--Insurers must not unfairly discriminate between individuals who are in the same risk class. --Use of any of the following is considered unfair discrimination: Race, Religion, National origin, Place of residence (the area where someone lives) --Most states prohibit unfair discrimination against individuals who are blind, or victims of domestic violence.

Medical Examinations and Testing

--Insurers will underwrite some application on a non-medical basis when the death benefit applied for is below a certain level. --Applications evaluated on health information on the application. --Insurer usually requires the proposed insured to take a medical examination for larger death benefit amounts. --Exams can be conducted by a registered nurse, paramedic and some applicants are required to have a doctor's examination with stress testing, scan, EKG's, MRI's etc. --Amount of death benefit determines the type of examination and testing required by the insurer. --Insurer pays for medical exams and tests that are requested during the underwriting process.

Other Errors and Omissions Situations

--Producers are liable for their mistakes, including misstatements and promises of coverage. --They must take special care to follow established procedures when: Taking applications, Explaining coverages, Collecting premiums, Amending policies, Submitting claims

Employee Retirement Income Security Act (ERISA)

--Protects participants in employee benefit plans. Qualified pension plans and group insurance. Reporting and disclosure information for plan participants. --Enacted to protect the interests of participants in employee benefit plans as well as the interests of the participants' beneficiaries. Much of the law deals with qualified pension plans, but some sections also apply to group insurance plans.

U.S. Patriot Act

--Purpose: deter terrorist activity, both globally and in the U.S. in particular --Establishes measures to prevent, detect and prosecute international money laundering and financing of terrorism. --Under the USA PATRIOT ACT, companies that issue permanent life insurance, annuities or other products that have cash value or investment features must adopt procedures and internal controls for recognizing and reporting potential money-laundering activities. --An insurer's anti-money laundering program must be headed by a compliance officer responsible for implementing the program, include ongoing training of appropriate individuals within the company, and be independently tested to assure its effectiveness.

Types of Suspicious Activity Insurers MUST Report (under USA Patriot Act)

--Receipt of any cash payment in excess of $10,000 --Purchase of insurance that is not consistent with the customer's needs --Requests to have refund or surrender proceeds or other benefits paid to a party not clearly related to the purchaser --Greater interest in the early termination features of a product rather than its potential performance --Fictitious identification or reluctance to provide identification; and maximum borrowing against a product's value soon after it is purchased.

Investigative Consumer Reports

--Reports containing information obtained by interviewing individuals who know something about the consumer such as associates, friends and neighbors. --Consumers must be notified and give their consent to having such reports done. --In the insurance industry, investigative consumer reports are also called inspection reports.

Attending Physician's Statement (APS)

--Retrieved from proposed insured's regular doctor. --Gives information on applicant's current condition and medical history with the physician. --Underwriter may also ask for copies of medical records.

Examples of Information that MUST be Distributed (under ERISA)

--Summary plan description to each plan participant and the Department of Labor --Summary of material modifications that details changes in any plan description to each plan participant and the Department of Labor --Annual return or report (Form 5500 or one of its variations) submitted to the IRS --Summary annual report to each plan participant --Any terminal report to the IRS

Consumer Reports

--Used to determine a consumer's eligibility for personal credit (credit report) or insurance or for employment. --They may be issued only to people who have a legitimate business need for the information. --Underwriters use an applicant's credit report to determine if they are reliable when paying their monthly bills. --Issuers count on policyholders to pay their premium to defer the high initial costs to issue a life insurance policy. --It can take several years for certain policies to become profitable for a life insurer.

2 Types of Reciepts

1. Conditional 2. Binding

3 Parts to an Application

1. General Information 2. Health Information 3. Producer's Report

4 Classifications of Insurance Risk

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

ERISA Fiduciary Responsibility

ERISA mandates a very detailed standard for fiduciaries and other parties-in-interest of employee welfare benefit plans, including group insurance plans. This means that anyone with control over plan management or plan assets of any kind must discharge that fiduciary duty solely in the interest of the plan participants and their beneficiaries.

ERISA Reporting and Disclosure

ERISA requires that certain information concerning any employees welfare benefit plan including group insurance plans, be made available to plan participants, their beneficiaries, the Department of Labor and the IRS.

Underwriter's responsibility once the insurer receives the application

Each insurance company has own underwriting guidelines to help underwriter determine if company should accept the risk. Information used to evaluate risk of applicant depends on type of coverage. Factors insurers use to classify risk should be.. --objective, --clearly related to likely cost of providing coverage, --practical to administer, --consistent with applicable law --and designed to protect the long-term viability of the insurer. Application = underwriter's primary source of information.

Part II: Health Information

Height and weight Tobacco usage Drug usage International travel Current medical treatments (details of most recent office visit) Medications being taken Conditions the insured has sought treatment for or been diagnosed with in the past History of disability claims Health conditions prevalent in the insured's family High-risk hobbies Name and address of current physician

Stranger Oriented Life Insurance (STOLI/IOLI)

Life insurance arrangements involve investors who persuade seniors to take out a new life insurance policy, with the investors named as the beneficiary. --Banned in most states. Investors named as beneficiaries. --Investors often loan money to the insured to pay the premiums for a specific period of time. Oftentimes, that is two years based on the life insurance policy's contestability period. After that period, the insured names the investor as beneficiary of the policy. --Seniors generally receive some financial inducement for this arrangement: an upfront payment, a loan or a small continuing interest in the policy death benefit. Most states are banning STOLI transactions because the investor as a beneficiary does not have insurable interest in the insured and it has become a method of fraud targeted at senior citizens.

Medical Information Bureau (MIB)

Non-profit insurance trade association that maintains underwriting information on applicants. --According to the Federal Trade Commission, member MIB companies account for 99% of individual life insurance policies and 80% of health and disability policies issues in the U.S. and Canada. --When member companies discover unfavorable information about an applicant during their underwriting process, they report it to the MIB using codes signifying certain conditions. If applicant applies for insurance elsewhere, other members companies will have access to this information. --The types of information maintained in MIB files include medical history, hazardous jobs or hobbies and poor driving records. --Purpose of MIB is to reduce instances of misrepresentation and fraud. ***Important to Note: --Insurers may not make adverse underwriting decision (such as rejecting the applicant) solely on the basis of information from the MIB. Insurers may only use this information to further their investigation. --Insurers do not represent underwriting decisions to the MIB. This prevents other member insurers to accept or reject an applicant based on what other insurance companies have done. --An applicant must be given written notice that information may be reported to and obtained from the MIB and insurers must get an applicant's written authorization to do so. --Applicants must also be notified that applying for insurance or filing a claim with another company may trigger the release of MIB information.

Fair Credit Reporting Act (FCRA)

Third party information -- notice to applicants REQUIRED -- consumers have rights and can dispute information in files -- penalty: fines (max of $5,000) and/or imprisonment (one year) --Requires consumer reporting agencies to adopt reasonable procedures for exchanging information on credit, personnel, insurance and other subjects in a manner that is fair and equitable to the consumer with respect to the confidentiality, accuracy, relevancy and proper use of this information. --All insurers and their producers must comply with federal FCRA regarding information obtained from a third party concerning the applicant. --Reports on consumers are prohibited unless the consumer is made aware that an investigative consumer report may be made, and that such report may contain information about the person's character, reputation, personal characteristics and lifestyle.

The Application

Used to purchase life insurance asks the applicant for basic information

Producer's Responsibility in Delivering and Servicing the Insurance Policy

When policy is issued, it must be delivered to the policyowner. Can be mailed, but in most companies it is the producer's responsibility to deliver it in person. In some states producers must obtain a receipt from the policyowner acknowledging that the policy was delivered and the date.

Field Underwriter

agent/producer frequently referred to as this name

Declined Risk

an insurer's underwriting guidelines indicate that an applicant is not insurable at any price -- the application or risk is declined

If proposed insured died before a policy is issued...

application continues through the normal underwriting process and one of the following will occur: 1. Deceased insured MEETS company's standard underwriting requirements and a policy would have been issued had they lived then... The policy is in force and the death benefit will be paid to the beneficiary. 2. Insured is found to be UNINSURABLE or a SUBSTANDARD RISK then... No coverage would be in force. The premium that was collected with the application will be returned to the policy owner or beneficiary (in the case of death).

Statement of Good Helath

attests that their health is the same as when they applied for the policy -- required if no premium with application -- if health changed, agent can't deliver policy -- during delivery, the agent/producer must collect the first premium (if not paid at the time of the application)

FCRA Consumer Rights

consumers who feel that information in their fields is inaccurate or incomplete may dispute the information and the reporting agencies may be required to reinvestigate and correct or delete information. --Insurance companies may use consumer reports or investigative consumer reports, to compile additional information regarding the applicant. If applicants feel that the information compiled by the consumer inspection service is inaccurate, they may send a brief statement to the reporting agency with the correct information.

Policy Review

during delivery, the producer will review the policy, riders, exclusions and other details with the policyowner -- producer any questions

"Offer to Buy" Insurance

exists when the first premium is submitted with the life insurance application

Part I: General Information

first part asks for general information or personal data regarding the insured. Name Address Date of birth Gender Social Security number Driver's license number Marital status Income Occupation and business address Type of policy and face amount being applied for Beneficiary Other insurance owned **If applicant is someone other than the insured, the applicant's name and address will also be requested

Classified

groups applicants are sorted into, after being evaluated, according to the level of risk each represents.

HIPAA Disclosures

imposes specific requirements on the disclosure of insureds' health information by medical providers, insurers and producers. --Health information must remain confidential to protect an applicant's privacy. --If any health information will be shared, applicants must be given full notice of: 1. The insurer's information-sharing practices 2. Their right to maintain privacy 3. An opportunity to refuse to have their information released.

Temporary Insurance Agreements

life insurance binders Insurer can either issue a policy or cancel the binder before the end of the stated period.

Standard Risk

mean average health and normal life expectancy and fall into the normal range anticipated by the company when it established its premiums -- these risks can be insured for standard rates

FCRA Notice to Applicant

must be issued to all applicants for life or health insurance coverage -- notice informs the applicant that a report will be ordered concerning their past credit history and any other life or health insurance for which they have previously applied -- agent must leave this notice with the applicant along with the receipt --Notice must be given to consumer no later than three days after a report was requested. --Consumer may make a written request for a complete disclosure of the nature and scope of the investigation underlying the report.

Underwriting

process of evaluating a risk to determine if it is acceptable based on established insurance company guidelines

Required Signatures (app.)

producer's responsibility in completing application 1. Proposed Insured -- must sign if the applicant is not the insured 2. Company Officer -- must sign a corporation owned policy 3. Parent or Legal Guardian -- signs a juvenile policy for the minor

Accuracy (app.)

producer's responsibility in completing application ■ Agents must record correct information for underwriter

Backdating (app.)

producer's responsibility in completing application ■ Application backdated so premium is based on earlier age (of applicant) -- lowers premium ■ Some insurers allow this ■ Most state laws allow life insurance applications to be backdated up to 6 months

Completeness (app.)

producer's responsibility in completing application ■ Incomplete applications cause delay in the underwriting process -- must be returned to the agent for completion ■ Causes applicant to wait longer without needed insurance protection

Changes in the Application (app.)

producer's responsibility in completing application ■ Must be initialed by the applicant

Confidentiality (app.)

producer's responsibility in completing application ■ Personal information obtained from application ■ Must inform applicant all will be confidential ■ Completed applications can only be seen by insurer representatives

Information Practices (app.)

producer's responsibility in completing application ■ Producer must notify applicants about insurer's privacy policy -- relates to the personal information collected and how it will be used

Producer's Report/Statement (app.)

producer's responsibility in completing application ■ Producer records information about proposed insured: producer's relationship to proposed insured, financial status, habits and character ■ Part III of life insurance application ■ Proposed insured does not see report -- not attached to policy when issued

Substandard Risk

represent below than average life expectancy, high-risk life insurance -- risk of loss that is above average and therefore unfavorable to the company -- unfavorable risk factors include poor health, dangerous occupation, or risky habits -- substandard risks are sometimes referred to as being rated up (sometimes shortened to just rated) -- methods of charging a relatively higher rate for substandard risks include adding a flat additional charge, charging applicants the standard premium for a higher attained age, or reducing the benefits provided by the policy

Preferred Risk

represent excellent health -- a risk loss that is below average and therefore favorable to the company -- favorable risk factors include such things as healthy lifestyle, clean medical history, or low-risk occupation -- these risks may be insured at preferred or discounted rates

Binding Receipt

temporary -- not common in life insurance -- effective for 30-60 days even if the applicant is found to be uninsurable **most often used with auto or homeowners insurance and rarely with life insurance

Effective Date of COverage

terms conditional receipt is issued -- substandard and pays additional premium, date of policy issue -- no receipt, policy issue date if premium paid at delivery -- ate of application or date of the medical exam (if required) --If application for insurance is sent to the insurer without the first premium, but it is paid at policy delivery, the effective date of coverage is the date the policy was issued.

If proposed insured is found to be a substandard risk...

the policy that is issued will require substandard/higher premiums because the initial application for insurance was forwarded with a standard premium If the applicant DECLINES the substandard policy and DOES NOT pay the additional premium... --Coverage has never been in effect. If the applicant ACCEPTS the substandard policy and DOES pay the additional premium.... --The effective date of coverage is the date the policy was issued.

FCRA Penalties

violators of FCRA may be subject to fines and imprisonment and may be required to pay any actual damages suffered by a consumer, punitive damages awarded by a court and reasonable attorney's fees -- maximum penalty for obtaining consumer information reports under false pretenses is $5,000, imprisonment for one year, or both

Agent Delivery

will usually get a signed receipt on delivery to the policyowner

Collecting the Premium

■ If no premium submitted with application -- coverage is delayed until premium is paid ■ If insured becomes uninsurable or dies between time when application is submitted and first premium is collected, the policy will pay no benefit

Conditional Receipt

■ Premium paid with application ■ Insurance is effective at date of application or medical exam (effective date). ■ Must be standard or preferred risk -- can be determined after death

Disclosure Notification

■ State laws require that applicants are given advance written notice stating: who authorized to disclose personal information, the kind of information that may be disclosed and reason for collection. ■ Allows insurer to gather and disseminate information as described in the notice

Receipts

■ When first premium is collected at the time of application, the producer must provide the applicant with a receipt ■ Effective date of coverage will depend on the type of receipt issued ■ 2 types of receipts

Producers Responsibilities in Completing the Insurance Application

■ confidentiality ■ accuracy ■ changes in the application ■ completeness ■ backdating ■ required signatures ■ producer's report ■ information practices