Chapter 4 Underwriting Basics

Immediate payment of claims

In a rate making, it is assumed that all claims are paid at the end of the year.

Probationary period

The period between start date and eligibility date.

Reserves

a portion of every premium 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. Reserves are accounting measurements of an insurer's liabilities to its policyholders.

Expense loading

added to the net premium to: • Cover all expenses and contingencies • Have funds for expenses when needed • Spread cost equitably among insureds.

Adverse selection

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

Mortality table

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

Declined risk

is one that an insurer has decided not to insure

Mortality rate

is the number of deaths per 1,000 people and is taken from the mortality table and is converted into a dollar and cents rate.

loss ratios

losses/premiums

Substandard risk

reflects 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, tabular ratings, graded death benefit, or other adjustment of premium or benefits).

Standard Risk

reflects average exposures and fall into normal range and can be insured for standard rates and premiums.

Required signatures

• Applicant • The proposed insured (if different from the applicant) • Agent soliciting the insurance • If corporation is the policy owner, one or more of the partners or officers

List Parts of the Application

• Part I - General Information • Part II - Medical Information • The agent's statement or report • Proper signatures of all parties to the contract

List Sources of Underwriting Information

• The insurance application • Medical exams and history • The attending physician's statement • Consumer reports • Medical Information Bureau (MIB) • A federal credit report and an agent report

Preferred risks

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

Gross annual premium

the amount the policy owner actually pays for the policy, equals the mortality risk discounted for interest, plus expenses or mortality - interest + expenses

Changes in the application must be initialed by

the applicant and sometimes the agent

Premium mode

the frequency with which a policy premium will be paid.

Policy owner

the individual who pays the premium, accepts the policy when it is delivered by the agent, and has the special owner's rights. Could also be the applicant.

Net Premium

the premium without expense loading

Aggregate claim amount

the primary element in calculating health insurance rates is a combination of the claim frequency rate and the average dollar amount per claim. Net premium: is the premium without expense loading.

If an applicant is rated or declined an insurance policy, the reasons for this decision will be explained to the applicant by whom?

the producer

The Underwriter's job

to select risks that can be assumed by the insurance company at a reasonable price and to reject other risks. To identify the risks that have a higher probability of loss and to either obtain a higher premium for the risk or to reject the risk.

Third party ownership

when a party other than the insured is the owner of the policy such as a parent, spouse or corporation.

Expense loading consists of four main items:

1. Acquisition costs 2. General overhead loading 3. Loading for contingency funds 4. Immediate payment of claims

Rating of risk or determination of the premium is the final step in the underwriting process. There are three factors used in determining insurance rates:

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

Group Life Insurance

frequently issued to employers, labor unions, trust, or associations to cover employees or members. Generally defined as having at least 10 people covered under one master contract.

Expense ratios

operating expenses/premiums

Third-party ownership

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

Plan sponsor

(employer, union, association, and so forth) is the policyholder responsible for administering the plan and making premium payments to the insurance company. Premiums are based on the experience of the group as a whole. The group receives and holds the policy, not the individual person.

Once the prospect has agreed to purchase the insurance contract, three important functions take place.

1. The underwriting process begins. 2. The application will be submitted, and the policy will be issued (or declined) 3. The producer will deliver the policy to the policy owner.

Acquisition costs

All costs in connection with putting the policy on the books. Usually amortized over a period of years. A policy that lapses during the first two or three years creates a loss for the insurer since it has not yet recovered acquisition costs.

Field Underwriting

As a field underwriter, the agent initiates the process and is responsible for many important tasks including: • 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 • Delivering and explaining the policy.

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.

Robin is a 25-year-old man who drinks occasionally, does not smoke, and has no known health problems. He probably would e classified by an insurer as what type of risk?

standard

Morbidity

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

Net premium

the mortality risk discounted for interest without any expense adjustment or mortality - interest

Applicant

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

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. includes reviewing the background information and medical history of the applicant.