Underwriting and Policy Issue

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 the applicant proves to be insurable either on the date the application was signed or the date of the medical exam • This may also be described as when the conditions of the receipt 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

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) • Is used when the applicant did not submit the initial premium with the application • In such cases, common company practice requires that, before leaving the policy, the agent must collect the premium and obtain from the insured a signed statement attesting to the insured's continued good health • Also used when reinstating a policy

Besides outright rejection, there are three techniques commonly used by insurers in issuing health insurance policies to substandard risks. What are the three techniques?

Attaching an exclusion (or impairment) rider or waiver to a policy Charging an extra premium Limiting the type of policy or coverage issued The insurance company will NEVER alter the PROVISIONS of an insurance policy due to risk

Avocations

Certain hobbies an applicant may have (such as skydiving or mountain climbing) may increase his/her risk to the insurer

Field Underwriting Procedures

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 by: • Assuring the application is filled out completely and correctly • Collect the initial premium • 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 • Delivering the policy Application Errors

Interest

Just as with life insurance, interest is a major element in establishing health insurance premiums. A large portion of every premium received is invested to earn interest. The interest earnings reduce the premium amount that otherwise would be required from policyowners.

Community Rating

This concept requires health insurance providers to offer health insurance policies within a given geographical area at the same price to all individual or group plans without medical underwriting, regardless of their health status.

Morbidity

Whereas mortality rates show the average number of persons within a larger group of people who can be expected to die within a given year at a given age, morbidity rates show the expected incidence of sickness or disability within a given group during a given period of time.

Claims Experience

• Before realistic premium rates can be established for health insurance, the insurer must know what can be expected as to the dollar amount of the future claims • The most practical way to estimate the cost of future claims is to rely on claims tables based on past claims experience • Experience tables have been constructed for hospital expenses based on the amounts paid out in the past for the same types of expenses • Experience tables have also been developed for surgical benefits, covering various kinds of surgery based on past experience

Inspection 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.

Age

• Generally, the older the applicant, the higher the risk. • Health insurance claims costs tend to increase as the age of the insured increases

Mandatory Second Opinions

• In an effort to reduce unnecessary surgical operations, many health policies today contain a provision requiring the insured to obtain a second opinion before receiving elective surgery • Under the mandatory second surgical opinion provision, an insured typically will pay more out-of-pocket expenses for surgeries for which only one opinion was obtained • The mandatory second surgical option provision can help contain the cost of a group medical plan

Policy Delivery

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.

Physical Condition

An applicant's present physical condition is of primary importance when evaluating health risks

Premium Factors

Besides risk factors, there are many other standard items that impact the cost of premium for a health insurance policy.

Medical Cost Management

Defined as the process of controlling how policy owners utilize their policies. There are four general approaches insurers use for cost management: mandatory second opinions, precertification review, ambulatory surgery, and case management.

Applicant Ratings and Classifications

Once all the information about a given applicant has been reviewed, the underwriter will utilize several different types of information in determining the insurability of the individual and the risk that the applicant poses to the insurer. This is evaluation is known as risk classification. 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.

What are the categorizes of the rating classification system which is used to categorize the favorability of a given risk?

Preferred Low/Better than Average Risk - Lower Premiums - nonsmoker, weight within an ideal range, nondrinker Standard Average Risk - No Extra Ratings or Restrictions - standard terms and rates Substandard High Risk - Rated Up - higher premiums or restricted coverage - chronic conditions, insulin diabetes, heart disease Declined/Uninsurable Not Insurable - potential of loss to insurance company is too high - terminal illness, too many chronic conditions • Lower risks tend to have lower premiums. • If an applicant is too risky, the insurer will decline coverage.

Ambulatory Surgery

The advances in medicine now permit many surgical procedures to be performed on an outpatient basis where once an overnight hospital stay was required these outpatient procedures are commonly referred to as ambulatory surgery.

Design

The design or structure of a policy and its provisions can have an impact on an insurer's cost containment efforts. • A higher deductible will help limit claims • Coinsurance is another important means of sharing the cost of medical care between the insured and the insurer • Shortened benefit periods can also prove beneficial from a cost containment standpoint

Application

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.

What is one of the main responsibilities of an underwriter?

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

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

Concurrent (Utilization) Review

• A health insurance company's opportunity to review a request for medical treatment to confirm that the plan provides coverage for your medical services • Health care is reviewed as it is being provided • Involves monitoring the appropriateness of the care, the setting, and the length of time spent in the hospital • This ongoing review is directed at keeping costs as low as possible and maintaining effectiveness of care by determining if the recommended treatment is appropriate

Medical Information Bureau (MIB)

• 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.

Point-of-service Plans

• A point-of-service plan allows the insured to choose either an in-network or an out-of-network provider at the time care is needed. • With in-network coverage, the insured receives care through a particular network of doctors and hospitals participating in the plan • All care is coordinated by the insured's primary care physician, which includes referrals to specialists • An insured receiving out-of-network care usually pays more of the cost than if it had been in network (except for emergencies)

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. • 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.

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. • The only time a customer will receive a receipt is if they pay their initial premium at the time of application. No receipt will be given at any other time. • There are two types of premium receipts that determine when coverage will begin

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.

Binding Receipt

• Coverage is guaranteed until the insurer formally rejects the application • This may also be described as Insurer is bound to coverage until the application is formally rejected • Even if the proposed insured is ultimately found to be uninsurable, coverage is still guaranteed until rejection of the application

Suitability Form

• Ensures that the customer is best suited for the policy they are purchasing. • Prevents the sale of unnecessary insurance for example a customer on Medicaid would not be suited for a Medicare Supplement policy because Medicare Supplement policies are typically expensive, and the customer is already receiving Medicaid due to financial need.

Expenses

• Every business has expenses that must be paid, and the insurance business is no different. • Each health insurance policy an insurer issues must carry its proportionate share of the costs for employees' salaries, agents' commissions, utilities, rent or mortgage payments, maintenance costs, supplies, and other administrative expenses.

Insurable Interest

• Exists 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 • As with life insurance, insurable interest is a prerequisite for issuing a health insurance policy • You have insurable interest in yourself • A producer may be the beneficiary of an applicant's policy of the producer has insurable interest on an insured

Part I of the Application

• General Information - Age, DOB, Sex, Address, Marital Status, Occupation, • Details about the requested insurance coverage: o Type of policy o Amount of insurance o Name and relationship of the beneficiary o Other insurance the proposed insured owns • Other information personal information o Tobacco use o Hazardous hobby o Foreign travel o Aviation activity o Military service.

Policy Issue

• Happens when the insurer "approves" the application, they are "issuing the policy" • Technically a policy could be ISSUED and not delivered for days or weeks later

Application 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 agent • The agent can NEVER change the application without the customer present to initial the changes

Case Management

• Involves a specialist within the insurance company, such as a registered nurse, who reviews a potentially large claim as it develops to discuss treatment alternatives with the insured • The purpose of case management is to let the insurer take an active role in the management of what could potentially become a very expensive claim

Initial Premium

• It is best for both the proposed insured and the agent to have the initial premium paid with the application and forwarded to the insurer • For the agent, this will help solidify the sale and may accelerate the payment of commissions on the sale • If the premium is not paid with the application, the agent should submit the application to the insurance company without the premium • The policy will not become effective until the initial premiums is collected even if it is approved and issued Premium Mode (Mode of Premium Provision) • The policy feature that permits the policyowner to select the timing of premium payments • If the policyowner chooses to pay premium more than once per year, there may be additional charges because the company will have additional charges in billing and collecting the premium payments • For health insurance, premium payment options include o Annual o semi-annual o quarterly o Monthly • Unlike life insurance, there is no "single-pay" option for health insurance policies

Part II of the Application

• Medical Information - Health History o Part II focuses on the proposed insured's health and asks a number of questions about the health history. o This medical section must be completed in its entirety for every application. o 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.

History

• Medical history may point to the possibility of a recurrence of a certain health condition. • An applicant's family history may reflect a tendency toward certain medical conditions or health impairments.

Sex

• Men show a lower rate of disability than women, except at the upper ages • Women are sometimes required to undergo more expensive testing like a Pap test, which is used for detecting cervical cancer • Women have a longer life expectancy than men

Constructive Delivery

• Occurs if the insurance company intentionally relinquishes all control over the policy and turns it over to someone acting for the policyowner, including the company's own agent. • Mailing the policy to the agent for unconditional delivery to the policyowner also constitutes constructive delivery, even if the agent never personally delivers the policy. • If the company instructs the agent not to deliver the policy unless the applicant is in good health, there is no constructive delivery.

Premiums are NOT tax deductible

• Paid after your paycheck is taxed and are not removed from your taxable income • In this case, the benefits of the policy would be tax free

Premiums are tax deductible

• Paid before your paycheck is taxed or removed from your taxable income when you file taxes • In this case the benefits will be taxed (because you are already saving taxes on the premiums)

Taxation

• Premiums paid by an employer for the benefit of employees are tax deductible to the employer. • Premiums paid by the employer are NOT tax deductible nor are they taxable to the employee.

Taxation of Disability Income Insurance

• Premiums paid for personal disability income insurance are not deductible by the individual insured, but the disability benefits are tax-free to the recipient • When a group disability income insurance plan is paid for entirely by the employer and benefits are paid directly to individual employees who qualify, the premiums are deductible by the employer. The benefits, in turn, are taxable to the recipient • If an employee contributes to any portion of the premium, her benefit will be received tax-free in proportion to the premium contributed

Buyer's Advice

• Provides general information about the types of insurance policies available, in language that can be understood by the average person • This is what a PPO is, this is what an HMO is, these are the basics of the 10 Medigap options, etc.

Policy Summary

• Provides specific information about the policy purchased, such as the premium and benefits. • Mom calls you excited because she bought new health insurance. This allows you to quickly see what "health insurance" specifically did she buy: Medicare Supplement, Major Medical, Critical Illness, Long term Care?

Occupation

• Some types of work are more hazardous than others, the premium rates for a person's health insurance policy may be affected by their occupation. o There is little physical risk associated with professional persons, office managers, or office workers. o However, occupations involving heavy machinery, strong chemicals, or high electrical voltage, for example, represent a high degree of risk for the insurer. • Change of occupation provision: o if the insured changes to a less hazardous job, the insurer will return any excess unearned premium o if the change is to a more hazardous occupation, the benefits are reduced proportionately, and the premium remains the same

Medical Report

• 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).

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.

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 • Having an applicant that is different from the insured (parent and minor child) is considered third party ownership

Effective Date of Coverage

• The effective date identifies when the coverage is effective and establishes the date by which future annual premiums must be paid • If the initial premium is collected at the time of application, the effective date is dependent on the type of receipt given to the applicant • 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 the date the policy is delivered to the applicant, premium collected, and statement of continued good health signed. Coverage will not be in effect until all of those things happen.

Moral Hazards

• The habits or lifestyles of applicants • Personalities and attitudes may draw attention in the underwriting process • It includes: o Excessive drinking and the use of drugs represent serious moral hazards o Applicants who are seen as accident prone or potential malingerers (feigning a continuing disability in order to collect benefits) o Poor credit rating o Dishonest business practices

Benefits

• The number and kinds of benefits provided by a policy affect the premium rate • The greater the benefits, the higher the premium. To state it another way, the greater the risk to the company, the higher the premium.

Precertification Review

• To control hospital claims and prevent unnecessary medical costs, many policies today require policy owners to obtain approval from the insurer before entering a hospital for elective surgeries • A pre-hospitalization authorization program (pre-certification) determines whether the requested treatment is medically necessary • Pre-admission, pre-hospitalization, and pre-certification are all common names used for this particular type of managed care • Pre-certification occurs before the treatment is provided • Pre-admission testing usually involves evaluating an individual's overall health prior to being hospitalized for surgery • Preadmission testing helps control health care costs primarily by reducing the length of hospitalization • Failure to obtain a preadmission certification in non-emergency situations reduces or eliminates the health care provider's obligation to pay for services rendered

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.

USA Patriot Act

• Was enacted in 2001. • It requires insurance companies to establish formal anti-money laundering programs. The purpose of the act is to detect and deter terrorism.