Chapter 2: Underwriting Flashcards by Jason George

What are the three components of underwriting?

Select, Classify, and Rate Risks

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Insurance companies use the underwriting process to prevent _____ ______, which could cause the insurance company to become _______.

Adverse Selection, Insolvent

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Two big questions underwriters seek to answer?

Is the applicant insurable?
Does the applicant have insurable interest in the insured?

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Insurable interest exists? 4 items…

The applicant is the insured,
Is related to the insured by blood or marriage,
Is a business partner or
Is a creditor of the insured.

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The ________ is the person applying for the policy who fills out the application to be submitted to the insurer.

Applicant

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______ is the person who has all ownership rights under the policy (such as assignment and naming beneficiaries), pays premiums and accepts the policy when delivered.

Pollcyowner (policyholder)

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_____ is the person covered by the policy

Insured

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Two main things an underwriter does:

Evaluate information about the applicant and
Select a risk classification and premium rate that matches the degree of risk undertaken.

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Three basic steps to the underwriting process?

Field Underwriting/Underwriting, Issuance, then Delivery of Policy

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Full list of risks considered by underwriters for life insurance?

Age
Gender
Lifestyle
Smoking
Hobbies
Hazardous Occupations
Medical History
Family Health History
Aviation

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Most important factors when underwriting HEALTH insurance policy? 3

Physical Condition
Moral hazards
Occupation

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What is the single most important factor in evaluating health risks?

Physical Condition

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TF: Past surgeries, physical condition, and childhood diseases all impact the underwriters decision in health insurance.

False - NOT childhood diseases

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5 classes of occupations, for insurance companies?

AAA Office Jobs
AA
A
B
C Hazardous occupations

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TF: Health insurance, higher risk = higher premiums, lower risk = lower premiums.

True

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TF: If the applicant changes to a less hazardous occupation, the insurance company will return excess unearned premium. If the applicant changes to a more hazardous occupation, the insurance company will reduce the benefits proportionately, but the premium will stay the same.

True

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What is the age limit for an insurance company to cover an individual health insurance plan?

65 years old

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Sources of Underwriting Information?

Application,
Medical Report,
Attending Physician Statement,
Investigative Consumer (inspection) report,
Credit report,
Medical Information Bureau,
Medical examinations and lab tests and
Special questionnaires.

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What is the primary source of insurability info used in underwriting?

The application

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Three basic parts of an insurance application?

Part I General Information,
Part II Medical Information, and
Part III Agent’s Report

Part 1 of an Insurance Application Includes?

This part of the application contains general information about the applicant such as:

The applicant’s name,
Date of birth,
Age,
Sex,
Social Security number,
Smoking status,
Marital status,
Address,
Occupation and
Income.
Part I also:

States the type of insurance policy for which the applicant is applying,
States the amount of coverage requested,
Includes information about existing policies if the proposed coverage is intended to replace existing coverage,
States the beneficiary.

Part II of an Insurance Application includes?

Part II of the application covers the applicant’s medical history. Information includes the applicant’s:

Diagnoses,
Diseases,
Visits to the doctor,
Treatments,
Surgeries,
Drug and alcohol use,
Dangerous hobbies,
Family health history.
The name and address of the applicant’s physician(s) are also included here.

Life insurance for coverage that is larger than $100,000 usually requires that the prospective insured undergo a medical examination performed by a paramedic or physician. The insurer pays the medical examination.

Part III of an Insurance Application includes?

Part III – Agent’s Report
The third part of the application is the agent’s report, which is used for underwriting, but does not become part of the contract. Here, the agent records:

Their observations of the applicant,
Information about the applicant’s financial condition,
The applicant’s background,
The applicant’s character, and
A disclosure of the agent’s relationship to the applicant.

What reports are used for underwriting policies with higher face amounts?

Medical report and Attending Physician Statement (APS)
Consumer Reports (Inspective and Investigative)
Credit Reports

What is the trade org that maintains medical info about individuals used by life and health insurers?

Medical Info Bureau (MIB)

What are the 3 purposes of the Medical Info Bureau?

Preventing misrepresentation and fraud, Providing insurers with tools to assess risk and Holding down the cost of life insurance.

TF: Insurers cannot refuse to issue policies solely on information supplied by the MIB.

True

A life insurance policy that does not require a medical examination is referred to as _______ or __________.

“simplified issue life insurance” or “non-medical application.”

TF: coverage issued to individuals who have tested positive for HIV cannot contain special policy limits or exclusions for losses due to HIV or AIDS.

True

TF: The insured does not need to sign a consent form before a HIV test can be performed.

False

If an underwriter determines that the risk does not meet the criteria for at least standard issue, the company may: 3 items

Choose to decline to accept the risk, Issue the policy with an exclusion rider, or Issue the policy with a higher than standard premium.

4 categories of applicant's classification:

Preferred Standard - average Substandard - stunt pilot or chain smoker Declined

TF: Substandard risks pay higher premiums because their life expectancy is shorter

true

The proportion of losses incurred by an insurer with respect to the total dollar value of premiums received is called?

Loss Ratio - total losses divided by total premium

What is the insurer's expenses divided by the total premiums received?

Expense Ratio

the sum of an insurer's loss ratio and expense ratio is...? 3 items

100%, then the insurer has broken-even. Greater than 100%, the insurer has a loss. Less than 100%, the insurer has a gain.

What are the 3 health insurance premium factors?

Morbidity Interest Expenses (called "loading")

What are the 4 components of an insurer's expenses/loading?

Acquisition Costs: cost of effectuating insurance policies, of which a producer’s first year commission makes up the greatest portion Overhead: insurer’s salaried staff, rent, and furniture Contingency Funds: additional premium may be required if original premium is insufficient – only some insurers (i.e., assessment insurers) have the right to charge additional premium Immediate Claims Payments: insurers assume that all claims are paid at the end of the year when establishing rates, when in reality claims are paid all year

Other factors affecting health insurance premiums?

Policy benefits Past claims experience Age Gender Occupation Hobbies

Which part of the insurance application collects information about the applicant's medical history? Select one: a. Part 1 b. Part 2 c. Part 3 d. None of the above

Who is informed of a positive HIV/AIDS test? Select one: a. Insurer, agent and underwriter b. Insurer, agent and applicant c. Applicant and underwriter d. Only the applicant

Which of the following terms describes a person who is the applicant and policyowner of an insurance policy, but not the insured? Select one: a. Beneficiary b. Underwriting c. Third party ownership d. Insurer

Insurance agent Margaret receives life insurance applications from Tim and Tom, who are identical twins, and are each applying for the exact same type of policy with the same face amount. The insurance company issues the policies as applied for, but charges Tom a 15% higher premium. Which of the following best explains the higher premium charged to Tom? Select one: a. Longer free look period b. Insuring clause c. Tom had to undergo a medical examination d. Tom's risk classification

Which of the following is not an underwriting factor? Select one: a. National origin b. Lifestyle c. Smoking status d. Age

Which one of the following forms does NOT require an applicant's signature? Select one: a. Agent's report b. Application c. Aviation questionnaire d. Authorization form

With respect to credit reports, which of the following best describes the purpose in obtaining an inspection or investigative report on an applicant, for an insurance policy? Select one: a. Provides information about the applicant's financial stability b. Provides information about the applicant's lifestyle c. Provides information about the applicant's character d. All of the above

_____________ is/are used to classify risks and assign premium rates that accurately reflect the amount of risk undertaken by the insurer. Select one: a. Loss ratios b. Underwriting c. Applications d. Insurance laws

Which of the following best describes the main purpose of the Medical Information Bureau (MIB)? Select one: a. The MIB is a group of underwriters contracted by insurers to evaluate risks. b. The MIB collects and shares medical information with member insurance companies. c. The MIB rates policies. d. The MIB publishes the CSO Tables every two decades.

Which of the following factors is not used in the underwriting process? Select one: a. Medical history b. Build c. Age d. Highest level of education completed