LIFE INSURANCE UNDERWRITING

TO properly interpret clients’ medical information and results, it is imperative for the life underwriter to have basic knowledge in the medical field. The underwriter needs to understand the significance of abnormal medical test results and how those abnormalities may translate to adverse mortality or morbidity.

New scientific developments present permanently significant challenges to the underwriting of risk. Insurance companies have to be knowledgeable about the new methods of detecting risk to maintain their competitive advantage and also to avoid anti-selection by the insured. Consider as an example the challenges that genetic testing has posed for life and health insurance underwriting.

It is a known fact that many diseases have a genetic basis that can be detected with

simple tests. Certain diseases are determined by one’s genes and that a positive genetic test means a higher possibility of developing certain diseases for the person who has tested positive. We must be cautious though as it is not entirely true that carrying a genetic mutation for a given disease is a guarantee that the disease will eventually occur.

Most genetic mutations generally only increase the probability of developing the disease, and therefore, the possibility of prevention and treatment once the carrier is aware of the mutation is advisable. In many countries, there was concern that

insurance companies could consider using such information to deny coverage, or make insurance more expensive for those individuals that present a positive genetic result.

This concern resulted in regulating the access to such information for insurance companies. It is illegal in most countries for health insurers to discriminate against potential customers on the basis of a positive genetic test. Underwriters are not alone in the risk assessment process.

All insurance companies have on staff professionals in the different relevant fields, like engineers and architects in the commercial insurance business or medical doctors in case of personal lines insurance to assist in the interpretation of the information obtained through the application, third party reports, the internet and physical on-site inspection.

In addition to the specialist’s support, insurance companies have a risk assessment manual. The manual is a comprehensive source of information and reference for the underwriters, which, combined with the skills and judgment of the underwriters and specialists, provides for a sound decision making process.

Underwriters work closely with the specialists 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 companies usually have underwriters on staff to carry out the underwriting tasks. However, there are also different business models that outsource the underwriting activity to third party entities. These are organizations where a number of underwriters offer their services to several insurance companies and underwrite cases at a fee per case basis. This is common in Western countries where outsourcing can create a competitive advantage. As earlier stated, the main task of an underwriter is to help the insurance company to build a portfolio of homogeneous risks.

While the assessment of risks is a delicate and complex matter, the interaction with the rest of the organization adds yet another degree of difficulty. Agents and the commercial area will be opposed to accept any restrictions requested by the underwriter to the acceptance of the policy which would make the sale more difficult.

Explaining the reasons for such additional conditions for the acceptance might not

always be straightforward. The reasoning will usually contain both analytic and subjective elements. As earlier mentioned, underwriting is an art and as such it may leave room for a subjective assessment of the risk by the underwriter. It is this room that will contract or expand depending on the pressure exerted by the commercial area, the character of the underwriter and the risk preference of senior management. Underwriters are permanently confronted with the request to grant an exception to the commercial area. While granting only one exception might not jeopardize the quality of the portfolio, the problem lays in the number of the exceptions made. Experienced underwriters can manage pressure by offering to the sales people a fixed number of exceptions per year if appropriately priced for. It is interesting to note here that in most cases this granted number of exceptions will ultimately not be requested. Sales people are always looking out for really deserving cases for the use of their now limited number of exceptions.

To better understand the different roles that underwriters can play in an insurance company, let us consider the relevant parts of the value generating chain of the insurance business where the participation of the underwriter is necessary.

The underwriter is at the centre of product development, insurance application, risk assessment, insurance acceptance, risk management and claims processing. Insurance application is the part of the insurance process whereby the insurance company is presented with a proposal or insurance application.

The application form will contain relevant information of the risk that allows the

insurance company to assess the risk, price it and ultimately accept or reject it. The underwriter plays an important role in determining the content of the application form. The underwriter will make sure that enough but not excessive information is requested in this form that will allow for a proper assessment of the risk.

Underwriters have also developed questions which address the moral risk. For instance questions pertaining to felony charges, bankruptcy, driving criticisms and the use of alcohol and drugs are used to assess possible moral risk. These types of questions have to be in compliance with insurance regulation and relevant consumer protection requirements.

The application form becomes an important part of the documentation of the policy if the proposal is accepted. This document is of particular importance in the case of a claim or any type of dispute that may arise. The application form needs to comply with the legal requirements with respect to discrimination, confidentiality and relevant consumer protection laws.

The application form is a standard document in any legal dispute and as such it should always be legally sound. Of equal importance is to avoid writing derogatory comments on the application form, as this could be considered prejudice against the proposed insured.

As an example, due to findings in the documents, if the underwriter puts a comment on the application form that the applicant is say ‘lesbian’ this may create an unnecessary legal complication for the insurance company.

Insurance is sold through different sales channels. Insurance can be sold by an agent, a broker, an enterprise or by mass distribution channels like banks. Depending on the sales channel a different application form will be needed.

For instance, for sales done using the mass distribution channel it is conceivable to use a simplified application form, where only two to three questions are asked. The products sold through a mass distribution channel, have very little underwriting and the ‘underwriting’ is done on an accept/reject basis. Look out for Part III.

The underwriter is at the centre of product development, insurance application, risk assessment, insurance acceptance, risk management and claims processing. Insurance application is the part of the insurance process whereby the insurance company is presented with a proposal or insurance application.