health insurance underwriting

Premium Mode

The premium mode refers to the frequency of premium payments. If the policy has an annual premium, the insurer can assess an extra charge if premiums are paid quarterly, semiannually, or monthly.

Proposed Insured

The proposed insured is the person whose life is requesting to be insured. Typically, but not always, this is also the applicant.

Rated Policy

(Rating Up): A "rated policy" is the basis for an additional charge to the standard premium because the person insured is classified as a higher than average risk. The above standard rates usually result from impaired health or hazardous occupations.

Policy Term

The policy term is the period of time a policy will remain in existence when premiums are being paid. It can also be described as a single renewal period for renewable policies.

Buyer's Guide

A Buyer's Guide is a pamphlet that describes and compares various forms of life or health insurance. This guide must be provided to a consumer by the producer when the latter is attempting to solicit insurance. A buyer's guide describes the key characteristics of the policy type being purchased. This information helps consumers make an informed decision when purchasing insurance coverage.

Credit Report

A Credit Report is a summary of an insurance applicant's credit history (credit score, debt levels, repayment history, and assumed creditworthiness, etc.), made by an independent organization that has investigated the applicant's credit standing. Credit reports are typically obtained from one of the three major credit bureaus (Experian, Equifax, and TransUnion)

Policy Summary

A Policy Summary summarizes the basic terms of an insurance policy, including the conditions, coverage limitations, and premiums.

Disclosure Form

A disclosure form is a comparison form required by various state regulatory agencies to be given to every policyowner when replacing an existing policy with another.

Uninsurable:

A loss exposure is uninsurable when the risk of covering it is so great that an insurance carrier cannot do so profitably. The applicant is considered uninsurable, and the insurance company will reject the application. An insurer may also reject an application when the level of risk is unknown or cannot be reasonably estimated.

Medical Report

A medical report is sometimes used for underwriting policies. 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).

Medical Report

A medical report may be needed to provide further underwriting information. This report may be based on a recent examination with the applicant's physician or an examination conducted as part of the underwriting process.

Trial Application

A trial application is an application submitted without the initial premium. There is no offer because, by itself, the application is not sufficient consideration to form a contract; the other half, the premium, is missing. In effect, the consumer is using the application to solicit an offer from the insurer.

Adverse Selection:

Adverse Selection is the tendency of a disproportionate number of poor risks to seek or buy insurance or maintain existing insurance in force (i.e., the selection against the insurance company). Sound underwriting reduces adverse selection.

Age Change

Age change is the date halfway between birthdays when the applicant's age changes to the next higher age. Some insurers base insurance policy age on the applicant's nearest birthday; others base it on the insured's last birthday.

Part III of the Application

Agent's Report (Statement) - Agent's personal observations of the applicant. Includes the applicant's financial condition, character, background, purpose of sale, and how long agent has known the applicant. Part III of the application is often called the agent's report. This is where the agent reports personal observations about the proposed insured. Because the agent represents the interests of the insurance company, the agent is expected to complete this part of the application fully and truthfully.

Free-look period

All life insurance policies must include at least a ten-day free-look period in a life insurance contract. This period begins when the producer delivers the insurance policy. If the policy owner decides to return the contract to the insurer during this period, they will receive a full premium refund. Mail order or direct response insurers must include a free-look period of at least thirty days.

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.

Inspection Report

An inspection report is a report that contains general information regarding the health, habits, finances, and reputation of an applicant. This report is developed by a firm that specializes in rendering this type of service.

Outline of Coverage

An outline of coverage describes the basic benefits, conditions, and other terms of an insurance policy without using industry jargon.

Underwriter:

An underwriter is a person who identifies, examines, and classifies the degree of risk represented by a proposed insured to determine whether or not coverage should be provided and, if so, at what rate. An underwriter applies the insurer's standards as their decision-maker in the company's underwriting process.

Avocation:

Avocations are hobbies or non-occupational activities. Some avocations, such as fishing or studying chess, do not require additional underwriting because they do not measurably increase risk. Other activities such as sky diving or mountain climbing could require more scrutiny during the underwriting process in the form of a special questionnaire.

Backdating

Backdating is the practice of making the effective date of a policy earlier than the application date. Backdating is used to make the issue age lower than an applicant's real age in order to get a lower premium. State laws usually limit the length of time an insurer may backdate a policy to six months. Backdating is not allowed in variable contracts due to the nature of the investment.

Binding Receipt (Unconditional Receipt)

Binding Receipts are also known as unconditional receipts. It is one of the types of receipts given by an insurance company upon the completion of an insurance application when the applicant pays the initial premium with the application. Insurance becomes effective on the receipt date and continues for a specified period of time or until the insurer declines the application.

Claims experience

Claims experience is an insured's history of claims or rate of loss. The greater the claims experience, the higher the required premium.

nspection Reports

Companies are allowed to obtain inspection reports under The Fair Credit Reporting Act. The Fair Credit Reporting Act of 1970 (FCRA) regulates the way credit information is collected and used to protect the rights of consumers for whom an inspection or credit report has been requested. It established procedures for the collection and disclosure of information obtained on consumers through investigation and credit reports. If an insurance company requests a credit report, the consumer must be notified in writing. This report provides information about the applicant's character, lifestyle, and financial stability. When an investigative consumer report is used in connection with an insurance application, the applicant has the right to receive a copy of the report.

Constructive Delivery

Constructive delivery occurs when an insurance carrier gives up all control of a policy and releases it for unconditional delivery to someone acting for the policyholder, including the company's own agent

Declined Risk

Declined risk describes an individual whose application for coverage was rejected by an insurance company.

Field underwriting

During this process, the producer determines which risks are desirable and submits those to the underwriting department for approval. The producer provides any required disclosure of information practices to an applicant, such as a notice regarding replacement, a buyer's guide, an outline of coverage, or a policy summary.

Information and Privacy Protection Act

Each insurer must conform with state and federal laws privacy. This act also prohibits insurers from basing their decisions solely on previous adverse underwriting decisions.

Evidence of Insurability

Evidence of Insurability means a statement or proof regarding a person's current health status and history that qualify him for coverage.

Part I of the Application

General Information - Age, DOB, Sex, Address, Marital Status, Occupation, Details about the requested insurance coverage:Type of policyAmount of insuranceName and relationship of the beneficiaryOther insurance the proposed insured owns Other information personal informationTobacco useHazardous hobbyForeign travelAviation activityMilitary service.

Insurable Interest

Insurable interest describes the financial or emotional relationship between two or more parties. Insurable interest exists in health insurance if the applicant is in a position to suffer a loss should the insured incur medical expenses or be unable to work due to a disability.

Community Rating

Insurance carriers generally base community ratings on their overall claim experience and healthcare costs in a geographical area.

Delivery Receipt

Insurance companies require producers to obtain signed delivery receipts as proof of delivery. The delivery receipt is important because it can designate the start of the policy's free-look period.

Conditional Receipt

Insurers issue conditional receipts when agents collect the initial premium with an application. Agents leave signed receipts as proof of payment and temporary guarantees of coverage as long as a specific condition is satisfied. Coverage can conditionally begin on the date specified in the receipt—on the date of application or date of a required medical exam, whichever is later. Coverage commences if the proposed insured demonstrates insurability. If the applicant proves to be uninsurable, no coverage takes effect, and the premium is refunded. Without a valid receipt, no coverage is in force until the policy is issued, delivered, and accepted with the initial premium paid

Attending Physician Statement (APS)

Insurers request an attending physician's statement when underwriters need additional detail regarding a medical condition revealed on an application. Also known as an APS, these reports from the applicant's attending physician may elaborate on a past condition or something that currently impacts the prospective insured's health. Because of the need to respect physician/patient confidentiality, the applicant must sign an authorization, which allows the physician to release information to the insurance company's underwriter.

Interest

Interest represents the income insurance companies earn from investing paid premiums. Premium calculations assume an expected rate of return.

Consumer Report

Investigative Consumer Report): A consumer report or investigative consumer report is a detailed background investigation that may include an interview with coworkers, friends, and neighbors about an applicant's character, reputation, lifestyle, etc. Insurers are allowed to conduct a consumer report to obtain additional information as long there is no invasion of privacy present. A common type of consumer report involves a credit report.

Part II of the Application

Medical Information - Health History Part II focuses on the proposed insured's health and asks a number of questions about the health history. This medical section must be completed in its entirety for every application. Depending on the proposed policy, this section may or may not be all that is required in the way of medical information. The individual to be insured may be required to take a medical exam and/or provide a blood test or urine specimen.

Moral Hazard

Moral hazards are applicant habits or lifestyles that indicate a higher than average level of risk for the insurer. Such habits include excess drinking, recreational drug use, and dishonest business practices

Morbidity

Morbidity describes the level of risk that someone has of suffering a disability—usually within a given year, a given age, and as part of a defined population group.

Warranties

Most State laws specify that the applicant's statements on the application are considered representations and not warranties. A warranty must be absolutely and literally true. Breaching a warranty may be sufficient to void the policy regardless of whether the warranty is material or the breach had contributed to the loss.

Representations

Most State laws specify that the applicant's statements on the application are considered representations and not warranties. Representations need only be substantially accurate to the best of the applicant's knowledge. Generally, a representation is considered fraudulent if it relates to a situation that would be material to the risk and that the applicant made with fraudulent intent.

Preferred Risk

Preferred risk describes an applicant who represents the likelihood of risk lower than that of the standard applicant, typically due to better than average physical condition, occupation, mode of living, and other characteristics compared to other applicants of the same age.

Premium

Premiums are the initial payments and subsequent periodic payments required to keep a policy in force. They represent the relatively small, certain price paid for the right to transfer a potentially large uncertain risk to the insurer. Insurance premiums are always paid in advance.

Replacement

Replacement is a legal activity where a producer convinces a prospective client to lapse or surrender a life or health policy and purchase a new one. Producers must provide a "Notice Regarding Replacement" to the consumer when this activity may occur. The producer must also notify the insurer that a replacement is occurring as well

Reserves

Reserves are funds set aside to pay future claims. Some reserves are required by state statute (Statutory reserves).

Risk Classification

Risk Classification describes the underwriting category into which a risk exposure is placed depending upon the applicant's susceptibility to injury, illness, or death.

Temporary Insurance Agreement

See "Binding Receipt"

Load

See "Expense Factor"

Loading factor

See "Expense Factor."

Mode

See the definition of "Premium Mode."

Rated-up Policy

See the definitions of "Rated Policy" and "Substandard Risk Classification."

Special Class

Special class describes an applicant who cannot qualify for a standard policy but may secure one with a rider waiving the payment for a loss involving certain existing health impairments. The insurer may require the applicant to pay a higher premium or accept a policy other than the one for which he has applied.

Special Questionnaires

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.

Special Questionnaire

Special questionnaires gather more detailed information about a non-medical aspect of the applicant's life—usually about an activity that often entails a greater than average level of risk. The requested information may be about: aviation, an avocation, foreign residence, finances, or one's occupation. The most common of these special questionnaires is the aviation questionnaire.

Standard Risk:

Standard risk describes a person who, according to a company's underwriting standards, is considered an average risk and insurable at standard rates. High-risk or low-risk candidates may qualify for increased or discoun

Substandard Risk (Impaired Risk):

Substandard risk, also known as impaired risk, describes an applicant whose physical condition does not meet the usual minimum standards. If the substandard classification is due to adverse health, the application may be declined or written with a "rated-up" premium. An applicant may be in excellent health but considered substandard due to their activities, hobbies, or avocations (i.e., scuba diving, skydiving, etc.).

Policyholder

The policyholder is the person who can exercise the rights or options conferred by the policy. The policyholder is usually the payor as well.

Fair Credit Reporting Act

The Fair Credit Reporting Act is a federal law passed in 1970 that provides an insurer with the right to receive additional information about insurance applicants. This law permits an insurer to conduct a consumer report on applicants and proposed insureds. An applicant for insurance must be informed of the purpose of the report. When the insurance company declines coverage due to information in the report, the insurer must provide the name and address of the reporting agency so that the applicant can secure a copy of the information in the report.

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, controls the cost of insurance, and helps underwriters evaluate risk. Information received from the Medical Information Bureau (MIB) about a proposed insured may be released to the proposed insured's physician. An insurance company would NOT notify the MIB if an application is declined.

Medical Information Bureau

The Medical Information Bureau is a service organization that collects medical data on life and health insurance applicants for member insurance companies.

Rated-up Premium

The additional amount added to the standard premium to account for the additional risk involved in underwriting a substandard loss exposure.

Agent's report:

The agent's report is also called an agent's statement. The agent's report is where the agent records personal observations about the proposed insured. It is a confidential way for the agent to provide relevant underwriting information to the insurance carrier.

Applicant:

The applicant is the person completing the application to the insurance company for the insurance policy. In most cases, the applicant is also the proposed insured, but this is not always the case.

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. It does not necessarily have to exist when the policy proceeds are actually paid.

Application

The application is the statement of information given when a person applies for insurance. The insurance company's underwriter uses this information as a basis in determining whether the applicant qualifies for acceptance under the company's guidelines. Applications are attached to and made a part of all individual contracts.

Earned premium

The earned premium is a pro-rated amount of paid-in-advance premiums allocated to the portion of the policy term that has already elapsed. For example, let us assume that a policy's term is 12 months, and the first three months have elapsed. Twenty-five percent of the policy term is in the past. That portion of risk has been covered. If the premium were $1,000, then $250 or 25% would be earned. (See Unearned premium.)

Effective date

The effective date of an insurance policy identifies when coverage is actually in force, and it establishes the date by which the policyowner must pay future annual premiums.

Expense Factor

The expense factor, also known as the "load," or "loading factor," factors the insurer's operating expenses' into the premiums. Some of these expenses include commissions, administrative costs, overhead, profits, and regulatory reserves.

Field underwriter

The field underwriter is the agent or producer completing the consumer's insurance application.

Health insurance premium:

The formula for a health insurance premium is (morbidity - interest + expenses). See the definition of morbidity, interest, and expense factor for additional information.

Issue Date:

The issue date is the date the insurance company finishes underwriting a risk exposure and generates the insurance contract. Coverage is already effective if there was a premium receipt. If no premium were paid, it would go into effect when delivered, assuming the first premium is paid, and a Statement of Good Health is obtained.

Payor:

The payor is the person responsible for paying the policy premium

Policy Fee:

The policy fee is a small transaction fee charged by some insurers for the first or subsequent policy years.

Counter-offer

The term "counter-offer" is the legal description of what happens when an insurer declines a paid application for insurance with a standard rate classification but is willing to offer a "rated" or substandard policy that will require a higher premium. The insurer rejects the initial paid offer and makes a counter-offer in reply.

USA Patriot Act

This is anti-terrorism legislation that also addressed money laundering

Inspection receipt

This receipt documents the temporary release of a new policy to the prospective policyholder without payment. It allows the prospective insured to review the contract before actually buying it. The free-look period required by all states makes this inspection receipt relatively obsolete

Non-Medical:

This term refers to an application evaluated without a medical exam

UNDERWRITING PROCESS

Underwriting is the process of risk selection 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 Material facts can affect an applicant being accepted or rejected One of the main responsibilities of an underwriter is to protect the insurer against adverse selection. The underwriting process involves reviewing and evaluating information about the applicant and establishing individual against the insurer's standards and guidelines for insurability and premium rates. The most common sources of underwriting information include:

Underwriting

Underwriting is the process of selecting and rating risks. Underwriters analyze information obtained from various sources pertaining to an applicant for insurance and then determine whether the carrier should decline the application, issue an insurance policy as requested, or offer either a modified policy with restrictions or a contract with a higher required premium

Unearned premium

Unearned premium is a pro-rated amount of paid-in-advance premiums that have not been "earned" by the insurer. It is a pro-rated amount of paid-in-advance premiums allocated to the portion of the policy term that has yet to elapse. For example, let us suppose a policy term is 12 months, and the first three months have elapsed. Seventy-five percent of that policy term is in the future. That 75% of risk has yet to be covered, and that percent of the premium has yet to be earned. If the premium were $1,000, then $750 would be unearned. (See Earned premium.) Unearned premiums appear as a liability on an insurance company's balance sheet because the insurer must re-pay any unearned premiums if it cancels an insurance policy.

Applicant Statements

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

Premium Receipt

When an agent collects a premium at the time of application, that producer must give a premium receipt to the applicant. This receipt is proof that the applicant paid the initial premium with his application. The type of receipt in use by the insurer determines when coverage becomes effective and what conditions apply.