Underwriters assess the risks and make premium calculations based on the extent and level of risks.
These exercises are done so as to:
- i. Prevent anti-selection or selection against the insurer
- ii. Classify risks and ensure equity among risks
An “Underwriter” carries out the process of assessing the risk of each person to be insured. He then decides on the grant of policy.
Role of underwriters: Underwriters assess risks and make premium calculations based on the assessed risks.
Risks are assessed based on:
Insurance policies cannot be issued without the decision of the underwriter. This is because insurance works on the principle of “sharing” and “pooling of risks”.
If the risk is wrongly assessed, the premium charged would not be correct. A lower premium affects the solvency of the fund.
Fund: Income from the life insurance business, including earnings from investments, is kept in a fund called Life Insurance Fund.
Equity Among Risks
The term “Equity” means that applicants who are exposed to similar degrees of risk must be placed in the same premium class. We have already seen how life insurers use a mortality table to determine the premiums to be charged.
The mortality table represents the mortality experience of standard lives or average risks.
Selection of insurance applicants is done at two levels.
- Filed Level – Primary Level
- Underwriting Level – Department Level
Primary underwriting: It includes information gathering by an agent or company representative to decide whether an applicant is suitable for granting insurance coverage. The agent plays a critical role as a primary underwriter. He is in the best position to know the life to be insured.
Many insurance companies may require the agents to provide Confidential reports containing specific information, Opinion and recommendations of the prospect and Moral hazard report
Underwriting at the Department Level
- The second level of underwriting is at the department or office level.
- Underwriters of insurance companies take up the responsibility of underwriting policies at the department level.
- Such underwriting involves specialists and persons who are proficient in this work. They consider all relevant data on the case and decide whether or not to accept a proposal for life insurance and on what terms.
There are two methods of underwriting.
Acceptance at Ordinary Rates (OR): This rating indicates that the risk is accepted at the same rate of premium as would apply to an ordinary or standard life. If the person to be insured does not have any adverse features affecting the mortality, then the risk is considered to be normal, standard, first class or average life. In such cases, the premium charged would be as per tabular rates.
Acceptance With an Extra Premium: This is the most common way of dealing with the large majority of sub-standard risks. It involves charging an extra over the tabular rate of premium.
The underwriter has to decide whether to give an insurance cover to someone who has acute diabetics.
Acceptance with a Lien on the Sum Assured: A lien is a kind of hold, which the life insurance company can exercise (in part or whole) on the amount of benefit it has to pay in the event of a claim.
Example 1: It may be imposed in case the life proposed for insurance has suffered and recovered from certain diseases like TB. Lien implies that if the life assured dies from a specified cause (for example relapse of the TB) within a given period, only a decreased amount of death benefit may be payable.
Example 2: Proposals are also accepted with a “lien” in case of occupational hazards. Ex. Formula car racer who wants an insurancecover of Rs. 15 lakhs. In such case:
- The risk is not standard
- The risk is expected to wear off in some years, in this case, say 5 years
- Hence, this does not justify an increase in premium
The underwriter accepts the proposal with a lien. In such a case, the SA is reduced during the “lien period”. This means that if anything happens within the first 5 years of the policy, the sum assured would be paid only Rs. 7 lakhs and not the full sum assured of Rs. 15 lakhs.
Acceptance With a Restrictive Clause: For certain kinds of hazards, a restrictive clause may be applied. Such a clause limits the death benefit in the event of death under certain circumstances.
For example, if the person to be insured is a married female, the underwriting process is different. If it is a 15 years policy, the restriction will be for the period of pregnancy and risk will be excluded.
Decline or Postpone: Finally, a life insurance underwriter may decide to decline or reject a proposal for insurance. This would happen in case of certain health or other features, which are so adverse that they considerably magnify the incidence of the risk.
Example: An individual, who suffers from cancer and has little chance of remission, would be a candidate for rejection.
The case for non-medical underwriting lies in the finding that medical examinations bring out adverse features only in a small proportion (say one tenth) of the cases. The rest can be found out from the answers given in the proposal or the proposed life’s leave records and other documents.
Non-medical cases have restrictions usually with regard to limits on:
- Nature of employment
Conditions for Non-Medical Underwriting
Let us see some of the conditions for non-medical underwriting.
- Only certain categories of females, like working women, may be eligible.
- Upper limits on sum insured may be imposed. For example, any case having a sum assured beyond five lakhs may be subject to a medical examination.
- Age at entry limits may be imposed – for example, anyone above 40 or 45 years of age has to compulsorily get a medical examination done.
- Restriction being imposed with regard to certain plans of insurance. Term insurance, for example, may not be allowed under non-medical category.
- Maximum term of insurance may be limited to 20 years up to age 60.
- Non-medical insurance may also be allowed to certain specific categories of individuals. For instance, employees of reputed firms who have put in one year of service. These companies have proper leave records and may also have periodic medical examinations.
Female Underwriting: The underwriting norms for female lives are different from that of male lives. Hence, the female community will be accepted with a ‘clause’, whereas it will not be so in case of men.
This is because there are:
More pregnancy related deaths, especially in remote areas
Deaths due to domestic violence
Record of frauds
Moral Hazard: The following raise suspicion on the intent of the individual and the consequent moral hazard.
A proposal is submitted at a branch located far away from the place of residence of the proposed insured.
A medical examination is done elsewhere even when a qualified medical examiner is available near one’s place of residence.
The proposal is made on the life of another without having clear insurable interest, or when the nominee is not the near dependent of the life proposed.
Occupational hazards can emanate from any of the three sources:
- Accident Hazards: Certain kinds of jobs expose one to risk of accident. like circus artistes, scaffolding workers, demolition experts and film stunt artistes.
- Health Hazards: When the nature of the job is such that it gives rise to a possibility of medical impairment – for example, rickshaw pullers are exposed to toxic or carcinogenic fumes.
Lifestyle and habits are terms, which cover a wide range of individual characteristics, example: Smoking and use of tobacco, Drinking alcohol & Substance abuse like drugs or narcotics, sedatives and other similar stimulants.
Medical Underwriting: Medical factors influencing the underwriters decision:
Family History: Hereditary diseases, average longevity of family etc.,
Personal History: Personal history refers to past impairments of various systems of the human body that the life to be insured has suffered from.
Personal Characteristics: body build, physical impairments etc.,
Killer diseases are cardio vascular diseases affecting heart and blood systems, leading to cardiac arrest and heart attacks, diseases relating to respiratory system and cancer, renal ailments and so on.
Degenerative Diseases: Diseases of the heart and kidney failure, increase with age and become high at older ages.