Chapter 31 - Underwriting

Question 1

Explain the general purpose of underwritng [1]

2011_S2

Answer 1

The purpose of underwriting is:

• To protect the intergrity of the risk pool agaist anti-seleciton
• To create homogeneous risk pools that are charged risk premiums commensurate with each pool’s risk
• Broaden access by allowing additional risk to be dealt with appropriately

Question 2

What is the purpose of Territorial underwriting?

2011_S2

Answer 2

• The underwriter will assess the countries the applicant intends travelling to (and for how
  long), whether it be for work or vacation.
• Travel to certain countries can pose additional
  risks, e.g. relating to tropical diseases, lack of medical care, civil unrest, etc.

Question 3

What is the purpose of Avocational/Lifestyle underwriting?

2011_S2

Answer 3

• The purpose of avocational underwriting is to assess whether any such pastimes pose an
  additional risk.
• Avocational underwriting will gather information on whether the applicant
  partakes in any dangerous pursuits, e.g. mountain climbing, paragliding, motorcross racing, quad-biking etc

Question 4

What is the purpose of Occupation underwriting?

Answer 4

• The purpose of occupational underwriting is to assess whether the applicant has an increased risk of dying due to the nature of their occupation.
• Occupational underwriting looks at
  whether the actual occupation is dangerous, e.g. bomb disposal expert
• and other factors, such
  as how far the individual needs to drive as a result of their occupation

Question 5

What is the purpose of Financial Underwriting?

Answer 5

• The company will gather information on the applicant’s income and total sums insured
  (possibly even across insurers if this information is available).
• Worse risks may be willing to pay premiums that are much higher proportions of
  household budgetshare than better risks.
• So this form of underwriting may detect more anti selective behaviour
• But the company may also face a change in mortality experience due to an altered mix of business and cross-subsidies in the pricing structure
• The main purpose of financial underwriting is to make sure that the policyholder is not over-insured, as this can pose a moral hazard.

Question 6

List the sources of medical information that could be used to underwrite individuals with high sums insured.

2012_s2

Answer 6

Medical evidence can be obtained from the following sources:
* questions on the proposal forms
* reports from medical doctors that the applicant has consulted
* medical examination carried out by medical professional on behalf of insurer
* specialist medical tests on the applicant

Question 7

Discuss briefly how underwriting is used to manage the risk of insurers and reinsurers. [5]

2017_s2

Answer 7

The main purpose of underwriting is to manage risk. This can be done in the following way.

• It can protect an insurance company from anti-selection.
• Given that a reinsurer normally sees larger risks and more impaired lives, antiselection is a concern for the reinsurer and needs to be managed
• Financial underwriting will help to reduce the risk from over-insurance and is important especially with high sums assured.
• The underwriting process will enable a life insurance company to identify lives with a substandard health risk
• and can be used for making a decision to reject the proposal or to accept the proposal on special terms, on the appropriate price for the risk
• For the substandard risks, the underwriting process will identify the most suitable approach and level for the special terms to be offered.
• These terms may be an additional loading on the premium or alternatively an exclusion cause (or other valid terms and conditions).
• Adequate risk classification within the underwriting process will help to ensure that all risks are rated fairly.
• Underwriting will help to ensure that actual mortality experience does not depart too far from that assumed in the pricing of the contracts being sold
• Underwriting is the process that aligns the risks written by a company with the pricing performed by the actuary
• Reinsurers also aim to manage their exposure to certain countries and occupations and will underwrite for these risks
• Underwriting will allow them the chance to place exclusions for travel to certain countries and types of injuries obtained for certain occupations.
• Avocational underwriting also allows an insurer or reinsurer to manage their exposure to hazards pursuits.

Question 8

State how underwriting can help to manage the insurer’s risk. [3]

2018_s2

Answer 8

Underwriting can help by:

• Protecting the insurer against anti-selection
• Identifying the lives with substandard health risk
• Identifying special terms to offer to the substandard risks
• Helping ensure that all risks are rated equitably
• Helping ensure that mortality experience is consistent with the pricing basis
• Reducing the risk from over-insurance (through financial underwriting)
• Can also assist with claim underwriting to make sure only valid claims are paid

Question 9

Your first product will be a regular premium 10-year unit-linked endowment assurance with a maximum guaranteed sum insured of R1 million.

Your marketing manager proposes that, because the maximum sum insured is quite low, there should be no initial underwriting on the product besides asking the applicant to state that they are in good health.

i. Discuss the advantages and disadvantages of the marketing manager’s proposal. [5]

2021_s2

Answer 9

Advantages:

• No initial underwriting will make the product more attractive and will lead to more sales than if there were initial underwriting
• This could allow the company to reach viability quickly, assuming the product is priced correctly.
• No initial underwriting will reduce the company’s up-front costs as it would not need to hire medical underwriters.
• The risk is also reduced as this is a unit linked product, and so may be meeting a savings need and not just protection.

Disadvantages:
* As there are no medical checks the company opens itself up to anti-selection.

• The impact will depend on what the market practice is relating to initial underwriting, the risk of anti-selection is higher if other insurers use initial underwriting.
• Furthermore, people who are sick could fail to disclosure their state of health and take up the policy.
• Higher than expected claims will lead to losses to the insurer, even though the sum assured is low.
• Although the company could decline some claims based on the health question, claim rejections may be challenged on grounds of different interpretations of “good health”.
• Declining too many claims will also not be good for the company’s reputation.

Question 10

An insurance company in a particular country plans to launch an income protection product in the next twelve months to be sold to individuals.

i. List the information that the applicant could provide on a standard application form that an underwriter could use to assess the risk.

2022_S2

Answer 10

Information from a standard application form:
* Height and weight
* Smoking and drinking habits
* current health and details of any current treatment being received
* personal medical history (any major illnesses or operation)
* family medical history (hereditary ailments like hear disease)
* occupation;
* potentially dangerous pastimes / hobbies;
* income; and
* assets and liabilities