Ramesh Venkataraman's Blog

Insurance Concepts - Part 6 - Underwriting Process

The Underwriting Process

Once an application is received from an applicant for Life Insurance, the underwriter evaluates it using various criteria for initial screening, as depicted in our earlier mail. The underwriting process for most individual life insurance products involves the following steps:
 

Perform field underwritingReview the applicationGather additional information to make a sound underwriting decisionMake an underwriting decision

For group life insurance, a group underwriter performs the following tasks:

Reviews the characteristics of the proposed groupEvaluates the insurance coverage and services requestedAssesses any previous claims and premium experience for the groupLet’s look at few important points of individual underwriting. 
Perform Field Underwriting

Field underwriting is the process in which a producer screens an applicant for life insurance and gathers initial information about the proposed. To assist a producer during field underwriting, most insurers develop a field underwriting manual. A field underwriting manual is a document that presents specific guidance for a producer's assessment of the risks represented by proposed insureds and guides the producer in assembling and submitting the evidence of insurability, which is documentation that the proposed insured appears to be an insurable risk.

Agent's Statement

Producer's are urged to report any information they know or suspect about a proposed insured that could influence the underwriter's decision, but which the applicant may not have mentioned. Producers report this information in the Agent's Statement, which is a portion of the insurance application in which a producer can comment at length on any factors relevant to the case and the risk it involves.

Tele-underwriting

It is an alternative to field underwriting, which is a method by which a home office employee or a third-party administrator, rather than a producer, gathers most of the information needed for underwriting. As the name suggests, tele-underwriting takes place through a telephone interview.

Review the Application for Insurance

Application for Life Insurance is standardized by ACORD (Association for cooperative Operations Research and Development), which is adopted by almost all Life Insurers.

Association for cooperative Operations Research and Development (ACORD)

ACORD (Association for Cooperative Operations Research and Development) is a global, nonprofit standards development organization serving the insurance industry and related financial services industries. ACORD’s mission is to facilitate the development of open consensus data standards and standard forms. ACORD members include hundreds of insurance and reinsurance companies, agents and brokers, software providers, and industry associations worldwide. ACORD works with these organizations towards a goal of improved data communication across diverse platforms through implementation of standards. ACORD maintains offices in New York and London. (www.acord.org)
 
Specimen ACORD application for Life Insurance is as follows:

Traditionally, an insurance application contains two parts.
 
Part I of the life insurance application identifies the proposed insured and the applicant (if different from the proposed insured), specifies the amount and type of coverage requested, and provides basic insurability information.

Part II of the insurance application provides the insurer with medical information about the proposed insured and generally takes one of three forms:

Medical report - A medical report is the most extensive Part II information form and is a report on the proposed insured’s health that is designed to be completed by both the proposed insured and a physician.Nonmedical supplement - A nonmedical supplement contains health history questions that a producer or teleunderwriting specialist asks a proposed insured.Paramedical report - A paramedical report contains the proposed insured’s answers to medical history questions and the results of certain physical examinations made by a paramedical examiner.The decision on which of these three forms to use for a particular application generally depends on

 
The insurer’s nonmedical limits—the total amount of life insurance that the insurer will issue on a proposed insured without requiring a medical examination
The cost of a medical or paramedical examination in relation to the amount of insurance applied for
Nonmedical limits usually apply to the sum of the insurance being applied for and the insurance already in force with the insurer.

Gather additional information to make a sound underwriting decisionUnderwriters gather additional information to take an informed decision, in the form of Medical and Personal Information.
 
Sources of Medical InformationAn underwriter can obtain additional medical information about proposed insureds from a number of sources, including
 
Attending physician's statements

Reports by a physician who has treated the proposed insured
Specialized medical questionnaires, which are documents that request detailed information about a specific illness or condition from a proposed insured's attending physician or a physician who has examined the proposed insured at the insurer's request

Laboratory tests, such as urinalysis, ordered in accordance with the insurer's  published underwriting requirements

MIB reports requested from the MIB Group, Inc. (MIB), a nonprofit organization that provides coded information to insurers about impairments that applicants have disclosed or insurers have detected in connection with previous insurance applications

Pharmaceutical databases, which are organized collections of information about the medications that have been prescribed for individuals

Sources of Personal Information

An underwriter can obtain additional personal information about proposed insureds from a number of sources, including
 
Motor vehicle records  about a person's driving history, including traffic violations and arrests and convictions for driving-related accidents
Inspection reports, which would investigative consumer reports prepared by a consumer reporting agency for an insurer to use during the underwriting process

Personal questionnaires designed to gather information from the proposed insured about the extent of her involvement in a specified activity that the insurer believes may increase mortality risk  

Table of Underwriting Requirements

For each life insurance product it sells, life insurers typically develop a table of underwriting requirements, which is a document that specifies the kinds of information the underwriter must consider when assessing the insurability of a person who is proposed for coverage under that product. The greater the risks being evaluated—such as large amounts of insurance or older proposed insureds—the greater the amount of information required.

Make an underwriting decision

When making an underwriting decision, an underwriter generally has one of three choices:

Approve the coverage as applied for
Rate the application - Rating is the process of increasing the premium rate or modifying the type or amount of coverage to approve a risk.
Decline the application

To make risk classification and premium rate decisions, life underwriters typically use a numerical rating system, which is a risk classification method in which a number is assigned to an individual proposed insured according to the degree of risk he presents to the insurer.

Policy Issuance

If the underwriting decision is to approve the coverage, the underwriter releases the file to the policy issue department. Policy issue is the insurance company functional area that prepares the insurance contract and facilitates the delivery of the policy to the policy owner, usually through the producer who sold the insurance.

Insurance Concepts - Part 5 - Life Insurance Underwriting

What's Underwriting ?

We may recall underwriting is the process of assessing and classifying the degree of risk represented by a proposed insured or group and making a decision to accept or decline that risk. An underwriter is an insurance company employee who evaluates risks, accepts or declines life insurance applications, and determines the appropriate premium rate to charge acceptable risks.

Underwriting Initiation 

When a customer decides to take a life insurance policy, in general, he or she submits an application to the producer. The Application form is used to gather information that will be used by underwriters.  All applications ask for the details like name and address of the applicant and the date when coverage would begin. The rest of the application form contains questions specifically relating to the type and amount of insurance being requested.

The decision an underwriter makes regarding the classification of a risk and the premium rate to charge for insurance coverage is referred to as the underwriting decision.

Underwriting Parameters 

Parameters considered during the underwriting decision process are:

 Impairment

It is any aspect of a proposed insured's current health, health habits, medical history, or family medical history that could increase his expected mortality risk.

Mortality

It is the likelihood that a person will die sooner than statistically expected. To evaluate the degree of mortality risk presented by a proposed insured, the underwriter looks at information about impairments.

Anti-selection

The tendency of people who  suspect or know they are more likely than average to experience loss  to apply for insurance protection to a greater extent than people who lack such knowledge of probable loss.

Risk Classes

A risk class is a group of insureds that represent a similar level of risk to an insurance company. General risk classes include:

Preferred class

Proposed insureds whose anticipated mortality is lower than average and who represent the least degree of mortality risk. In such cases, underwriters usually offer discount in standard premium.

Standard class

Proposed insureds whose anticipated mortality is average. Standard premium rates are applied here.

Substandard class

Proposed insureds whose anticipated mortality is higher than average, but who are still considered to be insurable. In such risks, premium rates are slightly jacked up.

Declined class

Proposed insureds whose impairments and anticipated extra mortality are so great that the insurer cannot provide coverage at an affordable cost or whose mortality cannot be predicted because of recent medical conditions. In normal underwriting practice, such risks are declined.

Risk Assessment Factors for Individual Underwriting

Individual underwriting takes care of individuals and their family members. In such cases, Insurers typically divide risk factors into three categories:

Medical risk factors

They include build, which is the shape or form of the person's body, including the relationships among height, weight, and the distribution of weight – Body mass index (BMI). Medical risk factors also include personal medical history, family medical history, tobacco use, and alcohol and substance abuse.

Personal risk factors

They include moral hazard, which is the likelihood that a person involved in an insurance transaction may be dishonest in that transaction. Personal risk factors also include occupation, avocations and hobbies, aviation activities, international residence, driving history, etc.

Financial risk factors

While its evaluation, the underwriter ensures that the amount of insurance sought is not excessive. In addition, at the time of policy issue, the applicant or beneficiary must have an insurable interest in the risk that is insured—that is, the applicant or beneficiary must be likely to suffer a genuine loss or detriment should the event insured against occur.

Risk Assessment Factors for Group Underwriting

 Group underwriting takes care of members and their families of a group, e.g. employees of a company, members of an organization, etc. The risk assessment factors that most insurers consider for groups are the:

Proposed coverageReason for the group's existenceNature of the group's business and group sizeGeographic location of the groupAge and sex distribution of the group membersStability of the groupLevel of participationClasses of employeesExpected persistency and prior experience

Insurance Concepts - Part 4 - Underwriting

The Origin Of the term Underwriting and Underwriter

The term underwriter was first used in Europe in the context of Marine Insurance. In the 17th  Century, when a sea voyage is about to start, the details like destination, type and age of ship, type of cargo, route to be taken, etc. were placed on billboards. Businessmen who were willing to take on a portion of the risk for these voyages would list the amount of the voyage they were willing to insure and sign their names underneath these details of the risk. These businessmen became known as underwriters because they wrote their names under the contract terms. Since that time, the insurance business has evolved and policies are no longer underwritten by individuals who insure risks, but the term underwriter continues to be applied to those who review and select risks to insure.

 What is Underwriting ?

 Underwriting is the process in which it would be decided whether to accept or reject a risk – if accept, what terms and conditions, and premium. If reject, the reasons thereof.

Who is an Underwriter ? 

An underwriter is a professional who has the ability to understand the risks to which the underwritten object is exposed to. This ability is gained not only through theoretical study but is also the result of years of experience dealing with similar risks and paying claims on those risks.

 The job of the underwriter is to protect the insurance company from acquiring non profitable business. But this cannot mean that every risk should be declined and the decision has to be balanced with the necessity of accepting well understood risk to grow the business. This balancing act requires often a lot of creativity from the underwriter.

 Experienced underwriters develop a sense for each application that allows them to determine when the risk should be accepted and when declined. It is the job of the underwriter to protect the Insurance company and at the same time to give the agent a suitable policy which can be sold. In some lines of business, underwriters are also responsible to provide best advice with respect to risk protection and are closely involved when designing insurance programs for the individuals and companies looking for protection. Underwriters also work closely with Insurance brokers for understanding the customer’s needs and designing policies to suit their purpose.

 Underwriters analyze information on insurance applications to determine whether a risk is acceptable and will probably not result in an early claim to the insurance company. To be able to properly assess the risk, insurance companies have developed underwriting guidelines to which all underwriters must abide.

 Underwriters are not alone in the risk assessment process. They work closely with the specialists like engineers of various disciplines, scientists, accountants, lawyers, doctors, etc. in determining the most appropriate risk assessment. However, in most insurance companies, the underwriter has the final decision and responsibility on the assessment of the case.

Insurance Concepts - Part 3 - Insurance and Its Classifications

What is an Insurance ?

Till now, we have discussed the Risk, its classification and Risk Management. We have also seen how the concept of Insurance is derived from Risk Transfer, which is one of the important techniques of Risk management.

Insurance is one of the most important risk management tools. An Insured will transfer his or her risk to an Insurer via an insurance contract. Insured is the party effecting insurance, who may be an individual, a Company, Firm, Corporate body etc., with legal status. Insurer is the party granting the protection under an insurance policy.

 The Insured will pay a consideration called premium to the insurer. The premium is  dependent upon the frequency and severity of the event occurring. The Insurer uses premiums collected from every Insured in a group to pay for the losses of the few members of the group. This is with the assumption that not everyone incurs a loss at the same time. This process is referred to as pooling. Pooling effectively allows each individual Insured to share the cost of a loss, so that no one Insured must cover the entire loss himself or herself.

 Insurance is as good as any other legal contract. It needs to have an offer, acceptance, consideration, legality of the transaction and should follow the public policy. It also needs to have common understanding between the parties. It is witnessed by an evidence of the contract called Policy of Insurance.

 Insurance contracts are designed in accordance with basic principles that define which risks are insurable. For a risk, which is a potential loss, to be considered insurable, it must have certain characteristics. These basic characteristics define an insurable risk and form the foundation of the business of insurance. A potential loss that does not have these characteristics generally is not considered insurable.

Classifications Of Insurance

The insurance domain is broadly classified into 4 parts. They are outlines in the below sections.

Health & Disability Insurance

 Pays for medical expenses for sickness or accidental bodily injury.

It is sometimes used more broadly to include insurance covering disability or long-term nursing or custodial care needs.

Provided through a government-sponsored social insurance program, or from private insurance companies.

Purchased on a group basis (e.g., by a firm to cover its employees) or purchased by individual consumers.

Life Insurance

Life insurance provides a monetary benefit to a decedent's family or other designated beneficiary, and may specifically provide for income to an insured person's family, burial, funeral and other final expenses.

Life insurance policies often allow the option of having the proceeds paid to the beneficiary either in a lump sum cash payment or as an annuity.

Annuities

It is recurring periodic series of payments. Annuities are also called Pensions.

 Property and Casualty (P&C) Insurance

 Property and Casualty insurance consists those forms of Insurance designed to protect against losses resulting from damage to or loss of property and losses arising from legal liabilities.

Property Insurance is designed to indemnify the insured for loss of or damage to building, furniture, fixtures or other personal properties.

Casualty insurance is designed to protect the insured  from losses arising out of Legal Liabilities

Insurance Concepts - Part 2 - Risk Management

What's a Risk ?

We may recall the definition of Risk:  “Risk is defined as uncertainty concerning occurrence of loss”. Risk exists if there is something we don’t want to happen – having a chance to happen.

 Uncertainty is measured in terms of  Probability, which is a measure of the likelihood that the Risk Event will occur.

 Now a potential question arises. Can we have control over a Risk? No, we cannot. We can only manage a Risk, which we call “Risk Management”.

 What's Risk Management ?

Risk Management is the process of reducing the threat of loss due to uncontrollable events.There are four techniques of Risk Management. They are outlines below.

Avoiding the Risk

When a company avoids risk, it eliminates the possibility that a particular event will occur, i.e. providing a zero probability of their occurrence. In practice, we  seek to avoid activities that have high potential severity and high frequency. e.g. To avoid the possibility of a suit for any faulty products - not to produce them, which would eliminate both the threat of a lawsuit and the opportunity to profit. With rare exceptions, avoiding risk entirely is extremely difficult. It may not be practical either.

Reducing Risk

A more practical approach is to reduce the risk by taking precautions. Risk reduction is an important element in most companies' approach to risk management. It would reduce the probability that the event will occur and in turn reduce the impact if the event does occur. Typical precautions include putting safety locks on doors to prevent robberies, installing overhead sprinklers to minimize fire damage, and periodic checking motor vehicles to prevent accidents.

Assuming risk

Firms retain (or pay themselves) potential losses that are low in frequency and low in severity. Thus the philosophy is to think - Let the risk happen and be ready to bear the consequences. Many companies draw on current revenues or set aside a "Contingency Fund" to cover unexpected losses. Setting aside money on regular basis could be cheaper than purchasing insurance. Moreover, the company can earn interest on the reserved cash. Such assumption of risk is also called self-insurance or risk retention.

 Transferring the risk

In this technique, we transfer the cost of an undesirable outcome to someone else. For pure risks, Insurance may be a good choice and for speculative risks, other transfer techniques may be used called ‘Alternative Risk Transfer (ART)’. In buying insurance, companies transfer the risk of loss to an insurance firm, which agrees to pay for certain types of losses. In exchange, the insurance firm collects a fee known as a premium.

 By understanding ‘Transferring the Risk’, we begin our long journey called Insurance.

 

Insurance Concepts - Part 1 - Risk

What's a Risk ? 

When you read you begin with A-B-C
We can take a cue from this number –When you try to understand Insurance, you begin with the Concept of Risk…

 Risk is defined as uncertainty concerning the occurrence of a loss. e.g. The risk of being killed in an auto accident, the risk of lung cancer for smokers, etc.

Types Of Risks

There are many kinds of Risks, out of which a couple are important for understanding Insurance. They are:

Pure Risk

Pure Risk is defined as a situation in which there are only the possibilities of loss or no loss. The only possible outcomes are adverse (loss) and neutral (no loss).

e.g. Premature death, job-related accidents, catastrophic medical expenses, damage to property from fire, lightning, flood, or earthquake.

Speculative Risk

It is defined as a situation in which either profit or loss is possible. e.g. Share/Stock trading, betting on a horse race, investing in real estate, etc.

 It can be seen that in the above situations, both profit and loss are possible.Only Pure Risks are Insured by the Insurers. Speculative Risks generally are not considered insurable, and other techniques for coping with speculative risk must be used.

Pure Risks are further classified into following categories

Personal Risks

These are the risks that directly affect an individual. E.g. premature death, insufficient income during retirement, poor health, etc.Property Risks

Property Risks

The risk of having property damaged or lost from numerous causes.Direct Loss

It is defined as a financial loss that results from the physical damage, destruction, or theft of the property. E.g. A restaurant that is damaged by a fire, the physical damage to the restaurant is known as a direct loss.Indirect or Consequential Loss

An indirect loss is a financial loss that results indirectly from the occurrence of a direct physical damage or theft loss. E.g. loss of profits, loss of rents, the loss of the use of the building, the loss of a local market, Extra expenses, etc. Liability Risks

Under legal system, one can be held legally liable if he/she do something that results in bodily injury or property damage to someone else. E.g. A court of law may order to pay substantial damages to property or the injured person.

Liability Risks

Unpredictable as there is no maximum upper limit with respect to the amount of the loss claimed

a lien can be placed on income and/or financial assets to satisfy the liability

legal / defense costs can be astronomical

Think AGILE - Part 1

During a recent group chat with my tech buds, the term AGILE popped up somehow from somewhere. Then started a long argument about AGILE and is it real or just a myth?  It was an interesting conversation with some of my buds who called it as a myth, a marketing slogan and a buzz with hype. I preferred to stay out of the chat thread and was observing the thought process around the topic. 

I let the chat comments into my mind and was trying to assess my thoughts on it. It was a pretty interesting thought process and decided to jot down my views on the topic based on my experience. When I asked myself "What's AGILE in my view ?", I came up with the following elements of AGILE which really worked with my assignments. 

The elements are of NO particular order. They are just in the order of my perception.

1. Evolutionary and Iterative

The very essence of any AGILE methodology is the abiity to build and refine repeatedly to acheive a certain goal.  This means that the various phases of software development can run in parallel which is contrary to the classical approaces. This iterative approach allows us to visualize the progress made while the software is constructed. This is comparable to the look and feel approach generally used in artistic creations. Typically iterations are designed in terms of weeks ranging from 2 weeks to 6 weeks depending on the variations of the AGILE methodology. This practice allows to easliy track the progress of the work during an iteration. The result of an iteration is either an acceptance or a scrap. The result leads to next iteration to build the next piece or rethink and reconstruct the scrapped piece. Hence the risk of a work is limited to the duration of the iterations in weeks as against months or even years in some cases. This very approach has caught up the attention of many software development projects around the world. This lean and flexible model allows the exeuction team to accomodate changes in the requirements often agile in nature.  

2. Collobrative and Inclusive

The AGILE is best suited for colloborative work. The teams participating in an AGILE method of development must understand and practice the culture of team work. The different work streams are involved in constructing different pieces of a software component. Typically the team gather for a stand up meeting to assess the progress of a particular iteration. Each standup is represented by a member of a developmemt stream, a tester, a BA / SME and an AGILE conductor. The agenda of a standup is two only answer few questions such as "What was done on the previus work day ", " What's on for the current work day ?" and "Are there any issues stopping from performing the current activity ?". The answers to these questins help the team be aware of the progress made and iron out the blocks if any. The colloborative nature is also attributed to the fact of involving the stake holder upfront in every iteration to provide a better visibility of the assignment. This is contrast to the classical approach where team meetings are stretched longer for capturing the status and involvement of the customer happens towards the end of the assignment. The AGILE conductor is responsible for driving the team forward and captture the status of the assignment. 

3. Informally Disciplined Approach

A very common perception among the traditional methods advocates is that AGILE does not have a structual, formal method of execution and does not follow any process. But the fact is that AGILE is very modular in nature and requires a very meticulus planning and tremendous amount of discipline in order to succeed. The AGILE is meant for a very seasoned and experienced teams which in turn implies that discipline is inbuilt and does not require to be taught. Another important facet of this methodology is that it places less importance on excessive docmentation and processes. In other words, the focus is less on documentation and processes and more on execution of the core tasks. This encouages the team to spend all its energy into the core activities and not get distracted and overloaded by unwanted tasks. The concept of Pair Programming is commonly applied by the developers where the peer reviews happen from the other developer. This places importantance to use the best practices during all the phases of the assignment. The best practices ensure proven benchmarks are used to assess the quality. This approach is different from the classical models where the emphasis tend to be more on excessive documentation and processes which has a direct impact on the result  and quality of the assignment.

4. Test Driven Development

This element is my favourite as a software developer. I believe that this is where the AGILE scores high in terms of meeting the requirements and enables tracking the construction towards the business requirements. The input to the developer is the test cases and scenarious as against a requirement document. The requiremnts are converted into s set of test scenarios and cases before the development can begin. This enables the Business Analyst or the Subject Matter Expert to understand and verify the business functions / tasks for a specific purpose / goal. This approach helps the project execution team better plan the construction and avoid costly mistakes of missed requirements. The test scenarious and cases are a series of elementary break-downs of each business function which is expressed ina natural human language. Another very important aspect of this method is that both the negative / exceptional  scenarios and non functional scnarios like performance, throughput etc are outlined in advance enabling the developers to develop a robust piece of software. This is quite opposite to the classical method where the negative and non functional aspects are thought of only post production and in many times post a disruption due to a software glitch.    

5. Focus on Small and Incremental Builds

I think this facet as a natural result of the Iterative Approach. The result of each iteration is a mangeable incremental piece of software packaged and deployed to the test environments. Each iteration throws out a well tested and incremental packages of application unit that strives to acheive a particular business objective. This gives the packaging and deployment teams the ability to deploy and verify the builds well in advance before moving into production environment. Once the package is deployed into the test environment, the regression tests are performed under the guidance and evidence of business users. The test results will allow the business users to ascertain if the software meets the objective or not. 

I know that there are few other important aspects like Scope, Requirement Changes, Manageability, Audit etc which is not covered as part of this post. I will try to cover them as part of another post.

Your thoughts ?

 

Enterprise Applications Hub

Overview

The Enterprise Applications Hub is an enterprise level centralized routing system that enables an organization to securely exchange structured and unstructured information (files) with external parties / organizations / systems. The EAH is a lightweight full fledged and flexible Enterprise Service Bus (ESB) used by internal and external applications / systems for service communications and message interchange in a seamless manner for SOA architecture

Key Benefits

Support transmissions of files sizes ranging from small transactions which are conversational in nature to large bulk file transmissions

Support a publish and subscribe capability which will allow partners with the appropriate relationship to subscribe to information published by EPG and receive it asynchronously

Support a ‘pull’ capability which will allow partners with the appropriate relationship to request information, on demand (synchronously), which was previously published by EPG. 

Potential Use Cases

Data Distribution Framework enabling business entities like Agents / Agencies to subscribe for a variety of insurance data (Policy, Commission etc) and receive them in a standard format like ACORD and native formats using protocols such as Web Services (B2B), FTP, FTPS, SFTP, Email etc.

Service Enablement Platform: Publish legacy business functions as Services using standard Service Oriented Architecture principles.

Service Bus: Enable Internal and External applications to invoke business web services using a an uniform and consistent pattern . The Service bus provides capabilties such as Dynamic Routing,  Guaranteed Delivery, Dynamic Transformation and Data Validation using XML schemas

Extensible Services Platform: Enables an organization to build and maintain services catalog abstracting service invocation details and provide a way to discover business services in a simple and seamless manner .

Building Blocks

1. Scheduling User interfaces for Files exchange.

2. Notification component to notify the business user

3. Partner repository integration

4. Evaluation of Business Rules Policies for dynamic resolution 

5. Partner information management web portal

6. Itineraries , Orchestration and Transformation components

7. Logging and Tracing components

8. Encryption and Decryption components