Midlands State University s9

MIDLANDS STATE UNIVERSITY

Faculty of Commerce

Department of Insurance & Risk Management

Life and Health Insurance Module: IRM204

1.  LIFE UNDERWRITING

Definitions

The following definitions will apply in this module in relation to life assurance:

Life assured - the person on whose life the policy depends

Assured - the original owner of the policy who will receive the
benefits of it.Also called the insured

Life office - the insurer issuing the policy

Sum assured - the amount payable on a claim by death or maturity

Premium - the sum paid to purchase the policy and keep it going. This
may be a single sum or a series of sums.

Proposer - a person who applies for a life policy

Proposal form - application for life assurance

1.1  WHAT IS UNDERWRITING?

(a) Definition

This is the consideration given to applications for life assurance to determine whether or not the policies applied for should be issued.

The acceptance of an applicant for either life or health cover involves a transfer of risk from the assured to the insurance company. By purchasing a life policy, the applicant substitutes a small, certain loss- the premium – for a larger, uncertain loss – usually the beneficiary’s loss of future financial support due to the early death of the life assured. Life cover transfers the risk of financial loss due to premature death of the insured individual from the policy owner or named beneficiary to the life insurance company.

Life cover must be provided on an equitable basis and therefore each life insured is charged a premium rate that corresponds to the risk that the person presents to the company. Someone with a higher risk of death (life assurance) or illness or accident (health insurance) must pay a higher premium than with a lower risk

(b)  Underwriting procedure and forms

When a client decides to insure his life he completes and submits a proposal from to the life office. The form when signed by the proposer, requests the life office to issue the desired policy to him based on the information supplied.

The proposal form:

This form has three main sections, namely:

  • Identification of the life to be assured – name, DOB, address, sex, marital status, etc.
  • Details of the proposed assurance – policy type, term, sum assured, supplementary benefits (riders)
  • Details of the life risk – occupation and avocations, medical history
  • Declaration

The signed declaration has the effect of making answers to questions in the proposal form warranties. The declaration also gives the life office authority to approach the proposer’s doctor for any additional information.

Proposal procedure

When a proposal is received in the underwriting department at the head office of life office it will be processed as follows:

-  details of previous assurances are checked from office’s index of lives

-  if any exist , the information is obtained to aid the underwriting of the current proposal

-  entries of impairments notified to the LOA registry are checked from the LOA life register

-  if any exist , the information is obtained to aid the underwriting of the current proposal

-  the proposal papers must checked for full completion and signature

-  the proposal papers are then passed to the underwriter for assessment

Medical factors

The underwriter may decide if the proposal can be accepted at ordinary rates without further investigation and passed on to the new business department for the policy to be issued.

Alternatively, based on the information in his possession, he may feel that the proposal can not be accepted and can:

  • Call for further information – at the office’s expense call for medical examiners report, ECG, leou, oops, etc.

This would be case where medical conditions likely to reduce the expectation of life are disclosed e.g

-  heart disease

-  circulatory disease

-  overweight

-  underweight

-  digestive system diseases

-  cancer

-  liver diseases

-  eye diseases

-  tropical diseases

-  respiratory diseases

-  kidney diseases

-  glandular disorders

-  diseases of the nervous system

-  mental disorders

-  diabetes mellitus or insipidus

-  HIV/AIDS

  • Impose some special terms – charge an extra premium or restrict cover to sum amount or restrict cover to a specific term, say to 10 years.
  • Postpone or decline the proposal – where the proposal cannot be accepted immediately because of some temporary impairment or where the proposal cannot be accepted because of some permanent impairment respectively.

Life offices have discovered that there are very few surprises in a medical examiner’s room. As a result they are prepared to issue life assurance cover on the basis of proposers’ answers to questions in a properly designed proposal from i.e. on a non- medical basis. Most offices have non-medical limits under which proposals will be considered without requesting the proposer to under medical examination. Limits vary from office to office and are dependant on ages at entry e.g. under 40 years of age the limit may be $500 000.

However, the life office reserves the right to for a medical report if the information on the proposal warrants it. The limits relate to the total sum assured for a life and not for just a given proposal. For example if a 35 year proposer already has a $ 100 000 policy on his life, the limit on a new proposal will be $400 000. Any excess above $ 400 000 will be subject to medical underwriting.

(c)  Basis of sound medical underwriting

The mortality profit of a life office is relatively small when compared to profits that can be made from the investment front. However, a life office must carefully select its lives for assurance; otherwise the expected small profit could end up being a very large loss. Underwriting standards of life offices are tending to be lenient as result of the availability of statistics, improved risks as a result of advances in modern medicine and surgery, and inflation. Some life offices are known to be extremely generous on substandard lives as a deliberate marketing policy and tend to attract the most impaired lives. However, some life offices remain stringent and selective as a definite policy.

An important development in life assurance is the emergence of professional reinsurance companies who deal with life offices. Some of the reinsurers have specialized in the insurance of sub-standard lives, enabling direct insurers to reassure certain sub-standard lives with them. Although the direct insurer largely loses the benefit of any profit from this form of business they manage to please good agency connections by taking substandard lives at attractive rates.

1.2  INTRODUCTION TO UNDERWRITING

It is a basic principle of life assurance is that the premium paid by each insured life is sufficient to cover the risk which he or she brings to the life insurance fund. A mortality table is used in the calculation of standard premium rates applicable to average lives, i.e. the potential mortality risk is unlikely to be heavier than that in the mortality table.

The life underwriter assesses each risk individually and accepts the proposal at standard rates if it appears that the mortality is no heavier than the mortality rate used in the premium calculation. The risk is taken as average or standard. If the mortality is heavier the risk is described as under average or sub-standard. In this case standard premium rates cannot be allowed and the proposal is accepted on special terms or declined or postponed according to the circumstances.

Risk assessment is influenced by the following factors:-

  • The proposer’s physical condition
  • The proposer’s medical history
  • Family medical history
  • The proposer’s occupation
  • Hobbies and leisure activities of a hazardous nature
  • Environment
  • Moral hazard
  • Possibility of foreign residence and travel

The underwriter must be futuristic is assessing life risks i.e. he must look ahead and take into account future deterioration of the proposer‘s physical condition, arising from his or her medical history or present state of health.

The risk premium is fixed at inception of the contract and the insurer cannot review it at renewal or refuse to accept the premium if it is tendered within the days of grace.

When assessing the risk relevant features must be considered in relation to each other e.g. a person with a history of chest disorders who works in dusty environment is worse risk than a person with a similar history working in the open air. Heredity may also play a part – there is a predisposition for certain illnesses to run in families or conversely for longevity to run in families.

Risks are assessed on the basis of:

  • Mortality in life assurance
  • Morbidity in permanent health insurance (PHI)
  • Occupation and medical condition in personal accident insurance
  • Medical condition and medical history in medical insurance schemes.

There is considerable difference between mortality and morbidity from an underwriting angle. Muscular rheumatism, for example, does not increase the sufferer’s mortality rate but certainly increases his morbidity rate as he is likely to be disabled from time to time.

In this case, normal rates can be offered for life assurance whilst PHI could be subject to a 26 weeks deferred period.

1.3  FINANCIAL UNDERWRITING

Underwriters also consider financial factors in their work. Most proposals do not present problems as they are received from salaried people and the cover requested is related to the proposers’ earnings. However, caution should be exercised on cases where the sums assured looks very high in relation to the circumstances. The intermediary should be requested to submit a fact find sheet justifying the sale.

The higher the sum assured the more the justification required. The underwriter must always consider the possibility of a fraudulent claim. There have been cases of individuals who have insured themselves for very large amounts with different offices and then faked a death certificate to enable an associate to defraud the life office.

1.4  UNDERWRITER’S OBJECTIVES

Underwriting decisions made by an underwriter ought to be:

  • Equitable to the client
  • Deliverable by the intermediary
  • Profitable to the company

(a)  Equitable to the client

A basic principle of insurance is that each life insured should pay a premium that is proportionate to the amount of risk the insurer assumes for that person. The underwriter must determine the degree of mortality risk and must charge a fair premium for that risk. A life with a higher risk of death must pay a higher premium than a life of the same age and sex but with a low risk of death.

(b)  Deliverable by the intermediary

The underwriter often finds it necessary to charge an extra premium for health reasons on the policy or limit the amount or type of supplementary benefits or riders applied for. This may it difficult for the intermediary to deliver the policy to the client.

The new terms to the client, they must satisfy three basic requirements:

  • The policy must provide benefits that meet the buyer’s needs
  • The cost of cover provided by the policy must be within the buyer’s financial means
  • The premium to be charged for the cover must be competitive in the market place.

Pricing is very competitive in life assurance and the underwriter must take this into consideration when calculating the extra premium to be paid the client. The underwriter must be able to explain reasons for any extra premium with enough credibility so that the intermediary will continue to sell life assurance for the company.

(c)  Profitable to the company

An underwriter must make decisions that are profitable to the life office. The profitability of a life office is to a large extent built into the rate structure as calculated by the actuaries. The underwriter’s role is to make decisions that ensure that actual mortality results that coincide with the actuaries’ mortality projections.

(d)  Service and speed

Prompt application approval and policy delivery is vitally important. The underwriter must balance the demand for prompt turnaround time with appropriate analysis of risk information.

He must develop good relationships with doctors, hospitals, laboratories and other service providers to ensure that reports requested are always delivered with minimum delay. Good relationships with reassurers will also ensure that any referred cases get the best possible terms with minimum delay.

1.5  THE SELECTION OF RISKS

(a)  Establishing risk classes

An actuary is able to establish risk classes by using statistics on mortality. The risk classes accommodate the varying degrees of risk presented by groups of individual applicants. A risk class is a group of insureds who present an equivalent mortality risk to the insurance company.

The underlying principle in pricing life assurance products is that past mortality experience can be used to predict future mortality experience if:-

  • A large number of people apply for insurance, and
  • If these people can be placed within relatively homogenous groupings for the

purpose of developing a premium structure.

Premium rates schedules for life and health insurances are based on the assumption that future mortality and morbidity rates anticipated by the actuary and the rates actually experienced by the actuary will be comparable to past mortality and morbidity rates. This assumption will hold true if individuals who exhibit similar degrees of risk are grouped together in large enough numbers for the laws of probability to operate.

Life offices group their insured lives into the following groups:-

  • The standard class – for individuals whose mortality is regarded as average
  • The sub- standard class – for individuals with impairments i.e. any aspect of their health, occupation, avocation or lifestyle that is likely to shorten their lifespan.
  • The non-smoker class
  • The preferred class – individuals with lower mortality

(b)  The need for selection

The selection process ensures that every life contributes his fair share towards the risk involved. Applicants exposed to comparable degrees of risk should be placed in the same premium class. The process of selection and classification of risks is necessary to reflect that individuals of the same age and gender may be classified into groups that will give widely different mortality results - e.g. a person suffering from insulin dependant diabetes mellitus has a higher mortality risk than someone of the same age and gender who suffers from mild obesity.

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