Chapter 31 - Underwriting

Question 1

What is underwriting

Answer 1

Underwriting is the process of consideration of an insurance risk.
This includes assessing whether the risk is acceptable and, if so, setting the appropriate premium, together with the terms and conditions of cover.

It may also include assessing the risk in the context of the other risks in the portfolio

Question 2

Why do insurers underwrite business?

Answer 2

ASS HOE

• protects the provider against ANTI-SELECTION
• enables the provider to identify risks for which SPECIAL terms must be quoted
• for SUBSTANDARD risks, the UW process will identify the most suitable approach and level for the special terms to be enforced
• enables provider to classify risks into HOMOGENEOUS groups for which a standard premium is charged
• for larger proposals, the financial underwriting procedures will help to reduce the risk of OVER-INSURANCE
• help ensure claim EXPERIENCE doesn’t depart too far from that assumed in the pricing of the contracts

Question 3

What are the main types of underwriting?

Answer 3

• Medical underwriting - The medical assessment of a potential policyholder’s health
• Lifestyle underwriting - The influence of sporting and hazardous leisure pursuits on the risk, and the extent to which the lifestyle might increase the possibility of contracting dangerous diseases such as AIDS
• Financial underwriting - assessing the financial situation of a potential policyholder
• Claims underwriting - although the phrase might seem a contradiction, we can do some underwriting at the claims stage

Question 4

Where can medical evidence be obtained from?

Answer 4

• Questions on the proposal form completed by the applicant
• Reports from medical doctors that the applicant has consulted
• A medical examination carried out on the applicant by a doctor, nurse, paramedic or pharmacist
• Special medical tests on the applicant

Question 5

For which types of products would a life insurance company impose no underwriting requirements?

Answer 5

For any product with a zero sum at risk, underwriting is normally irrelevant, unless there is a significant possibility of deaths leading to non-recovery of initial expenses.

Question 6

What are the other factors other than the medical state of the applicant that can affect the mortality or health and care risks of the individual

Answer 6

• Applicant’s occupation
• Leisure pursuits of the applicant
• Applicant’s normal country of residence

Question 7

What are the special terms that can be specified if a risk is deemed not normal

Answer 7

• An addition may be made to the premium, this addition being commensurate with the degree of extra risk
• A deduction may be made from the benefit, this deduction being commensurate with the degree of extra risk
• An exclusion clause may be added to the contract, which excludes payment of benefit claims that arise due to specified causes

Question 8

What are the common exclusions that insurers would add to their policy resulting in claims not being paid

Answer 8

• Alcohol and drug abuse
• Self-inflicted injury or attempted suicide
• War or civil commotion
• The failure to follow appropriate medical advice
• Payments may not also be made while the claimant is resident outside an agreed geographical location

Question 9

List possible decisions that can be made following underwriting

Answer 9

AR DARE

• Accept on standard terms
• Reject / decline
• Deferral of cover
• Addition to premium, commensurate with the degree of extra risk.
• Reduction in benefit, commensurate with the degree of extra risk
• Exclusion clause(s)

Question 10

What factors would need to be considered in an analysis of the appropriate level of underwriting to use

Answer 10

VERIFIED C

• How to VARY underwriting criteria by age, sum assured, target market and various other factors
• The EXPENSES associated with the level of underwriting proposed
• The level of REGULATION, which may constrain the level and/or type of underwriting that is permitted, eg the use of genetic testing
• The INTERACTION between underwriting level and the terms offered by the company’s reinsurers
• The extent, and in particular the FINANCIAL significance, of any potential anti-selection risk. If anti-selection is going to occur, it will present itself to the insurer with the least stringent underwriting requirements within the peer group offering that product. Therefore offering the same product will less underwriting may mean an insurer attracts a disproportionate share of the anti-selection risks
• The INTERACTIONS between the level of underwriting and the potential level of sales.
  – The greater the level of underwriting the lower the risk costs, but the expenses will rise.
  – People are more inclined to take out contracts where there is a low level of underwriting
  – Less underwriting leads to quicker processing of new business proposals
• The EFFECTIVENESS of the proposed underwriting - benefit exclusions may be difficult to police, or limiting medical evidence may make it difficult for staff to underwrite effectively. Non-disclosure also makes underwriting less effective
• The more DETAILED the underwriting, the greater the homogenisation of the risks that may be involved
• CLAIMS underwriting may deter people from taking up a contract, due to the uncertainty as to whether a claim may be accepted

Question 11

How could the risk of anti-selection be reduced for a life insurance contract offered with no underwriting

Answer 11

LUNULAE M

• LOW sums assured
• target at UNSOPHISTICATED market
• NO death benefit payable within, say, 2 years
• UNDERWRITING at claims stage
• LIMITED time available in which to apply after a mailing or advert
• AVAILABLE to recipient of letter only
• EXCLUDE pre-existing conditions
• MAXIMUM entry age

Question 12

A life insurer decides to relax the underwriting used for term assurances. How might this affect the premium it will charge

Answer 12

• A reduction in underwriting costs, reducing theoretical premium
• An increase in anti-selection and hence mortality experience, increasing the premium
• Improved marketability, which should increase sales reducing per policy costs and increasing total profits

The total effect will depend on the relative size of these factors. However, even then the company may decide to charge a different premium for, say, competitive reasons

Question 13

What are the common measures used to limit the risk of anti-selection for group schemes

Answer 13

FETAL

• setting FREE cover limits
• ENSURING members are actively at work when cover begins
• setting TAKE-UP rates on voluntary schemes
• APPLYING exclusions
• LAYING down take-over terms where the insurer accepts a scheme previously insured elsewhere

Question 14

How can more underwriting increase the marketability of policies

Answer 14

• More underwriting will result in an increase in costs. However, if this is outweighed by a reduction in claim payments, then the company will be able to charge lower premiums. Increasing its attractiveness
• Underwriting may be used with annuities to be able to offer enhanced terms to impaired lives

Question 15

How does the amount of underwriting used affect the reinsurance terms

Answer 15

The more underwriting used, the better the reinsurance terms that might be offered, increasing profitability

Question 16

What is free cover

Answer 16

Free cover is the amount of cover automatically granted without underwriting to individuals in a group scheme