- A) Underwriting:- basic concepts
The process of insurers to decide whether the proposal to be accepted or rejected depending from the proposal information and insurers requirements and procedure is known as underwriting.
i) Underwriting purpose –
a) To prevent anti selection or selection or selection against the insurer.
b) To classify risks and ensure equity among risks. Equity among risks here refers to those applicants who are exposed to similar degree of risk and are to be grouped together and charged same premium.
ii) Risk classification –
a) Standard lives – those applicants / proposers whose mortality rate is considered to be as per standard requirements.
b) Preferred lives – those applicants / proposers whose mortality rate is significantly low and hence can be charged lower premium.
c) Sub –standard lives – those applicants / proposers whose mortality rate is higher than standard lives but insurable. They are charged extra premium.
d) Declined lives – those applicants / proposers whose mortality rate is very significantly high and cannot be insured at affordable cost.
iii) Selection process – underwriting or selection process takes place at 2 levels
a) Field level (or) primary level – it includes information gathering of proposer through agents. Hence agents are also termed as primary underwriters. He monitors if any information given by proposer is true or not as he is the person who is in direct contact with proposer. He sends his confidential report containing proposer‟s occupation, income, financial standing and reputation.
b) Department level – at office level a specialist person who is expert in judging the collected data and considering this relevant data decides whether to accept or not the proposal. Such experts are known as underwriters.
iv) Underwriting decisions – the various options available to underwriter besides accepting or rejecting the proposal are as follows.
a) Acceptance at ordinary rate (OR) – it is the most common decision where in the proposal is accepted at same premium as it would apply for standard lives.
b) Acceptance at extra rate (ER) – it involves charging extra premium for substandard lives.
c) Acceptance with lien – it is kind of hold on sum assured amount. It implies if a policy is accepted under lien and if the proposer dies within lien period then the nominee is entitled to receive decreased sum assured. Lien is applicable normally for 1/3rd period of the total period.
d) Acceptance with restrictive clause – for certain kind of hazards or restrictive clause is applied; if tomorrow claim arises due to such clause then full sum assured is not payable.
e) Decline or postpone – if the proposer does not fit in any of the above conditions. i.e. They are very adverse and there is little chance of improvement then such cases are declined or decision on them is postponed for certain time period.
Rating factors in underwriting:–
i) Female insurance – insurability of women depends upon various factors such as income source (own, heir); pregnancy problems; moral hazards- domestic violence.
ii) Minors – insurability of minors look for capacity of parents; need for insurance; has properly developed physique; proper family history; parents adequately insured.
iii) Large sum assured – insurability for large sum assured policies raise a doubt of concern. Generally S.A is to be 10-12 times of annual income.
iv) Age – insurability for advanced age group is to be considered with utter care. As chances of moral hazard is very high. Some special reports may be called.
v) Moral hazard – it is termed as characteristics of an individual‟s financial situation, lifestyle, habits, reputation, mental health that indicate his / her intentions.
vi) Occupational hazard – insurability for people with occupational hazard may arise due to accident – driver / circus artists / stuntmen‟s; health – chemical factory workers / nuclear plant / deep sea divers; moral – criminal mind / night club workers.
vii) Lifestyle and habits – drinking and smoking.
viii) Non-medical underwriting: – a large number of proposals get accepted without conducting medical examination. Such cases are termed as non-medical proposals. Depending upon the information given in proposal form such cases are underwritten under non-medical case. Conditions for non-medical underwriting-
Certain categories of female, like working women may be eligible.
Upper limit of sum assured for e.g. Cases above 5lac may need to undergo medical.
Entry level of age. Proposers above 40-45 age may compulsory need medical.
Term of the policy. Insurer might restrict term up to 20 yrs. or maturity age till 60.
Class of lives. Depending upon work area insurer might call for medical.
vi) Medical underwriting: – the medical factors that would influence an underwriter‟s decision. They may often call for a medical examiner‟s report.
Factors involved are :
Family history – 3 factors are taken into consideration in order to understand family history of the proposer
Heredity – certain diseases can be transmitted from one generation to another.
Average longevity of family – if parents have died early due to cancer, heart trouble.
Family environment – the environment in which the family lives.
ii) Personal history – it refers to past impairment of various systems of human body which the proposer might have suffered.
iii) Personal characteristics –
Build – for a given age & height there is a standard weight, if the standard weight is too high or too low then such proposals need to be checked.
Blood pressure – another indicator to know personal characteristic.
Average pulse rate should be 72 and varying between 50-90.
Urine-specific gravity – one‟s urine indicates the salts in the body. Its mal-functioning can be indicated through its test.