INSURANCE UNDERWRITING

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WHEN an insurance application is received by an insurance company, the administration department will set up the application on the company’s underwriting system.

This system can be web base, electronic or in some cases paper. At this point the underwriter will have a task to assess the risk and classify it according to its likelihood of a loss.

He/she will verify and recommend whether the risk should be accepted and if so how the policy should be issued. Insurance companies cannot assume that every proposed insured object will represent an average likelihood of loss.

For instance, motor insurance has different tariffs depending on the type of car, experience of the driver, location of the risk, usage of the car, etc, reflecting the different likelihood of suffering a claim.

The process of identifying and classifying the degree of risk represented by a proposed

insured object is an important aspect of underwriting or risk selection. To assess the risk the underwriter uses relevant information contained in the application form to screen the object to be insured from possible risks. For illustration’s sake, the location of a building in a non flood prone area will exclude the flood exposure peril.

By the same token, a particular Construction Code will allow for the exclusion of say perils created by winds below a certain strength. The underwriter will also use data bases to check on the risk exposure, possible past claims, or declined applications in the past.

Underwriters will do a medical review on the client and will pay attention to the client answers on the application form. As a next step and because insurance companies have a duty to exercise reasonable care in determining whether insurable interest exists and whether the consent of the insured has been obtained to avoid legal implications.

Underwriters will look at the beneficiary’s insurable interest.

The presence of insurable interest must be established for every life insurance policy to make sure that the insurance contract is not challenged to be an illegal wagering agreement. If an insurable interest is not found at the time of underwriting, the policy will not be issued.

To determine insurable interest the following rule of thumb is followed; Insurable

interest exists when the proposed insured is likely to benefit if the insured continues to live and is likely to suffer some loss or detriment if the insured dies.

Underwriters screen every application for life insurance and make sure that the insurable interest requirement imposed by law will be met when the policy is issued.  Stated differently the underwriter must determine whether the beneficiary of the life insurance policy has an insurable interest in the proceeds of the insurance policy. A person is always deemed to have an unlimited insurable interest in one’s own life and health.

Therefore, the beneficiaries of the policies do not need to prove an insurable interest as long as they are deemed to be concerned with the insured life.

There are guidelines for those persons and entities deemed to have insurable interest in the proposed insured life. They fall into three categories, relations by blood or marriage, business relationship, and creditors.

Blood or Marriage; People generally have an insurable interest in the lives of their spouses and dependents. Based on this relationship, the general rule of thumb is:

Insurable Interest; Husbands and wives, parents and children, including adopted children, grandparents and grandchildren, brothers and sisters, engaged couples. This will depend on the country.

No Insurable Interest; Other relatives by marriage, nieces and nephews, cousins, uncles and aunts, stepchildren and stepparents. Business Relationship; One who receives economic benefit from the continued life and good health of another has an insurable interest in that person’s life.

For instance, employers can take out “key person” life insurance on key employees, corporations can take out insurance on the lives of their officers, and business partners can take out life insurance on each other. Thus, an insurable interest may be created in an otherwise non-insurable interest relationship by the existence of a financial dependency or a business relationship between the parties.

For example, an uncle may be deemed to have an insurable interest in a nephew because the uncle’s business is run by the nephew and the business, as run by the nephew, is making money for the uncle.

Creditors are allowed to take out life insurance on the lives of their debtors, with the debtors’ consent, up to the limit on the debt. Mortgage and credit insurance are examples of this type of insurance. The underwriter then reviews the non-medical aspects of the application to access the moral and physical risks.

The purpose of insurance is to protect. Hence, the underwriter will look in the application form for a valid insurance purpose like estate planning, business or family protection etc.

The occupation of the applicant is relevant because some occupations are hazardous and increase the risk of death, disability or accidental death. The income of the applicant is also important to determine if the amount of insurance applied for is justified.

The use of tobacco or smoking is another important factor affecting mortality and morbidity as is the excessive intake of alcohol. In addition, the vocation and frequency of foreign travel are also important factors in the risk assessment process as these could also have an impact on mortality and morbidity.

As a final step the underwriter will analyze the medical exam or paramedical exam, blood profile, and electrocardiogram and in some cases the attending physician statements if applicable. Reviewing the medical information is also critical as the underwriter has to determine that there is no adverse medical history that could result in a poor mortality or morbidity risk.

During this step the underwriter’s knowledge of medicine is valuable to interpret and understand the information received from the attending physician or specialist like pathology reports, tests results from MRI’s, CT scans, to mentioned but a few examples.

Insurance acceptance; Here the underwriter will determine under which conditions the risk should be accepted. Upon the completion of identifying the risks, the underwriter will classify the insured object in to the appropriate risk class. Classifying risk into classes allows an insurance company to determine the appropriate premium rate that should be charged.  Not having such differentiation of the risk classes would result in some insured policies being charged too much premium while others will be too cross subsidized as they would be charged less than the actual cost for insurance. In a competitive market this cross subsidy will create a serious competitive disadvantage for the insurance company.

Underwriters follow general rules for the risk classification. These rules are referred to as underwriting guidelines or selection tables. Every insurance company develops its own guidelines.

It is standard for insurance companies to have guidelines or selection tables that identify various classes according to the likelihood of a claim. Further, if a risk does not meet any of the classes mentioned then the risk is declined. Look out for Part IV.

*Note: In this column I offer general insurance information. Do not completely rely on this column in making insurance decisions. For specific guidelines email; insuculture@gmail.com

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