Unit 4- Underwriting Basics

Medical Information Bureau (MIB)

Non-profit trade association that maintains medical information on applicants for life and health insurance. Underwriters often ask for reports from the MIB.

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)

Simplified issue

life insurance that requires no medical exam and asks only basic medical questions

Net Premium

the mortality risk discounted for interest w/ out any expense adjustment (net premium= mortality - interest)

Net Premium

the premium w/out expense loading

Required signatures

Applicant, the proposed insured (if different from the applicant), and the agent.

National Do Not Call Registry

A list of phone numbers from consumers who have indicated their preference to limit the number of telemarketing calls they get.

Third party ownership

A situation where the policy is owned by someone other than the insured. Ex: when a corporation applies for insurance on the life of a key employee (in this case, the corporation is the applicant & policy owner & beneficiary but the key employee is the insured)

Loading consists of 4 main items:

Acquisition costs, general overhead loading, loading for contingency funds, and immediate payment of claims

Field Underwriting

Agents act as field underwriters (i.e. completing the application w/ the applicant, getting required signatures, explaining disclosures, collecting initial premium/issuing a receipt, completing agent's report, & delivering and explaining the policy).

Underwriting (as a job)

An underwriter's job is to select risks that can be assumed by the insurance company at a reasonable price and to reject other risks. Part of their job is to protect the insurance company against ADVERSE SELECTION (goal is to get a profitable distribution of exposures and where avg. losses are at a normal range)

Interest

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

Reserves

By law, a portion of every premium must be set aside as reserve against a 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. Theoretically, is is the amount (together w/ the interest to be earned and future premiums to be paid) that will exactly equal all of the company's contractual obligations.

Aggregate Claim Amount

Claim frequency X Avg. Dollar Amount per Claim (is the primary element in calculating health insurance rates)

General overhead loading

Clerical salaries, furniture, fixtures, rent, etc.

Expense loading

Covers all operating expenses and contingencies, have funds for expenses when needed, and is spread cost equitably among insureds.

Adverse Selection

Exists when a group of risks insured is more likely than the average group to experience loss. This exists bc people who are sick tend to apply for insurance more.

Agent's Statement

Generally includes info regarding the agent's relationship to the proposed insured and general info of their knowledge of their financial status, habits, etc. and other info that is pertinent to the insurer.

Claim frequency rate

Help insures see how much it will cost when claims happen- how frequently claims happen among a particular population as well as the avg. dollar amount per claim

Producer role example

If an applicant is rated or declined in an insurance policy, the reasons for this decision must be explained to the applicant by the PRODUCER.

Investigative Consumer Reports

Includes information on a consumer's character, general reputation, personal habits, and mode of living that is obtained through an investigation (i.e. interviews w/ associates, friends, neighbors, etc.). These reports cannot be made unless the consumer is clearly told about the report in writing.

Insured

Individual whose life is covered by the policy

3 Factors that Determine Rates

Mortality/morbidity, interest, & expenses

Underwriting (as a process)

Need to review the background information and medical history of applicant and lets the insurance company know if they should accept or reject them for coverage and whether they will charge standard or modified premium rates.

Parts of an Application

Part 1- general info, Part 2- medical info, the agent's statement or report, & proper signatures of all parties to the contract

Immediate payment of claims

Refers to the allowance that occurs when loss in expense loading happens because people can't pay all at once at the end of the year and must pay throughout the year

Preferred Risks

Reflect a below average risk of loss and can be insured at preferred/discounted premium rates

Substandard Risks

Reflect an above average risk of loss but are still w/in an acceptable range. The underwriter must use some rating technique in order to obtain a relatively higher premium for these risks

Standard Risks

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

Classification of Risks

Standard, Substandard, Preferred, and Declined

Mortality table

Table based on statistics kept by insurance companies over the years on mortality by age, sex, etc. help them come up w/ precise predictions. (Morality- interest + expense)

Surplus

The extent to which an insurer's assists exceed its liabilities. When this happens, policy dividends are paid out from this surplus back to the policy owners.

Premium mode

The frequency with which a policy premium will be paid (most common premium modes for life 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 (bc the insurance company has to offset the interest they would have earned had the insured paid it all at once)

Morbidity

The likelihood that a person will suffer an accident, contract a disease, or otherwise require medical care (e.g. older people are more likely to require medical care & construction workers are more likely to suffer an accident). Morbidity factors matter to HEALTH insurance premiums (NOT LIFE INSURANCE).

Mortality Rate

The number of deaths per 1,000 people and is taken from the mortality table and is converted into a dollar and cents rate. Most important factor for determining life insurance rates.

Declined Risks

Those that an insurer has decided not to insure and declines the application for insurance (however, insurer's rarely do this and instead just seek higher premiums or limiting/excluding certain losses)

Attending Physician's Statement (APS)

Underwriter's can request these in addition to a medical examination from the proposed insured's doctor. Usually the APS is designed to obtain more specific info about a particular medical problem revealed in the application or during the examination.

Acquisition costs

all costs in connection w/ putting the policy on the books and are usually so high that they must be amortized over a period of years. One of the highest acquisitions costs is the producer's first year commission

Loss ratio

determined by dividing losses by total premiums received. Loss ratios are often calculated by acct, by line of insurance, by book of business (all accounts placed by each producer/agency), and for all business written by an insurer. This info helps make decisions whether to renew accounts, contracts, and if they should tighten underwriting standards. Loss ratio= losses/premiums ex: loss ratio= $3 mil/$10 mil= 30% loss ratio

Expense ratio

determined by diving an insurer's operating expenses (including commissions paid) by total premiums. When the combined loss and expense ratio is 100%, the insurer breaks even. If it exceeds 100%, an underwriting loss has occurred and if it is less, then an underwriting profit/gain has occurred. Expense ratio= operating expenses/premiums

applicant

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

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). Usually, but not always the applicant as well.

Beneficiary

the individual(s) who the policy owner has named to receive the benefits of the policy

Level premium

this concept was devised to solve the problem of increasing premiums (mathematically, the level premiums are equal to the increasing sum of the premiums caused by the increased risk of mortality)

Loading for contingency funds

usually once a premium is set it cannot be raised, but unforeseen contingencies could make the rate inadequate.