The underwriting process is accomplished by reviewing and evaluating
information about an applicant and applying what is known of the
individual against the insurer’s standards and guidelines for insurability
and premium rates.

Underwriters have several sources of underwriting information available
to help them develop a risk profile of an applicant. The number of sources
checked usually depends on several factors, most notably the size of the
requested policy and the risk profile developed after an initial review of the application. The larger the policy, the
more comprehensive and diligent the underwriting research. Regardless of the policy size, if the application raises
questions in the underwriter's mind about the applicant, that, too, can trigger a review of other sources of
information. The most common sources of underwriting information include: the application, the medical report, an
attending physician's statement, the Medical Information Bureau, special questionnaires, inspection reports,
and credit reports.

The Application

The application for insurance is the basic source of insurability information. Regardless of what other sources of
information the underwriter may draw from, the application is the first source of information to be reviewed and will
be evaluated thoroughly. Thus, it is the agent's responsibility to see that an applicant's answers to questions on the
application are fully and accurately recorded. There are three basic parts to a typical life insurance application:
Part I-General, Part II-Medical, and Part III-Agent's Report.

Part I-General

Part I of the application asks general questions about the proposed insured, including name, age, address,
birth date, sex, income, marital status, and occupation. Details about the requested insurance coverage are
also included in Part I, such as:

► Type of policy
► Amount of insurance
► Name and relationship of the beneficiary
► Other insurance the proposed insured owns
► Additional insurance applications the insured has pending

Other information sought may indicate possible exposure to a hazardous hobby, foreign travel, aviation activity, or
military service. Whether the proposed insured smokes is also indicated in Part I.

Part II-Medical

Part II focuses on the proposed insured's health and asks a number of questions about the health history. This medical section must be completed in its entirety for every application. Depending on the proposed policy face amount, 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.

Part lll-Agent's Report

Part III of the application 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.

In Part III, the agent provides additional information about the applicant's financial condition and character, the
background and purpose of the sale, and how long the agent has known the applicant. The agent's report also
usually asks if the proposed insurance will replace an existing policy. If the answer is "yes," most states demand that
certain procedures be followed to protect the rights of consumers when policy replacement is involved.

The Medical Report

Quite often, a policy is issued on the basis of the information provided in the application alone. If the application’s medical section raises questions specific to a particular medical condition, the underwriter may also request an
attending physician's statement (APS) from the physician who has treated the applicant. An insurer's request for an attending physician's report must be accompanied by a copy of the signed authorization. The statement will provide details about the medical condition in question. Medical reports must be completed by a qualified person, but that person does not necessarily have to be a physician. Many companies accept reports that are completed by a paramedic or a registered nurse. When completed, the medical report is forwarded to the insurance company, where it is reviewed by the company's medical director or a designated associate.

The Medical Information Bureau

Another source of underwriting information that specifically focuses on an applicant’s medical history is the Medical
Information Bureau (MIB). The MIB report will also identify life insurance in force with other carriers as well as lifestyle habits such as drug use. The bureau is formed by more than 700 member insurance companies.

Its purpose is to serve as a reliable source of medical information concerning applicants and to help disclose cases
where an applicant either forgets or conceals pertinent underwriting information, or submits erroneous or misleading
medical information with fraudulent intent. A Medical Information Report (MIB) may disclose lifestyle habits such as drugs, drinking, overeating and smoking.The MIB operations help to hold down the cost of life and health insurance for all policyowners through the prevention of misrepresentation and fraud. Information received from the Medical Information Bureau (MIB) about a proposed insured may be released to the proposed insured's physician. This is how the system works. If a company finds that one of its applicants has a physical ailment or impairment listed by the MIB, the company is pledged to report the information to the MIB in the form of a code number. By having this information, home office underwriters will know that a past problem existed should the same applicant later apply for life and health insurance with another member company. The information is available to member companies only and may be used only for underwriting and claims purposes. Information received from the Medical Information Bureau (MIB) about a proposed insured may be released
to the proposed insured's physician.

USA Patriot Act

The USA Patriot Act was enacted in 2001 and requires insurance companies to establish formal anti-money laundering programs. The purpose of the USA Patriot Act is to detect and deter terrorism.A life insurance policy that can be cash-surrendered is an attractive money laundering vehicle because it allows criminals or terrorists to put dirty money in and take clean money out in the form of an insurance company check.

Special Questionnaires

When necessary, special questionnaires may be required for
underwriting purposes to provide more detailed information related
to aviation or avocation, foreign residence, finances, military service,
or occupation. For example, if an applicant has a hobby of skydiving,
the insurance company needs detailed information about the extent of
the applicant’s participation to determine whether or not the insurance
risk is acceptable. The most common of these special questionnaires is the aviation questionnaire
required of any applicant who spends a significant amount of time flying.

Inspection Reports

Inspection reports usually are obtained by insurance companies on applicants who apply for large amounts of life
and health insurance. These reports contain information about prospective insureds, which is reviewed to determine
their insurability. Insurance companies normally obtain inspection reports from national investigative agencies or firms and may contain information obtained by a telephone call to the proposed insured.

The purpose of these reports is to provide a picture of an applicant's general character and reputation, mode of
living, finances, and any exposure to abnormal hazards. Investigators or inspectors may interview employees,
neighbors, and associates of the applicant, as well as the applicant. 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.
An insurer's obligation involving the disclosure of an insured's nonpublic information is to give notice,
explain, and allow opting out.

Inspection reports ordinarily are not requested on applicants who apply for smaller policies, although company
rules vary as to the sizes of policies that require a report by an outside agency.

If an insurance company obtains an inspection report on a prospective insured, it must inform the prospect that
it is permitted to do so under The Fair Credit Reporting Act.

Credit Reports

Some applicants may prove to be poor credit risks, based on information obtained before a policy is issued. Thus,
credit reports obtained from retail merchants’ associations or other sources are a valuable underwriting tool in
many cases.

Applicants who have questionable credit ratings can cause an insurance company to lose money. Applicants with
poor credit standings are likely to allow their policies to lapse within a short time, perhaps even before a second
premium is paid. An insurance company can lose money on a policy that is quickly lapsed, because the insurer’s
expenses to acquire the policy cannot be recovered in a short period of time. It is possible that home office
underwriters will refuse to insure persons who have failed to pay their bills or who appear to be applying for more
life and health insurance than they reasonably can afford.

The Fair Credit Reporting Act of 1970

To protect the rights of consumers for whom an inspection or credit report has been requested, Congress in 1970
enacted the Fair Credit Reporting Act. As previously mentioned, this federal law applies to financial institutions that
request these types of consumer reports. Insurance companies fall under this category.

Applicant Ratings

Once all the information about a given applicant has been reviewed, the underwriter seeks to classify the risk that the
applicant poses to the insurer.This evaluation is known as risk classification. In a few cases, an applicant represents a risk so great that the applicant is considered uninsurable, and the application will be rejected. However,
the majority of insurance applicants fall within an insurer's underwriting guidelines and accordingly will be
classified as a preferred risk, standard risk, or substandard risk.

Preferred Risk

Many insurers reward good risks by assigning them to a preferred risk classification. Companies issue preferred risk policies with reduced premiums with the expectation of better than normal mortality or morbidity experience. Characteristics that contribute to a preferred risk rating include not smoking, weight within an ideal range, and not drinking.

Standard Risk

Standard risk is the term used for individuals who fit the insurer's guidelines for policy issue without special
restrictions or additional rating. These individuals meet the same conditions as the tabular risks on which the
insurer's premium rates are based.

Substandard Risk

A substandard risk is one below the insurer’s standard or average risk guidelines. An individual can be rated as
substandard for any number of reasons: poor health, a dangerous occupation, or attributes and habits that could be
hazardous. Some substandard applicants are rejected outright. Others will be accepted for coverage but with an
increase in their policy premium.

As noted earlier, an agent plays an important role in underwriting. As a field underwriter, the agent initiates the
process and is responsible for many important tasks: proper solicitation, completing the application thoroughly and
accurately, obtaining appropriate signatures, collecting the initial premium, and issuing a receipt. Each of these tasks
is vitally important to the underwriting process and policy issue.

Proper Solicitation

As a representative of the insurer, an agent has the duty and responsibility to solicit good business. This means that
an agent's solicitation and prospecting efforts should focus on cases that fall within the insurer’s underwriting
guidelines and represent profitable business to the insurer. At the same time, the agent has a responsibility to the
insurance-buying public to observe the highest professional standards when conducting insurance business.

As in many states, an agent is required to deliver to the applicant a Buyer’s Guide and a Policy Summary. These documents are usually delivered before the agent accepts the applicant’s initial premium. Typically, the buyer's
guide is a generic publication that explains life and health insurance in a way that average consumers can understand.
It speaks of the concept in general terms and does not address the specific product or policy being considered.

The policy summary addresses the specific product being presented for sale. It identifies the agent, the insurer, the
policy, and each rider. It includes information about premiums, dividends, benefit amounts, and insurance cost indexes of the specific policy being considered.

Completing the Application

The application is one of the most important sources of underwriting information and it is the agent's responsibility to
see that it is completed fully and accurately. An insurance company will return the application to the agent if the agent submits an incomplete application. Statements made in the application are used by insurers to evaluate risks and
decide whether or not to insure the applicant. An applicant’s statements are considered representations. Representations are statements an applicant makes as being substantially true to the best of the applicant's
knowledge and belief, but which are not warranted to be exact in every detail. Representations must be true
only to the extent that they are material to the risk.

Warranties are statements that are guaranteed to be correct. A warranty that is not literally true in every detail, even
if made in error, is sufficient to render a policy void. If an insurer rejects a claim based on a representation, it bears
the burden of proving materiality. Representations are considered fraudulent only when they relate to a matter
material to the risk and when they were made with fraudulent intent.

Each application requires the signatures of the proposed adult insured, the policyowner (if different from the
insured), and the agent who solicits the application. The applicant's signature is required on an insurance
application to represent that the statements on the application are true to the best of the applicant's knowledge.
By reading and signing the insurance application, the applicant should realize that any false statements on an
insurance application could lead to loss of coverage.

Where required by state law, the agent also must sign a form attesting that a disclosure statement has been given to
the applicant. Moreover, a form authorizing the insurance company to obtain investigative consumer reports or
medical information from investigative agencies, physicians, hospitals, or other sources generally must be signed by
the proposed insured and the agent as witness. The name of the insurance company and the agent’s name and
license identification number must appear on the application. It may be printed, typed, stamped, or handwritten,
if legible.

Changes in the Application

The application for insurance must be completed accurately, honestly, and thoroughly, and it must be signed by the
insured and witnessed. When an applicant makes a mistake in the information given to an agent in completing the
application, the applicant can have the agent correct the information, but the applicant must initial the correction. If
the company discovers a mistake, it usually returns the application to the agent. The agent then corrects the mistake
with the applicant and has the applicant initial the change.

Initial Premium and Receipts

It is generally in the best interests of 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 usually help solidify the sale and may accelerate
the payment of commissions on the sale. However, if a 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 valid until the
initial premium is collected. Recall that one of the requirements for a valid contract is consideration. In the case of an insurance contract, the consideration is the first premium payment plus the application. An insurer will not allow an applicant to possess a policy without receipt of the initial premium.

Premium Mode

Premium Mode refers to the policy feature that permits the policyowner to select the timing of premium
payments. Insurance policy rates are based on the assumption that the premium will be paid annually at
the beginning of the policy year and that the company will have the premium to invest (interest factor)
for a full year. If the policyowner chooses to pay the premium more than once per year (example monthly,
quarterly, semi- annually) there normally will be an additional charge because the company will have additional
charges in billing and collecting the premium payments. Sometimes referred to as the Mode of Premium provision.

Premium Payment Options:

► Annual
► Semi-Annual
► Quarterly
► Monthly

Note: The higher the frequency of payments, the higher the premiums

 

 

Conditional Receipts

The most common type of premium receipt is the conditional receipt. A conditional receipt indicates that certain
conditions must be met in order for the insurance coverage to go into effect. The conditional receipt provides that
when the applicant pays the initial premium, coverage is effective on the condition that the applicant proves to be
insurable either on the date the application was signed or the date of the medical exam.If the applicant proves to be uninsurable as of the date of application or of the medical exam, no coverage takes effect and the premium is refunded.

Binding Receipts

Under a binding receipt, coverage is guaranteed until the insurer formally rejects the application. Even if the
proposed insured is ultimately found to be uninsurable, coverage is still guaranteed until rejection of the application.
Since the underwriting process can often take several weeks or longer, this can place the company at considerable
risk. Accordingly, binding receipts are often reserved only for a company's most experienced agents. Like the
conditional receipt, a binding receipt typically stipulates a maximum amount that would be payable during the
special protection period.

After the underwriting is complete and the company has decided to issue the policy, other offices in the company
assume the responsibility for issuing the policy. Once issued, the insurance contract is sent to the sales agent for
delivery to the applicant. The policy usually is not sent directly to the policyowner since, as an important
legal document, it should be explained by the sales agent to the policyowner.

Constructive Delivery

From a legal standpoint, policy delivery may be accomplished without physically delivering the policy into the
policyowner's possession. Constructive delivery is accomplished technically 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. However, if
the company instructs the agent not to deliver the policy unless the applicant is in good health, there is no
constructive delivery.

Explaining the Policy and Ratings to Clients

Most applicants will not remember everything they should about their policies after they have signed the application.
This is another reason agents should deliver policies in person. Only by personally delivering a policy does the
agent have a timely opportunity to review the contract and its provisions, exclusions, and riders. In fact, some
states (and most insurers) insist that policies be delivered in person for this very reason.

The agent's review is especially important, for it helps to reinforce the sale and prevent a potential lapse. It can
also lead to future sales by building the client’s trust and confidence in the agent's abilities.

Explaining the policy and how it meets the policyowner's specific objectives helps avert misunderstandings, policy
returns, and potential lapses. Agents sometimes may have a chance to prepare applicants in advance when it
appears that policies may be rated as substandard, which normally requires an extra premium.

Obtaining a Statement of Insured's Good Health

In some instances, the initial premium will not be paid until the agent delivers the policy. 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.

The agent then is to submit the premium with the signed statement to the insurance company. Because there can be
no contract until the premium is paid, the company has a right to know that the policyowner has remained in
reasonably good health from the time the policyowner signed the application until receiving the policy. In other
words, the company has the right to know if the policyowner represents the same risk to the company as when the
application was first signed.

• Excessive drinking and the use of drugs represent serious moral hazards

• Applicants who are seen as accident prone or potential malingerers (feigning a continuing
  disability in order to collect benefits) likewise might be heavy risks, particularly those applying
  for disability income insurance

• Other signals of high moral hazard can be a poor credit rating or dishonest business practices

Occupation

• There is little physical risk associated with professional persons, office managers, or office
  workers. However, occupations involving heavy machinery, strong chemicals, or high electrical
  voltage, for example, represent a high degree of risk for the insurer.

• According to the change of occupation provision, if the insured changes to a less hazardous job,
  the insurer will return any excess unearned premium. However, if the change is to a more
  hazardous occupation, the benefits are reduced proportionately and the premium remains the same

Other Risk Factors

Additional health insurance risk factors include the applicant's age, sex, medical and family history, and
avocations.

Age

Generally, the older the applicant, the higher the risk

Sex

An applicant's sex is also an underwriting consideration. Men show a lower rate of disability than
women, except at the upper ages. Women are sometimes required to undergo a Pap test, which is used for detecting cervical cancer.

History

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

Avocations

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

Insurable Interest

• An 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

Classification of Applicants

There are four ways to classify the applicant and their request for health coverage: as a preferred risk, a
standard risk, a substandard risk, or an uninsurable risk.

• Standard risk applicants are usually issued a policy at standard terms and rates

• Preferred risks generally receive lower rates than standard risks, reflecting the fact that  people in this class  have a better-than-standard risk profile

• Uninsurable applicants are usually rejected and denied coverage

• Substandard risk applicants (those who pose a higher-than-average risk for one or more
  reasons) are treated differently. The insurer can either: reject the risk, charge
 a higher premium (called a rating), or attach a rider excluding specified coverages

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.

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.

Secondary Premium Factors

• The benefits provided under the policy

• Past claims experience

• The age and sex of the insured

• The insured's occupation and hobbies

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.

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

• When determining the appropriate coverage and final premium rate for group health insurance, the
  insurer's underwriters will use the group's experience rating. An experience rating system is used to
  estimate how much a specific group will have to spend on medical care.

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.

►HEALTH INSURANCE PREMIUM FACTORS

Premium Mode

Health insurance policies are typically paid monthly, quarterly, semi-annually, or annually. Single premium is not used when paying for health insurance policies.

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.

Age and Sex of the Insured

As discussed earlier, experience has shown that health insurance claims costs tend to increase as the
age of the insured increases.

Occupation and Hobbies

• Some types of work are more hazardous than others, the premium rates for a person's health  insurance policy may be affected by occupation

• The same holds true for any dangerous hobbies in which the insured may participate

►TAX TREATMENT OF HEALTH INSURANCE PREMIUMS AND BENEFITS

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, the benefit will be received tax-free
 in proportion to the premium contributed

Taxation of Medical Expense Insurance

• Incurred medical expenses that are reimbursed by insurance may not be deducted from an
  individual's federal income tax

• Incurred medical expenses that are not reimbursed by insurance may only be deducted to the
  extent they exceed 7.5% of the insured's adjusted gross income

• Tax-qualified long-term care premiums are considered a medical expense. If a taxpayer's medical expenses exceed 7.5%
  of their adjusted gross income, long-term care premiums are tax deductible.

• Benefits received by an insured under a medical expense policy are not included in gross
  income because they are paid to offset losses incurred

• For self-employed individuals, 100% of their health insurance premium is tax deductible

►MANAGED CARE

Policy 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 and contain costs

• 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

Medical Cost Management

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

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

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

• In an emergency situation, hospital pre-admission certification typically requires notification be given after
the patient is admitted to the hospital

• Pre-admission, pre-hospitalization, and pre-certification are all common names used for this
 particular type of managed care

• 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

Concurrent Review

Concurrent review (sometimes called “utilization review”) is part of a managed care program in which health care is reviewed as it is being provided. It 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.

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.

Case Management

• 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


Point-of-Service Plans

A point-of-service (POS) health plan is best defined as a plan that combines indemnity plan features with those of HMO's. It allows the insured to choose either a 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)