5 - Life Underwriting

FIELD UNDERWRITING PROCEDURES

Field underwriting is completed by the agent. Unlike the insurer, the agent has face-to-face contact with the applicant which can aid the insurer in risk selection. As field underwriters, agents help reduce the chance of adverse selection, assure that the application is filled out completely and correctly, collect the initial premium, and deliver the policy.

Substandard

High Risk - Rated Up - Higher Premiums

Preferred

Low Risk - Lower Premiums

Declined

Not Insurable - Potential of Loss to Insurance Company is Too High

Representation

Statements made by applicants that are substantially true to the best of their knowledge, but not warrantied as exact in every detail.

What right does the applicant have when a producer has issued a credit report?

The applicant has the right to receive a copy of the report when an investigative consumer report is used in connection with an insurance application.

Application

The application is the starting point and basic source of information used by the insurance company in the risk selection. Although applications differ from company to company they all have the following same components. Insurable interest must exist between the policyowner and insured at the time when the application is made

Conditional Receipt

The producer issues a conditional receipt to the applicant when the application and premium are collected. The conditional receipt denotes that coverage will be effective once certain conditions are met. If the insurer accepts the coverage as applied for, the coverage will take effect from the date of the application or medical exam, whichever is later.

Policy Summary

provides specific information about the policy purchased, such as the premium and benefits.

Credit Report

An applicant's credit history is sometimes used for underwriting and to determine the likelihood of making premium payments. The Fair Credit Reporting Act requires the applicant be notified in writing if a credit report will be used. The applicant must also be notified if the premium is increased because of a credit rating.

Standard

Average Risk - No Extra Ratings or Restrictions

What are some other duties of field underwriters?

Forwarding the application to the insurer in a timely manner Seeking additional information about the applicant's medical history if requested Notifying the insurer of any suspected misstatements in the application

Medical Report

A medical report is sometimes used for underwriting policies with higher face amounts. If the information in the medical section warrants further investigation into the applicant's medical conditions, the underwriter may need an attending physician statement (APS).

Premiums and Receipts

Agents should make every effort to collect the initial premium with the application. The agent issues the applicant a premium receipt upon collecting the initial premium.

What must the producer provide when given a credit report?

The producer must provide a privacy notice to an applicant if personal information about that applicant is disclosed and is passed along to the insurer or its affiliates.

Backdating

is the process of predating the application a certain number of months to achieve a lower premium. A lower age results in a lower premium. A backdated application results in a backdated policy effective date, if approved by the insurer. Applications usually can only be backdated up to 6 months. This process is also known as "saves age".

Effective Date of Coverage

As explained under conditional receipt, coverage is not effective without collection of the initial premium, approval of the application, and policy issuance and delivery. If the initial premium does not accompany the application, the premium must be collected by the agent. In some cases, the insurer requires the agent to collect a statement of good health from the insured at the time of delivery. If the initial premium is not submitted with the application, the policy effective date is established by insurer. In this case, it could be the date of policy issuance, or the date the policy is delivered to the applicant, premium collected, and statement of continued good health signed.

Medical Information Bureau (MIB)

The MIB is a nonprofit trade organization which maintains medical information about individuals. Information from the MIB is used by life and health insurers. This helps insurance companies from adverse selection by applicants, as it detects misrepresentations, helps identify fraudulent information, and controls the cost of insurance. Information released from the Medical Information Bureau about a proposed insured may be released to the proposed insured's physician.

The Statement of good health

verifies that the insured has not become ill, injured or disabled during the policy approval process (time between submitting application and delivery of the policy), or did not submit the initial premium with the application.

CLASSIFICATIONS OF RISK

After all necessary information is collected on an applicant the underwriter will classify the applicant based on the degree of risk assumed. Lower risks tend to have lower premiums

Errors

If an agent realizes that an applicant has made an error on an application, the agent must correct the information and have the applicant initial the changes. An incomplete application will be returned to the producer and a new one will have to be filled out.

Fair Credit Reporting Act

Regulates the way credit information is collected and used. Information regarding an individual's credit standing and general reputation is contained in a consumer report. It established procedures for the collection and disclosure of information obtained on consumers through investigation and credit reports.

Signatures

The agent and the applicant are required to sign the application. If the applicant is someone other than the proposed insured, except for a minor child, the proposed insured must also sign the application. This is considered third-party ownership.

PURPOSE OF UNDERWRITING

Underwriting is the process used by an insurance company to determine whether or not an applicant is insurable and if so, how much to charge for premiums. The underwriter will utilize several different types of information in determining the insurability of the individual. This is called risk classification. Material facts can affect an applicant being accepted or rejected.

Upon policy delivery, what must an agent deliver to the policyowner?

Upon policy delivery, agents must deliver the life insurance buyer's guide and policy summary to the applicant. A life insurance producer may also be required to obtain a signature on a statement of good health at the time of policy delivery.

Special Questionnaires

are used for applicants involved in special circumstances, such as aviation, military service, or hazardous occupations or hobbies. The questionnaire provides details on how much of the applicant's time is spent in these activities.

Personal delivery

of the policy is a good practice as it allows the producer to explain the coverage to the insured (such as the riders, provisions, and options). Personally delivering also builds trust and reinforces the need for the coverage. All of the following acts can be considered means of delivery: mailing policy to the agent; mailing the policy to applicant; and the agent personally delivering policy

What are the parts of an Application?

Part I - General Information - Age, DOB, Sex, Address, Marital Status, Occupation Part II - Medical Information - Health History Part III - Agent's Report - Agent's personal observations of the applicant. Includes the applicant's financial condition, character, purpose of sale, and how long agent has known the applicant.

Binding Receipt

The binding receipt or the temporary insurance agreement provides coverage from the date of the application regardless of whether the applicant is insurable. Coverage usually lasts for 30 to 60 days, or until the insurer accepts or declines the coverage. Binding receipts are rarely used in life insurance, and are primarily used in auto and homeowners insurance.

Inspection Reports

This report provides information about the applicant's character, lifestyle, and financial stability. Inspection reports are usually only requested for larger coverages because they add expense to the underwriting process.

Warranty

Warranties are statements that are guaranteed to be literally true. A warranty that is not literally true in every detail, even if made in error, is sufficient to render a policy void.

Buyer's Guide

provides general information about the types of life insurance policies available, in language that can be understood by the average person.