Underwriting

Question 1

Reasons for underwriting (7)

Answer 1

*It protects the insurer against anti-selection.
*It helps the insurer to identify the lives with substandard health risks.
*It assists the insurer in setting the special terms to offer to the substandard risks.
*Underwriting helps ensure that all risks are rated equitably.
*Underwriting helps ensure that mortality experience is consistent with the pricing basis.
*Underwriting reduces the risk from over-insurance (through financial underwriting
* better reinsurance terms

Question 2

Describe the purpose of the various types of underwriting available to the insurer at policy inception and the information on which initial underwriting decisions are based

Answer 2

Medical:
The purpose of medical underwriting is to assess the health of the individual applying for the policy.
Medical underwriting would be done:
Using the application form, which would have many medical related questions, including specific questions on health, family history, smoking status, height, weight etc.
Getting a report from a doctor.
Using specific test results (blood tests, lung function etc.).

Financial:
* The purpose of financial underwriting is to ensure that the sum assured reflects the financial circumstances of the individual taking out the policy.
*over-insurance = increased lapse rate bc unaffordable prems, worse by selective lapses
* prevents fraud e.g. policyholders exaggerating the severity of a critical illness (with the assistance of their doctor) if there are significant financial benefits
The underwriting would be done by:
* Lo oking at proof of income, for individuals formally employed.
*Looking at financial statements, over several years, for individuals who own their own businesses.

Avocational/Occupational:
The purpose of this underwriting is to ensure that the individual:
* Does not participate in a dangerous hobby (for example skydiving); or
* Does not have a particularly hazardous occupation (for example bomb disposal expert).
* The underwriting would be done by using a questionnaire in which the applicant would have to state their occupation and/or hazardous pursuits.
It may also be of relevance to capture information on whether the applicant plans to visit regions which could be considered as dangerous.

Question 3

How are proposal forms for u/w interpreted?

Answer 3

• numerical fields like height and weight are converted into OK/ not OK
• if most or everything is OK => accept cover
• if not, specialist underwriters will use doctors hired by insurer and underwriting manuals prepared by reinsurers to decide on next steps

Question 3

Describe the reasons why not all the sources of medical evidence will be used for underwriting purposes (11)

Answer 3

• the whole aim of using and obtaining u/w info is to control mortality risks in a cost effective manner
• to save expenses
• opportunity for anti-selection is negligible
• competitiveness and sales volumes
• SA is small
• group cover is applied for
• cover is compulsory
• invasion of privacy not socially acceptable
• not permitted by legislation
• earlier sources like proposal forms show no problems
• info not available like medical reports bc of data protection

Question 4

What special terms can be included after underwriting (5)

Answer 4

• Decline to offer the cover if the condition is very serious and irreversible
• Defer the decision till you have more information on a condition that may stabilise or improve or send the applicant for further specialised tests.
• loadings to premiums commensurate with extra degree of risk
• reduction of benefit commensurate with extra degree of risk
• suggest a different policy (unlikely)
• include exclusions (suicide or self-inflicted injury, alcohol or drug abuse, war or civil commotion, failure to follow appropriate medical advice, being outside of agreed geographical location)

Question 5

List the common exclusions on policies (5)

Answer 5

• attempted suicide or self-inflicted injury
• not being in agreed upon geographical location
• not following appropriate medical advice
• war or civil commotion
• alcohol or drug abuse

Question 6

Cons of underwriting (8)

Answer 6

• comes at a cost => increased costs
• could lead to lower sales
• and less marketable, especially if other companies dont underwrite that much
• could discourage healthy applicants
• claims underwriting deters everyone
• which would lead to expenses per policy being high
• longer to process new business
• public adversity

Question 7

List the alternatives to underwriting at proposal stage (11)

Answer 7

• moratorium underwriting
• maximum age at entry
• exclude pre-existing conditions
• restrictions on sum assured
• waiting or eligibility period
• link product to a financial need like loan repayment
• remove flexibility to increase sum assured
• include a mortality charge for sum at risk
• make sure all charges are reviewable
• no death benefit payable within a certain period like 2 years
• available to recipient to letter only
• limited available in which to apply for cover after mailing or advert

Question 8

List the 8 factors for analysing the appropriate level of underwriting

Answer 8

REACHES AI
* Regulation
* Expenses
* Anti-selection
* Claim deterrence
* Homogeneity
* Effectiveness
* Sales impact
* Interaction with age, sum assured and target market

Question 9

What kind of information is required in a proposal form

Answer 9

Personal information like name and address
Policy information such as benefit intended and options
Medical information such as smoking and drinking habits, current or recent illness, medical history of critical illness
Information on financial underwriting like do you have other life policies
Bank details if payment is to be made by automatic deduction from account

Question 10

Describe the process of “claims underwriting” (10)

Answer 10

• The main role of claims underwriting is to ensure that only valid claims are paid, with others being repudiated.
• The insurer will check that:
• There is a valid death certificate.
• The death was not from a condition that was specifically excluded.
• There is no evidence of non-disclosure.
• The policyholder has paid their premiums.
• If a claim looks suspicious, the claims team will have to gather additional information.
• This could be medical reports from the claimant’s doctor. This would include medication, hospital visits etc.
• The claims team would also check for aggregation of covers to ensure that the policyholder didn’t have multiple policies with various insurers.
• If over-insurance is suspected, the claims team can gather additional information on the financial status of the claimant prior to death (e.g. income, assets and liabilities etc).