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.