IC-22

RANCE
LIFE INS O UNDERWRITING
N KEYNOTEs)
s a o edgement pared with the assistance of
Ad has i

Ti Pandit (Head of Underwriting andClaims, Munich Re India Sery;tees

iting

es

re (External
DeAsha Mange Medical
(Asst. Vice Consultant,
President, Life @Swiss ReServices
Health Products, India
SwissPvt.
Re Ltd.)
Ms soda Pvt. Lid)

# G T G
?nn GetThroughGuides.com
© +94 20 323 12819
IC-22

yE INSURANCE UNDERW
LI (WITH KEYNOTES) RITING
ement:
A k n o w !edge been prepared w i t h the assistance o f
js

cours si .

Thicepa Pandit (Head of Underwriting and Claims, Munich Re india Services

P e a s Bhatia (Vice President, Life & Health Products, Swiss Re Services

Pvt. Ltd.)
;

india i n i Nalkur (Ex-Director, Underwriting & Claims, AEGONReligare

fe insurance Co. Ltd.) . .

pr Asha Sapre (External Medical Consultant, Swiss Re Services India Pvt, Lid.)
Me Shilpa Mangla (Asst. Vice President, Life & Health Products, Swiss Re
services India Pvt. Ltd) ; .

ois Malathi Narsimhan (Chief Operating Officer - SBI-Life Insurance Company)

We also acknowledge Get Through Guides, Pune for their contribution in

preparing the study material

w G T G
www.,GetThroughGuides.com
© +91 20 323 12819

san a rap
INSURANCE
INSTITUTE
OF INDIA

INSURANCE INSTITUTE OF INDIA

a )
B),
G - Block, Plot No. C-46, Bandra Kurla Complex, Bandra
( )
Mumbai - 400 051.
CONTENTS

Chapter No. :| Title Page No. ,

1 4 - i f e under n t i n -g Principles & concepts (Part. 1

mn , | /

2 Life undenstiting - Principles & concepts(Part-2) 18

a T e nderanting -- Structure & prcese , 8

w s Occupational. avocationalandresidential risks ty

G T Reinsurance aR
5 | Blood disorders
~ ES
8 | Nervous system > re
7 6 ,
9 Diabetes mellitus t e
th
Thyroid diseases I R ,
u [ o r a system a oe |

? 1 2 | The respiratory system 2 7 ,

[ e e e [ a
4 Cardiovascular
system | 08 ?

15 Special senses disorder of theeyes,

ey cars and nose , 00 :

Glossary 7 , Si
~ A n e n u r e s
> I C - 22 L i f e Insurance U n d e r w r i t i n g

CHAPTER 1

LIFE U N D E R W R I T I N G - PRINCIPLES &

CONCEPTS (PART 1)

[Chapter Introduction .
]
i!
chapter aims
is
i
to provide i
an understanding of the concept off life |insurance
life
r

ne writing. You w i l l also learn about the process of assessing individual risk,
cation o f risks and the possible outcomes of the underwriting process.
d

JB Learning Outcomes

Understand the concept ofunderwriting: ;

3 Describe the process ofassessing individual risk. ..

c) Understand the classification of risks. ©

¢ Explain thepossible outcornes of the underwriting process.

IC ? 22 Life Insurance Underwriting

1. Understand the concept of underwriting. |

[Learning Outcome aj

1.1 Concept of underwriting

Life insurance underwriting is the process of:

¥ assessing;
v selecting;
Y classifying;
¥ evaluating;
¥ measuring; and
¥ rating

The level of risk associated with an individual. Based on the above, 4 decision is
taken as to whether or not to accept the risk.

Diagram 1: Underwriting concept

U r e a eco m e e e

Classifying

Measuring

C R A RECS

In the case of underwriting, an assumption is made towards the mortality of an

individual (i.e. how long an individual is expected to live), while excluding
unexpected factors such as accidents. Based on these mortality tables,
underwriters make estimations about an individual?s mortality and take a
decision of accepting or declining a risk.
-
IC - 22 Life Insurance Underwriting

wifeinsurance underwriting is mainly concerned with two aspects:

evaluation of the risk associated with providing life insurance cover to an

individualsa n d
1) pricing the Fk
ess of underwriting
1.2 Proc

f o r performing the task of underwriting, insurance companies hire professionals

who are referred to as underwriters?, In life insurance underwriting. an

underwriter follows the steps discussed below to decide whether to accept or

reject 8p a r t i c u l a rr i s k .

Diagram 2: Process of underwriting

Process of underwriting

Classification of risk
3

*Standard or
- eSub-standard -:

Rating the tisk

Mortality jow or
*Mortalityhigho r
?Mortality. a p s l a i i a l y high

Taking a Seciaton

?Accent the tisko r L

* Accept the risk with

special terms or
Postpone the Fisk or
#Decline the risk

Premium t o be charged

*Standard premium or
* Extra premium over
standard premium
Yq

1C - 22 Life Insurance Underwriting

based on the information collected by the underwriter

a) Classification of risk: vy

the
he can classify the risk related to an individual as:
from different sources,

¥ standard risk; or
¥ sub-standard risk

The various sources from which underwriters can gather information for
assessing the risk are:
Proposal form
Insurance agent?s confidential report
Medical history and medical examinations reports of the life proposed e
Income statements ( eg. ,P& L statements, Balance sheet, ITR?s, Fm No.16
etc.)

b) Rating the risk: once the risk has been classified, the underwriter then needs
to measure the level o f risk associated with an individual proposal by
actuarial means, The underwriter can provide the following ratings to
individual cases depending on whether the :

¥ predictive m o r t ai sl ilow
ty
Y predictive mortality i s high
¥ predictive mortality is substantially high

These ratings are then compared to the mortality tables, based on which
premiums are charged.

) Taking » decision on the risk: based on the rating estimated by the

underwriter, one of the following decisions are taken:

Accept the risk: i f the predictive mortality does not deviate too much when
compared to that indicated in the mortality table provided by the actuaries,
then the risk is accepted by the underwriter.
Y Accept the risk with special terms: i f the mortality risk is found to be
higher than the standard mortality table, then the underwriter may decide to
accept the proposal with some special terms such as loading(charging extra
premium) or exclusions (excluding certain risks etc.)
¥ Postpone the risk: i f the mortality risk is found to be substantially high
w h e n compared to the mortality table at the time of applying for a policy, and
his condition is tikely to improve after a period, the risk can bepostponed.
This is done in cases where the risk is of a kind that may reduce with the
passage of time.
-
IC - 22 Life Insurance Underwriting

risk: i f the mortality risk is found 10 b be to i i

pecinet h e I
i substantially high wh

mnpared 10t h e mortalitytable, t h e t i s k may be declined. This i o n e ' n

cases WhETEt h e risk is very high and is either predicted to remain static or
may increase in the future.

e cases, declinature of the risk is necessitated, as no amount

i would be sufficient to take care of the very high extra o n a l o m

¢ underwriter needs to ensure that the premium that is charged to the

policyholderi s sufficient to cover the risk associated with the policyholder, as the
premium that iscollected by the insurance company becomes a part of a common
poo! from which claims are paid. If an individual is selected in a group that
him to pay a lower premium than the risk he presents, then the insurance
ees

company will have to suffer a loss or under-estimation of the risk.

) Premiam to be charged to the proposer: this is determined from the

premium table prepared by actuaries in which indicative standard premiums
for ?standard risks? are given. The following kinds of premium can be
charged to the proposer:

Y Standard premium: according to the premium table, the standard premium

is charged to individuals i f the predictive mortality does not deviatem u c h
from the standard values, when compared to that indicated in themortality

table provided by the actuaries.

Y Extra preminm over the standard premium: i f the individual life which is
underwritten shows a higher mortality than the standard lives in the mortality
table, it is termed 2 ?sub-standard? risk and the individual will be required
to pay extra premium to cover the additional risk he brings to the common
pool or insurance portfolio.

1.3 Factors considered in life insurance underwriting

The factors that are analysed while selecting an individual for life insurance
cover in life insurance underwriting are discussed below:

a) Health related factors: evaluated for underwriting are:

, Medical history of the applicant ;

v Present medical conditions ,diagnosis and the treatmentdetails

y Mental status of the applicant. seases present in the family

/

Family history -presence of hereditary di

etc, and the longevity of the
members such as diabetes, blood-pressure,
family members.
IC - 22 Life Insurance Underwriting

Ajay has a history of a certain medical condition. In this case ,his application
will be assessed, evaluated and the decision to grant him cover for life insurance
i

t
of not will be done by the underwriters and will be subject to assessment of his
current medical condition, the outcome of his pre-insurance medical tests,
Income proof etc. If the proposal is to be accepted then the premiums chargeable
(may be standard or modified terms may be applied.)The proposal may be
postponed or declined as decided i f the information in the documents evaluated,
so justify.
? ? ? ? ? ? s s . e e

b) Lifestyle and habits: in this case, the factors evaluated for underwriting are:

Personal habits and avocations (whether they are hazardous in nature)

Drinking habits
Smoking habits
Tobacco consumption habits( guthka, snuff, pan-masala etc)
High risk hobbies (e.g. scuba-diving, bungee jumping etc.)

e d
Suresh has a high risk hobby such as mountaineering, scuba diving etc. His
proposal may be accepted for life insurance cover by charging a higher premium
$0 as to cover the additional risk that he brings to the common pool or insurance

portfolio, I f the risk factors are too high, the proposal may be rejected or declined
o r accepted on other m o d i f i e d terms.

E e E e ? e ? ? ? ? ? ? ? ? ? ?

c) Occupation: in this case, the factors evaluated for underwriting are:

¥ Nature of occupation

B e
Karan is suffering from asthma and is employed in a cement factory. He would
be considered as a higher risk as compared to a person suffering from asthma and
working as a software engineer in an IT firm.

@) Financial condition: the factors evaluated for underwriting are:

Vv
Income and expenses
¥ Assets and liabilities
¥ Existing insurance cover
¥ Number of dependents
>
IC - 22 Life Insurance Underwriting

we financial record indicates that he is continuously in debt and his

Mano] es ?stent

d his i
his income and assets. In this cas ¢
consistently exceed ¢
the underwrit if

? e e jectt h e proposal for insurance cover or even recommend reductioni n t h e

quan
iata n be granted as Manoj might not be able to pay the
rum of cover
for the selected tenure/term of the policy and may also tantamount to
?ums
i ne se"

r i n s e invoking an element of moral hazard.

e) Place o fresidence and foreign travel: the factors evaluated for

underwritingare:

V. Risk levels relating to the tocation where the individual resides.

VY.
Risk levels relating to the location to where the individual is travelling

Girish 0!
fficially travels to certain foreign locations where the medical
infrastructure in these places is poor, political instability exists, the crime ratei n
these regions is high or these places are disease-prone. These ate considered to be
high risk as per insurance companies. In this case, Girish?s proposal for life
insurance will be categorised as high risk and the proposal may either be rejected
or accepted with modified terms.
i e

Diagram 3: Factors considered in life insurance underwriting

P e s c e M M R E e R e n a La]

Health related. Financial _ -Place of residence

fa °
condition and foreign iravel

is charged to individual:
s i f the predictive mortality does not
din the mortality table provided by the
deviate much as compared to that indicate
actuaries.

A Sub-standard premium
B Standard premium
C Extra premium
D Loaded premium
IC - 22 Life Insurance Underwriting
oF

2. Describe the process of assessing individual risk.

{Learning Outcome b|

2.1 Criteria for assessing risk

Risk associated with an individual can be assessed based on:

~ The mortality rate

Y The morbidity rate

Diagram 4: Criteria for assessing risk

Criteria f o r a s s e s s i n g risk

Morbidity rate

1. M o r t a l i t y rate

Mortality refers to a fatal outcome or death.

Mortality rate is the ratio of total deaths that occurred in a given group of people
in a certain area over a specified /defined period of time, which is usually a year.

The number o f deaths in a given time in a given population is the m o r t a l i t y or the

death rate.

? ? = ? E = ? ? = ? = [ _ ? ? ? ?

Mortality rates are generally expressed as the number of deaths per 1,000 of the
population per year. These rates are recorded in mortality tables, which are
applicable to the country in which they are to be used.

M o r t a l i t y table

Mortalitytable used by actuaries is a table that contains data on mortality rates

on the basis of age, gender, occupation etc.
a
IC - 22 Life Insurance Underwriting

Mortality tables are also known as ?life tables? Of ?actuarial tabes"

igtical data ina mortality table shows the ili i
s a c o r his next birthday, onthe bets o t h e that a certain individual

o t a l ) rates are influenced by various factors suchas:

vy nature ofoccupation
v financial status of the individual
Y_
lifestyle and habits
Z history of alcohol consumption, tobacco consumption ete.

An actuary bases his assumptions on the above parameters f i i

of products and the demographics for which these are to bewwe © i r e t kinds

2, Morbidity rate

Morbidity rate is the frequency with which a disease i f

on the basis of their age, gender, occupation etc, Appears in group of people

el

M o r b i d i t y rate is t h e e x p e c t e d n u m b e r o f people becoming ill or sick over a

defined period, usually a year. These rates help insurers predict the likelihoad
that an insured will contract or develop any number of specified diseases.

Morbidity rates are also used widely while designing health insurance, and long-
term care insurance products.

Morbidity risk

Morbidity risk arises when the probability of an individual likely to become ill
or contracting an adverse medical condition is high.

If, for a certain individual, the morbidity risk is high, then the insurance company
and grant him only the base
can exclude critical illness rider from the policy;
cover with or without an appropriate loading.

\
" IC - 22 Life Insurance Underwriting 7
2.2 Assessing the individual risk

Insurance companies assess the risk associated with an individual on the

assumptions based on mortality and morbidity rates.

i
I
Underwriters evaluate whether the risk associated with an individual can be
ft

accepted at standard rates or not, based on several factors already mentioned

above.

The practices followed by underwrites must be consistent and conforming to the

business guidelines laid down by the company. The decision as to whether a
certain risk is standard or not is always subject to a degree of personal judgment
with rationalised decisions.
Hence each of the underwriting decisions taken by an underwriter should be
backed with adequate rationale and supporting documentation on the
underwriting review sheet with regard to the final terms of acceptance, andthese
should not be judgmental or biased.

The following decisions may be taken by an underwriter after assessing an

individual?s risks:

a) L o w risk cases: underwriters generally accept most o f the proposals at

standard rates, where the risk associated with an individual is considered to
be low. However, there are also cases which cannot be accepted on these
terms, e.g. due to an adverse medical condition or for some other reason such
as adverse lifestyle, occupation etc.

b) High risk cases: i f the risk associated with the individual is considered to be
high, then the risk is either accepted with some loading, exclusion or may be
declined altogether ( i f the risk associated is very high and an early claim is
foreseen).

¥ Declining the risk: i f an individual is suffering from medical conditions that

are so severe at the time of underwriting, that risk cannot be accepted even
with extra premium because an early claim is foreseen, such cases are
declined.

v Accepting the risk with loading: i f an individual is suffering from some

existing medical condition and the risk is high but can be accepted by the
insurance company, then insurance cover can be provided to the individual
with appropriate loading (i.e. extra premium).
IC ~ 22 Life Insurance Underwriting

¥ Accepting the risk after a period of time (postponement): i f the initial risk
associatedw i t h an individual is unacceptable at the time of underwriting, but
i s expected to improve over a Period of time, then in such cases t h e life
insurance offercan be postponed for a certain period, say between 6months
to 2 years depending on the medical condition. After the initial high-risk
riod has elapsed, th i
vatpoint o f t i n e © applicant would be evaluated and assessed afresh at

Hence, it?s aw i n - w i n situation for both ? the individual and the insurance
company.T h e individual can avail insurance cover at a better rate after the
elapsed period o f postponement, while the insurance company can deal with
reduced risk after the period of high risk haselapsed.

v Acceptingt h e risk with exclusion: i f a particular part of the risk associated

with an individual is unacceptable to the insurance company, then exclusion
may beplaced on the policy. In such a scenario the insurance company will
not be liable to make any payment in the event of death from that particular
risk for which the exclusion was applied.

A c kacd
In a helath insurance product, i f a person had been diagnosed with pulmonary
Tuberculosis (TB) 2 years ago, but was treated adequately, then insurance cover
may be provided to that individual with an exclusion clause based on his medical
history. In this case, i f the person gets a recurrence of symptoms directly
connected to TB after the policy has been issued, then the insurance company is
not be liable to pay the claim as per the special exclusions accepted by the
applicant at the stage of policy-issuance.
? ? ? ? E E ? E = = = Z =

Exclusions are used more frequently for health insurance, where the client is
granted cover with exclusions, due to some pre-existing impairments - in-lieu of
totally declining the case.

Diagram 5: Decisions f o r sub-standardr i s k s

Wetec n a n c e crecuy be

4 ?
,
Accepting therisk | Accepting the risk ;
Accepting the risk
Declining
the risk OE i n g ~ (alteraperiod oftime) withexclusion

ll
IC - 22 Life Insurance Underwriting ee.
E R
k Ea g
disease appears in a given
_ _ i s the frequency with which a
group o f people on the basis o f their age, gender and occupation.

A Mortality rate
B Morbidity rate
C Mortality table
D Morbidity risk

3. Understand the classification of risks.

[Learning Outcome ¢]

3.1 R i s k classification
rinciple of ?utmost good faith
Life assurance is guided on the fundamental pi information given byt h e
lies on the
(uberrima fides)?, whereby the insurer re! licable. Based
proposer, supported by necessary medical evidence, wherevera p p an
individual
on the information collected on an individual, risk associatedw i t h
can be classified as:

a) standard risk; and

b) sub-standard risk

Diagram 6: Riskclassification

Risk classification

Standard risk
F
Sub-standard risk

Decreasing Constant |
-axtra risk extra risk ;
IC - 22 Life Insurance Underwriting

is the frequency with which a disease appears in a given

group of people on the basis oftheir age, gender andoccupation.

A Mortality rate
B Morbidity rate
C Mortality table
D. Morbidity risk

3, Understand the classification of risks.

Oo
[Learning Outcome c]

3.1 Risk classification

e of ?utmost goodf a i t h
Life assurance is guided on the fundamental princip!
(uberrima fides)?, whereby the insurer relies on the information given by the
proposer, supported by necessary medical evidence, wherever applicable. Based
on the information collected on an individual, risk associated with ani n d i v i d u a l

can be classified as:

a) standard risk;a n d
b) sub-standardr i s k

Diagram 6: Riskclassification

ete w e e e
ra

B e r s cuccieic.s
C l eEe ents

finareasing| [Decreasing] [Constant

| extra risk extra tisk | extra Fisk |
IC- 2 2 Life InsuranceUnderwriting

3.2 Standard risk

u t a
I f the risk associated with an indiy
idual is considered to be low and insurable at
standard premium rates by insu;
rance companies, then it is known as standard
tisk.

S e a r enereReRREETETEESESROSSS

3.3 Sub-standard risk

If the risk associated with an individual is considered to be high and cannot be

insured at standard premium rates by insurance companies, then it is known as
sub-standard risk. The range of sub-standard, too, may also vary from being
stightly sub-standard to substantially sub-standard.
e a e

i f insurance companies do not differentiate between ?standard? and ?sub-

standard? risks, there will be a case of adverse selection, where more
individuals with sub-standard risks will get insured, as a result of which
insurance companies would have to suffer losses,

Hence, the insurance company has to assess the information on individuals for
risks associated with them in such a way that the mortality experiences of those
who have been accepted at ordinary rates match the actuarialassumptions.
The underwriter also has to ensure that the terms offered to the sub-standard lives
are reasonable and fair, not only to the proposer but also to the other policy-
holders, and the insurer, to the extent possible.
Sub-standard risk can be further classified as:

Y Increasing extra risk

Y Decreasing extra risk
Y Constant extra risk

a) Increasing extra risk

If the risk associated with an individual is considered to be tow at the time of

commencement of policy, but there is a chance of that risk becoming high after a
certain period, it is known as increasing extra risk.
a
IC - 22 Life InsuranceUnderwriting

ime o f underwriting,
from any disease at the Cm! is
I f an obese person is not sufferint t h e time o fc o m m e n c e m e n t o f policy.
he is prone to certain
then he may be considered low risk at
vancement o f abe
However, in the near future, witha d disease.
diseases such as high blood pressure, diabetes OFheart =

b) Decreasing extra risk .

: vated
i ing

extra risk. ?The risk associat

e t initial
a l undunderwritingb u t decreases over
it a
Decreasing extra risk is the opposit
with an individual is high at the time of
period o f time as time elapses.

an individual is considered to be h i gaht t h e t i o of

I f the risk associated w i t h but there is a chance o f that risk becoming l o w ra
commencement o pf o l i c y , ision and medication, it is k n o w n asdecreasing,
|
certain period with propersuperv!
i
| extra risk.

ual has been diagnosed with tuberculosis at the time o funderwriting,

ategorised as high risk by underwriters. However, with the
e, and after havingundergone medical treatment and rest, he would

et better. Then as time goes by, he would becomep e r f e c t l y healthy again,

ce becomes negligible o rn i l .
gi
without any symptoms. Now the risk of a recurrent

c) Constant extra risk

seseemouiensmscnsiesisir

nt over the
I f theriskassociated with an individual is considered to remain consta!
period, then it is known as constant extra risk.
S e e n

In constant extra risk, the mortality

,
ortality risk remains
ri

i
of time for which the life assured is exposed to thera trovghout the duration

4
IC - 22 Life Insurance Underwriting

i f an individual is ap i l o t , the risk associated with him will remain constant even
in future as longa s his Occupation is a pilot, as there is always a chance of an
accident However,i f this individual changes his career from ap i l o t to become a
management executive, the risk associated with his occupation as a pilot will
cease, and he will now be categorised as standard risk as regards his occupation.
In this case, the extra premium that was charged on his earlier occupation can be
removed.
?

I f anindividualh a s been employed as an X-ray technician for more than 15

years, then the risk associated with him will remain constant even in future as the
harmfulraysw o u l d have already harmed his body. In future, even i f this person
changes hisprofession to a clerk, the risk will remain the same, as his profession
as an X-ray technician has caused sufficient harm to his body through radiation.
Hence, extra premium will continue to be charged.

LEN

C e c e
Which of the following risks associated with an individual is high at the time of
initial underwriting but decreases over a period?

A. Increasing extra risk

B Constant extra risk
C. Decreasing extra risk
D Falting extra risk
a

15
&#s§

IC - 22 Life Insurance Underwriting

4. E xplain the possible

ble outcomes of the underwriting
process,
[Learning Outcome d)

4.1 Possible outcomes of underwriting

a a n riter will base his decision of accepting the risk associated with an
carry sub-standard
ual after careful analysis of information. If the individual is considered to
risk by an underwriter, then the decision to accept the risk can

be based on following:

° ») the type of risk: increasing, decreasing oTconstant

the purpose for which the insurance cover is sought
¢) the degree or extent of severity of the risk
Post underwriting, based on the above criteria, an underwriter can take anyo f the

following decisions:
jal or altered terms
¥ Accept the proposal with spec
¥ Postpone the proposal
¥ Decline the proposal

D i a g r a m 7: Underwriting decisions

Post underwriting Perse e m i otanaaa r e e r n eee ehneia) TAMU

e e satLCas

16
IC - 22 Life InsuranceUnderwriting

4.2 Accept the proposal with special or altered terms

An underwriter can decide to accept .

and altered terms as follows: Sept the sub-standard risk based on some special

a) Charge extra premium for the extra risk

¥ I n thi i
i n d iismethod.an
9 insurance company charges extra premium over the

e t i a m over theenti potey tisk. fowe decision to charge extra

2
erm or i
upon the type of risk associated with the indvideol tem period depends

v F o r increasing extra risk: a level extra premium is charged by the

insurance company to the policyholder for accepting theproposal.This
°s e a i n g e x t r aemainst h e same throughout the policy term, I f an
in me c h ?ged, for increasing risk, it would be very difficult
a d m nist it, as it would be then necessary to monitor the health of
each individual over the term of the policy. Also, if an average of the
extra premium was to be made applicable to all lives, those lives with
goodhealth conditions would cease to pay the premium by walking out
on the insurance cover, whereas those whose medical condition remains
bad or showing deterioration would continue forever.

v For constant extra risk: a level extra premium is charged by the

insurance companyt o the policyholder for accepting the proposal. This
extra premium remains the same throughout the policy term.

Y For decreasing extra risk: Where the extra risk is of a reducing kind ,it
would not be fair to charge a level extra premium to this individual
throughout the policy term and the individual would be tempted to
discontinue the policy . Hence, a temporary extra may be charged for a
short pre-determined period until the time, the extra risk would have
either diminished, or ceased to exist. Hence, such extra premium is
charged on a temporarybasis.

b) Diminishing lien
luced basic sum -assured is paid, if
i) In this method of acceptance, aredi
er words, a debt is created as a pre-
death occurs during lien period, In oth rds, a deb
3

deterthined amount i f death were to occur within a stipulatedperiod.

ii) The amount of debt is maximum at the time of commencement ofthe

policy and it gradually decreases by a certain amount with each passing
year and the debt gets fully cancelled after acertainpre-determined
period, which is specified in the schedule of the policy.

i7
IC ? 22 Life Insurance Underwriting

iit) However, when the debt is operative :

¥ The bonuses are paid in full under a swith-profits? policy and noton
the diminished sum-assured.

Y If death happens due to accident, no tien is applied and the claim's

paid on the full base sum-assured basis.

iv) This method of diminishing lien is currently not used #9 I

" e of full insurance cover, i f death were to
that it defeats the very purpos : iminishin,
occur in the first few years fro! m commencement, while the diminishune

lien clause would be effective.

r T
i %
diminishini
oposal wi ith 259% jn case o f the
b

I f an insurance company accepls 2 * payable to nominees

the
years, then the sum assured that is
insured?s death will be as follows:
i f sum-as
Death in the 1* from commencement
year 75% _0
from commencement 80% of sum-assured
Death in the
Death in 3 year
the 2" year from commencement a oo f f ae e ?

Death ia T 4! yea from commencement 0 sum-assured

4
[95%_of ]
Death in the 5" year from commencement
1e
si
ar onwards, the lien will no longer be operative as the risk
From the e n en and the full sum-assured becomespayable.

would have been diminished by th

c) Specific exclusions
Y In this method, a proposal is accepted by the insurance company with
some exclusion(s). This clause restricts the payout o f a claim for the full
cover, i f death were to occur under specified conditions or denies claim
payment under certain conditions .e.g.:-Policies which have a special
exclusion imposed which does not pay any claim , i f the person dies in an
air-crash while he is executing his aviation duties as a fighter-pilot, but
would pay the claim in full ,if he was travelling as a regular fare-payi n g
passenger and death were to occur in an air-crash

18
IC ? 22 Life Insurance Underwriting

V. I f the insureddies due to a condition that has been excluded from the
policy. then the insurance company denics payment of the claim to the
nominee(s).

/¥ Theseexclusions could lead to litigations e.g., i f policies ,with such

exclusionsa r e issued and assigned to mortgage loans, and i f death claim
is denied, this could lead to aggrieved beneficiaries and legal battles
between the beneficiaries and the insurance company.
? e cat t y r ee team nmenet i n e
Exc

I f a certain individual is categorised as high risk due to his hazardous occupation,

t h e n t h e insurance company can accept the risk with specific exclusion ? ?No
claim w i l l be payable i f the insured dies due to occupational hazard?.
e S

4.3 P o s t p o n e m e n t o f t h e a c c e p t a n c e o f r i s k

There could be situations where the health condition of a client is uninsurable at

the time of application, ¢.g., i f the client has been advised to undergo a cardiac
surgery and post-operative treatment. Since, there exists a possibility of
improvement in his health after the surgery and taking necessary rest and
treatment; it would not be fair to decline the proposal. The underwriter can take a
decision to postpone the proposal for a certain period i f he feels that the risk
associated with the individual will diminish after a certain period and the
individual can become insurable and could be accepted with a better rating...

The risk cover is, therefore, deferred or postponed for a specified period. This
benefit, both, the client who gets a fair premium charged to him after the change
in his health into a favourable one, and the insurer, is absolved from accepting a
very high risk profile at the policy commencement stage.

The proposal is re-evaluated after the postponement period by the underwriter,

which requires a second pre-insurance medical screening of the individual. Only
after the underwriter accepts an individual to be an acceptable risk (after the
specified period o f postponement), through an underwriting process once again,
will the proposal be accepted by the insurance company. It should be known that
the risk cover is not accepted automatically afier the specified period of

postponement.

has a growth o r
lump in the neck, which is under medical
Ifan individual
i t is recommended that the acceptance of risk is postponed until it is
investigation,
fully medically investigated,and adequately treated .The case can be reviewed
only after the specified postponement period and treatment hasceased.
( e e

19
IC ? 22 Life Insurance Underwriting

I f a female applicant who is pregnant at the time of application and also has a
history of two miscarriages in the past, the insurance proposal needs to be
postponed till her delivery, in view o f the extra risk that s h e b r i n g s to the
ted mis-carriages.
portfolio, by way of her adverse past medical history of repea

4.4 Declinature of the proposal

ifthe an individual considered 1 be substantially
is

B A APE
risk ssociated with

risk associated with an individual isconstoe ons van help the company
no amount o f extra premium or specified exc! : od
,
y the

diminishing that risk for the company, then the proposal is declin
insurance company.
have different threshold limits for acceptingproposals.
Insurance companies sometimes be willing to
high
risk appetite may } ;

Hence, companies that have a ? n declined by other insurers by setting

offer insurance to a proposer who has bee:
appropriate loading and altered terms.

clined for the following medical as well as non-medical

Proposals can be de
as rejection) reasons such as:
(commonly referred to asknown
ical conditions even
v there is no possibility of improvement in his existing medi
i f his case is postponed.
Y the country or city where the applicant lives is in the ?restricted list? of
countries according to the guidelines of the insurance company.
the occupation o f the applicant may be extremely hazardous, making the
proposal unacceptable for acceptance and issue o f policy.

What happens to the bonus for ?with profit? Pp policies in iminishing li

i f the insured dies within the lien period? case o f diminishing lien,

A_ No bonus will be paid

8 A veauced bonus will be paid
ull bonus
will be paid on the base sum: -assured,
u

D Bonus will not be paid after the lienp e r i o d . ?

20
IC - 22 Life Insurance Underwriting

Summary

> Life insuranceunderwriting is the process of assessing, selecting, classifying,

evaluating, measuring and rating the level of risk associated with an
individual and then taking a decision whether to select that risk or not and if
selected ,also deciding the terms of acceptance.
For performing the task of underwriting, insurance companies hire
professionalswho are referred to as ?underwriters?.
Statistical data in a mortality table shows the probability that a certain
individual will die before his next birthday on the basis of his age.
Morbidity risk arises, when the probability that an individual becomes ill or
faces an adverse medical condition is high.
I f the risk associated with an individual is considered to be low and insurable
at standard premium rates by insurance companies, then it is known as
standard risk.
I f the risk associated with an individual is considered to be higher than
normal and cannot be insured at standard premium rates by insurance
companies, it is known as sub-standard risk.
The diminishing lien method is used in cases where the risk associated with
an individual is expected to diminish over a period of time.
In the specific exclusions method, a proposal is accepted by the insurance
company with exclusion clause(s)..
The underwriter can take a decision to postpone the proposal for a certain
period i f he feels that the risk associated with the individual will diminish
after a certain period and the individual will become insurable..
I f the risk associated with an individual is considered to be substantiallyh i g h
by an underwriter, and no amount of extra premium or specified exclusions
can help the company in diminishing that risk for the company, then the
proposal is declined by the insurance company.
a

|
Answers to Test Yourself

Answer to T Y 1

The correct answer is B.

ed to individuals i f the predictive mortality does not

Standard premium is charg u
: : :

deviate much when compared to that indicated in the mortality table provided by
the actuaries.

21
IC - 22 Life Insurance Underwriting

Answer to T Y 2

The correct answer is B.

Morbidity rate is the frequency with which a disease appears among a group of
people on the basis of their age, gender, occupationete.

Answer to T Y 3

The correct answer is C.

Decreasing extra risk is high at the time o f initial underwriting but decreases

over a period.

Answer to T Y 4

The correct answer is C.

Full bonus is paid for ?with profit? policies in case o f diminishing lien, i f
the insured dies within the lien period.

|
Self-Examination Questions

Question 1

I f an insurance company selects more o f sub-standard risks as compared to

standard risks, then this will resuit in

A_ Increased profits for company

B Optimum claim payment
C Adverse selection
D High mortality rate

Question 2

Prateek is an asthma patient who is employed in a cement factory as a supervisor.

Which of the following risks is he exposed to?

A Health risk
B_
Financial risk
C Lifestyle and habits risk
D Occupational risk

22
IC - 22 Life InsuranceU n d e r w r i t i n g

Question 3

ror which of the following cases will extra :

company on a temporary basis? Premium be charged by an insurance

A.
Increasing extrar i s k
p Decreasing extrar i s k
c. Constant extrar i s k
p Falling extra risk

Question 4

Which of the following risks can be insured at standard premium rates?

A. Standard risk
B Sub-standard risk
C Moderate risk
D Low risk

Question 5

W h i c h o f the following risks arises when the probability that an individual

becomes ill or faces adverse medical condition is high?

A Mortality risk
B Morbidity risk
C_ Standardr i s k
D Sub-standard risk

23
¢ Underwriting B
IC - 22 Life Insurance:

tions |
| Answers to Self-Examination Ques

Answer to SEQ 1

The correct option is C.

ks as compared to
ore of sub-standardr i s
I f an insurance company Itselects madvers' e selection.
a

standard then this result in

risks, wi

Answer to SEQ 2

The correct answer is D.

Prateek is exposed to occupational risk as he is an asthmapatient and is working

in a cement factory.

A n s w e r to S E Q 3

The correct answer is B.

remium w i l l be charged by an
f decreasing extta risk, extra Pi
In the case © a temporary basis.
insurance company on

A n s w e r to S E Q 4

The correct answer is A.

Standard risks can be insured at standard premium rates.

A n s w e r to SEQ 5

The correct answer is B.

Morbidity risk arises when the probability that an individual becomes ill or faces
adverse medical condition is high.

24
IC ~ 22 Life InsuranceU n d e r w r i t i n g

CHAPTER 2

L I F E U N D E R W R I T I N G - PRINCIPLES AND
CONCEPTS (PART 2)

Chapter I n t r o d u c t i o n

This chapter
"
aimsageto provide an
.
understanding of the numerical ti
rating

meth

used inu n d e r w r i t i n g .
Y o u w i l l also leam about t h e concept ?ot ?terms e f
acceptance?, ?dating back o f polices? and riders,

f i Learning Outcomes

a) Discuss underwriting methods.

b) Understand the underwriting decisions with respect to extra mortality
rates,
c) Learn about riders.
d) Explain the concept of dating-back (back-dating) of policies.

25
IC ? 22 Lite Insurance Underwriting
1

. Di
iti thods. )
I * Discuss underwriting me {Learning Outcome a

1.1 Methods o f underwriting

For decision making, underwriters follow two methods:

a) Judgment method
b) Numericalr ating method

D i a g r a m 1: Methods of u n d e r w r i t i n g

i e y C u e s fae
Percale

D i e t e r ts
by. anderwriters

1.2 Judgment method

This method
eth is rarely used in underwriting in present times,
1
i i method
as under this
the decision to accept or decline the risk depends upon the personal judgment of
the underwriter based on his experience. semen

The individual (proposer) is assi i i

ohne a r e a }is assigned ratings on the basis o f subjective judgment

26
IC ~ 22 Life InsuranceUnderwriting

Limitations of the judgment method

¢ It was found to be inconsistent and v jecti i

expertise ofthe underwrite. ery subjective, depending on the

/ Themethod of risk classification was found to be inconsistent and not

scientific (especially when new underwriters come in to meet business
volumes).

1.3 Numerical rating method

¥ The numerical rating method was originally devised in the USA in the.1960s,
a n dhas gained popularity around the world,
v The biggestadvantage o f this method is that it ensures consistency in risk
classification by achieving a consistent basic mortality assessment by treating
all similar lives in a similar manner.

In this method, numerical rating is employed by underwriters for taking decisions

to accept or decline the risk. The method of Numerical Rating uses mortality
ratings as the basis of selection and classification of lives.

Mortality risk

v Mortality risk of an individual is determined by personal information of an

individual?s past, current and genetic health situation and various other
factors.

The current health status is indicative of future health risks, and to a large
extent, subsequent mortality.

This system is based on statistical mortality rates that essentially group

individuals into mortality classes using a numerical rating system.

Health factors are considered individually and can affect one's mortality in
either a positive or negative way. Depending on the value of one?s final
health rating, the cost ofa life insurance premium may be higher or lower.

It is important to remember that every individual comes with a different

health status and hence risks may be different for every individual.

In the numerical rating method, applicants are classified according to certain

factors and assigning credit or debit points to each of these attributes or
factors, based on underwriting guidelines.

27
IC - 22 Life InsuranceU n d e r w r i t i n g

¥ Rating guides and manuals are formulated by an insurer and reinsurance

professionals. These manuals are based on the results of extensive medico.
actuarial research and mortality studies.
various impairments, list of
Y The underwriting manual contains description of 7

medical documentation that would be required to assess the risk-profile of

the applicant and gives details on the favourable andunfavourable states of
the impairments along with suggested ratings to support the risk profile.
the individual, build,
The factors that are evaluated arephysical condition of ,
nal habits, place of residence,
family history, personal history, perso
avocations, occupation moral hazard etc.
from the baserating,
Y Favourable factors in an individual earn debit ratings t ratings to the base
w h i l e unfavourable attributes mandate addition of credi
rating.
V. The standard life, is known to be accepted at ordinary tates, anc 1S @
;
have value of 100 .Thereafter ,every favourable attribute js credit and is
a a
numerically as a percentage of this value and deducted
total. In case of any unfavourable factor in the application / applicant, the
same is treated as a debit and necessary points are added to the total.

Y The final extra mortality rating will be equivalent to the percentage total
particular proposer has been classified.
mortality of the group in which that

1.4 Factors considered for pricing o fr i s k s

Diagram 2: Factors considered f o r pricing o f risks

« Environmental
« Hereditary

28
IC ~ 22 Life Insurance Underwriting

Other than health related factors, ththere

a
»
are other factors that are used for
assessment by underwriters. In fact, these factors can be bifurcated into:

a) 1? phase: personal factors

These include:
Y personal medical history (current and i

¥ physical build Past history)

Y habits and lifestyle

¥ Hobbies/avocations (e.g. bungee jumping, mountaineering etc.)

b) 2 " phase: environmental factors

These include:
¥ occupation (whether hazardous or not)
Y place of residence and / occupation (whether living in countries featuring in
the list of ?restricted countries?)

c) 3? phase: hereditary factors

This includes ascertaining the medical history of the family members of the
applicant (like diabetes, blood-pressure etc)

For each phase, numerical or percentage assessment of the risk is made by

underwriters.

29
IC ? 22 Life Insurance Underwriting *
1.5 The Numerical Rating Method

Steps involved in the numerical rating method are as follows:

Diagram 3: Steps involved in numerical rating method

a) Define value o f standard risk

?value o f standard risk? which w i l l be
The underwriter needs to first define the
u e is generally fixed at 100%. The
accepted by insurance company. This val
expressed in relation to this
relative value then assigned for each factor is
reference point value o f 100%.

b) Risk assessment for personal, environmental and heredity factors

The risk assessment starts with the assessment of an individual?s physical build
that includes the height and weight of the individual. Once the physical build is
examined, thenother personal, environmental and hereditary factors such as ~
age, gender, medical history, occupation, place of residence, family medical
history and moral hazard factors are assessed.
IC ? 22 Life Insurance Underwriting

°Q Assign n u m e r i c a l ratings based on E M R

Mortality rates and extra mortality rates (EMR) for sub-standard lives need to be
referred to from manuals, and accordingly, numerical ratings are assigned to
different factors.

Mortality r a t e s refer to the ratio o f total deaths that occurred in a given

population at a certain area over a specified period o f time, which is usually a
year.

Estimates of mortality rates are as follows:

T h em o r t a l i t y rate o f a group o f standard lives will be 5 per 1000.

The mortality rate of a group of obese individuals will be 8 per 1000.
T h em o r t a l i t y rating for a standard group taken as 100%.
T h e mortality rating for a group of obese individuals will be (8/5 x 100) =

Hence, extra mortality rating of +60% will be added to the base rating of 100% in
case of obese individuals.

Mortality rates for all the other factors such as, adverse personal and family
medical history, etc. need to be determined. For each adverse factor, the rating is
always in the form o f addition o f a credit rating to the base rating.

The concept o f extra mortality is applied in the case of sub-standard lives, Extra
mortality rate or EMR refers to the excess mortality in the case of sub-standard
lives, Extra mortality is usually expressed as a percentage of standard
mortality.

d) Favourable factors eam debits (reduction in mortality rating) a n d

unfavourable factors mandate credits (addition / enhancement of mortality
ratings

Applicants are then assigned debit or credit points with respect to mortality
rates for each of these factors, based on underwriting guidelines. The
unfavourable aspects of the risk attract additional ratings known as credit
ratings and for the favourable features deductions are made from the base
ratings and called as debits.

a1
IC - 22 Life InsuranceUnderwriting

Diagram 4: Factors forr a t i n g

Favourable
Factors

Credit Debit
-

(-) ratinga pplicabie.

(A) r a t i n g plicable
ap

f Total: Rating :

the applicantas
SClassify

Highly Sub-
?Standard isk Sub-standard risk standards

Rating guides andmanuals

/ Rating guides and manuals are formulated by insurance and reinsurance

professionals.
¥ Numerical ratings are derived from these manuals. edico-actuarial research
/ The manuals are based on the results of extensive m'
and mortality studies. le medical
Underwriting manuals contain extra mortality rates for all possib!

conditions. ions of various impairmentsa n d

uals also contain descript
Underwriting man' that would be required to assess the risk-profile of
medical documentation
the applicant. It gives details on the favourable and unfavourable states of the
impairments along with suggested ratings to support the risk profile.

ing of 100 to unfavourable factors

A creditr ating will be added to the base rati
such as high blood pressure or diabetes, whereas a debit rating (deduction) will
be made for favourable medical factors such i i
medical history, family history etc. oh
as o o d physical b u l f a v o u r s

32
IC ~ 22 Life InsuranceUnderwriting

i f the rating g u iofd an

e insurance company has calculated that i
for a group o f individuals who are overweight is 150% of the sandon i y hen
underwriter will assign a credit o f +50% points to the degree of e: risk then
thebaser a t of 100. XCESs Weight to

S S C s
e) Risk classification of the applicant

Once all| the factors are debited

; or credited, they are then to taled
rate, which would then classify the applicant as standard risk, sub stpdued
risk or highly sub-standard risk. The total acc A : ar

roundedoffto the nearest 25%, ?umulation of debit and credit is

¥ While totaling, all unfavourable attributers and their rates are total
everycredit rating is added to the total. In the case of any vounble
factors noticed for the individual, it is treated as an addition of credit ratings
and the necessary ratings for each of such attribute are added to the base
rating of 100, (based on the guidelines).

¥ However, in the case o f favourable factors, it is treated as deductions for

every favourable attribute, from the base rating of 100 (based on the
guidelines from the manual.)

Y A standard life is one with a minimum extra mortality score (E.M.R.). The
extra risk goes higher as the number of credit ratings increase, which also
means that the unfavourable attributes are more.

Y A nommal individual is assumed to have a value of 100% on assessment. In

life insurance, an individual can be categorised as standard risk i f his
assessment value falls in the range of 75% - 125%.

Y If the value is more than 125%, the individual will be categorised as sub-

standard.

Y If individual extra mortality ratin; gs have been calculated (it

as 100%
dard life), then this implies that the
means 100% over and above the stan ife),

an individual who
individual is likely to face double the mortality risk than
has been accepted on standard terms.

33
IC ? 22 Life Insurance Underwriting '

t rating on the base rating of 100 fy

An underwriter assigns/adds credit the base rating of 100 fo,
unfavourable factors and deducts the ratings from ;

favorable factors. Assume that the following rates have been assigned by ay
underwriter for an individual for adverse Junfavourable features:

High blood pressure

Adverse smoking habits [ _ _ # 2 5 % |
Adverse family histoi L _ + 1 5 % |
for favourable attributes (called as debits or
Likewise, some credits points
) are also given ¢.g. this same person has a
deductions from the base rating,
d longevity, it is possible that -5% to.
favourable family history o f good health an
|. The lowest possible score that is
10% points would be deducted from the total
lass for that applicant.
arrived at gets him the final score of mortality cl

extra risks are generally postponed or declined, depending

Highly sub-standard
upon whether the extra risk isincreasing, decreasing or constant.

Combined effect

It is important to note that when there are more unfavourable than favourable
factors present in an individual, then their combined effect would also need to be
considered cautiously in underwriting. The total o f the individual unfavourable
factors that are considered in isolation may not give true results; acombination
effect o f these factors may give a much higher extra mortality rate than for the
individual unfavourable/ adverse factors.

It indicates that the effect is multiplicative and not purely additive, as the
extra mortality is very high when two or more adverse factors co-exist.

I f an individual suffers from obesity, : high blood pressure and diabetes,

1 indiv

i then total
credit ratings fc tra mortali ft tali j :
cre

:tes or e x t ortality after totaling each factor w i l l be + 1 0 0 as

34
IC - 22 Life InsuranceUnderwriting

However, thecombined effecto f all three factors, when th co-exist i

individual can increaset h emortality tate of the individualmanifold Hence an

additional rating fort h e combinationfactor? (say +25 % or +50 % EM)w i l l be

required i tt t & o r e cassiied Sppropriately, which may result in a

higher

hie t eextraT mortali

i t e c
»
e ethe t o tEMR
Making
at o
l either
eith Y
125% in-li
or 150% in-lieu

In simple words,
is the extra
p

trammortality rate for an individual who suffers fro1m ali

threedics obesity, righ piood Pressure and diabetes, will be higher than
the in
total
mortality rates for each of
factors put together. of the adverse/unfavourable

1.6 Advantages of the numerical rating system

¥ Itestablishes a standard method of underwriting which can be referred to
by every underwriter.
v The factors are rated on the basis of documented manuals; hence all the
factors are uniformly rated by all underwriters.
v it eliminatespersonal judgment of the underwriters to a large extent.
¥ It helps in assessing the combined effect of multiple adverse factors
together.
Y It increasesspeed and efficiency in handling large volumes of business
and also maintaining consistency in decision making in the underwriting
process.

1.7 Disadvantages of the numerical rating system

¥ This method involves charging a level extra premium for the sub-
standard lives throughout the term of the policy contract. This would be
unfair for the persons whose category of extra-risk is of decreasing type,
ie., where the extra risk diminishes over a period of time -Hence,
charging of level extra premium for the entire term to these individuals is
notjustifiable.
¥ The method of charging for the extra risk in the initial years of the policy
but which decreases with the passage of time, a temporary extra is
imposed for a short period along with the normal extra mortality rating.
This extra is generally expressed like Rs 3 /- per 1000 sum-assured for a
definite period (e.g. ., ranging from 2 to 5 years).
Y This method, whilst it helps in the risk assessment of individual
impairments, the overall risk in case of multiple impairments in the same
individual may not be equal to ratings for the sum of risk o f individual
impairments .This is a limitation, as it does not account for the effect of
presence of co-morbidity factors.

35
Impact of Occupation on Underwriting

Y The occupation of an individual can impact his risk profile to a large ex,
Example: € person working underground in the coal mines is subjeg
working in polluting environments rich in obnoxious gases, also leadin
life-threatening diseases, B to

¥ The probability of accidents at under-ground work-site also adds to the ext,

tisk. The exact nature of an occupation has to be reviewed by the underwrite,
and only then an underwriting decision, be taken. Example: If a person ig
working for the local Municipal Corporation Office, it is important to know
whether he is working in the administrative function of that office, o,
whether in the municipal hospital or in the water-works department, each
carrying a different risk-profile.

¥ There could be some individuals whose occupations entail travel to foreign

countries, which appear in the ?restricted? list of countries. Such cases can
attract an extra premium for the extra risk or may warrant declinature in a
few cases, Detailed discussion is provided in subsequent chapter.

In the numerical rating method, which of the following factors is assessed for risk
evaluation?

A Personal factors
B_ Environmental factors
C_ Hereditary factors
D_ A l l o f the above
_ ? ? ? ? _ ? ? ? ? ?

F i n a n c i a l aspects a n d M o r a l H a z a r d

Y The underwriter will ensure that the insurance cover, applied for, by the
client is reasonable and commensurate to the type of occupation stated in the
proposal form, his existing insurance cover and declared financial strength.

¥ The amounto f insurance cover to be granted to the applicant should not be so

high that the life assureds? worth to his family is perceived to be more when
he isdead than h e n he is alive. This is ?moral hazard? and needs to be
underwritten with caution. This is discussed i il
i
on financial underwriting ussed
in more detail in Chapter No 4

36
IC ~ 22 Life InsuranceU n d e r w r i t i n g

v His total existing insurance cover with all the insurance companies and the
amount o f cover he has sought would also be taken into account when
ooking at the financial aspects of the applications. Detailed discussion is
provided in chapter on financialunderwriting.

2. Understand the underwriting decisions with respect to

extra mortality rates,
{Learning Outcome b]

The underwriter needs to review several documents necessary for risk selection,
such as:
v duly filled proposal application form
v age-proof documents
v medical reports used as pre-insurance screening
v personal health records o f the client (if any)
¥ financial documents etc.(income proof and other business income statements
etc.)
v Moral hazard reports from competent authorities of the insurance company.

Diagram 5: Documents f o r r i s k selection

The underwriter decides upon the terms of acceptance of the application only
after careful analysis o f these documents.

37
IC ? 22 Life Insurance Underwriting

the underwriter classifies the risk as ?

ity

rates,
o f extra m ona p-standard. Based on the level of risk, the
Aft r d o r highly su
standard, ect the risk.
choose to accept Ofr e j
underwriter can
fthe following decisions with respect to risk:
An underwriter can then take any ©

¥ Accept the risk with extra premium

y Accept the risk with exclusions ;
a
Y Postpone/ defer the risk for certainp e r i o d
¥ Decline the risk

a) Accept the risk with extra premium

er than standard one, the
Where a risk is analysed and found to be great .
underwriter may opt to charge an extra premium on grounds o f medical,
occupational, avocational or for residence or for a combination o f reasons.

An underwriter can choose to accep! a sub-standard risk by charging e x t r a

premium, which can be charged either for the entire policy term or for a limited
period, depending upon the adverse factors.

Extra premiums can be loaded in two ways:

¥ Extra premium based extra mortality rate

In this method, the extra mortality rate that has been calcul: lated for sub-standard
life and the risk associated is converted into extra premium, which is then
charged in addition to the tabular premium.

Y Standard extra premium

In this method, a flat or standard rate is applied for ¢xpected extra mortality
h
i rate

j o r a cenain adverse factor such as dangerous hobbies like mountaineering.

Hence, i prospectsw h o are engaged in dangerous hobbies w i l l be charged an
premium of a specified amount for getting the cover.

b) Accept the risk with exclusions

v :
Though he insurers would want to charge extra premiums for the extra
exire premium v e n r k s which Pose a veryh i g h tisk, that even a substantial
oe ?ged, will not be sufficient to take care of the extra
e o 2 e L I S LWISurd i e V A C e r w r i t i n g

Y T h e e x t r a p r e m i u m , , i ftgs.o n e w e r e t o charge, ° w o u l d b e so
» high
t h a tt h i cant
w o u l d find itprohibitive. To take care o f such extra v e e exclu are
imposed, wherein certain defined risks will not be covered. °

¥ Though,t h i s means diminished benefits in the cover for the life assured, it
can sometimes prevent declinature of cases, when the risk is very high and
help the client get insurance cover with exclusions rather than no cover at all
These exclusions are detailed in the policy. ?

There can be two kinds of exclusions:

Y General exclusions: which apply to all individuals covered by that product

v Specific exclusions: which are applied only to certain individuals, based on

their health and risk profile determined after underwriting the proposal.

c) Postponement o r deferment o f r i s k

Y Incases where a medical condition or impairment in an applicant has been

recently detected and would entail the applicant to go in for long span of
medical treatment, the underwriter may defer or postpone a decision for a
period ranging from 3 months to 3 years depending upon the severity of the
condition.

Y This helps the insurer in not adding very high risks to the portfolio, but to
defer it till such time that the client gets treated and gets better as regards his

risk profile. .

Y This also helps the applicant, as the extra premium that he would be required
to pay throughout the contract period would be very high i f he were to go in
for insurance cover before his treatment period, and which the applicant may
not be willing to bear.

Y The postponement or deferment period allows the client to get better terms
of acceptance, after the treatment or waiting period phase is over.

d) Declinature of risk
In certain cases, which constitute a small number, theapplicantw i l l b e v e r y
highly substandard to such an extent, that this extra risk may either remain
constant or even get worse. In such cases, evenpostponement of risk will not
help taking care o f extra risks. These cases will be declined.

39
IC - 22 Life Insurance Underwriting

licant o f advanced age, with multiple adverse medical factors likehistoryo r

p i n e along with long-standing hearta ilment.

a ,

Underwriters can decline proposals from individuals who are suffering fom
some incurable diseases / conditions, asPostponement of neither risk nor wil
charging of extra premium help manage the extra risks.

eee reer e e e eee e r r a t a ,

in which o f the following ways can an insurance company communicate its terms
o f acceptance to a life insured?

A FPR
B Policy contract
C Consent form
D Proposal form

3. Learn about riders,

[ L e a r n i n g Outcome c}

3.1 Riders

Riders affect the amount o f life insurance premium that is payable by the
policyholder.

x??___?____________
Riders are optional additional coverage and benefits that are offered along with
basic life insurance policies to enhance the benefits that will be payable to the
policyholders,

ee

40
3.2 Features of riders

¥ Riders ;can be addede either

¢
it
added at the commencement of the i
or from
policy

the period coinciding with the policy anniversaries of thecontrac.

¥ Riders also need to be underwritten like the base cover and can have
decisions ranging from standard premium, extra premium or decline.

¥ Certain riders can be added only at the commencement of the policy

contract.

3.3 Types of riders

The common form of riders that are offered by the life insurance companies are:

Waiver o f premium (WoP) rider or Premium Waiver Benefit Rider (PWB)

Accidental death benefit (ADB) rider
Total Permanent disability benefit rider (TPD)
Term rider
Critical illness rider (C.I. Rider)

Diagram 6: Types of riders

Common
riders

41
IC - 22 Life Insurance Underwriting

a) Waiver o f premium rider

Waiver o f premium rider (WoP) is also k n o w n as p r e m i u m waiver benefit

(PWB).
i
ii ider

ith child plans, where

wi f premium rider is more popularly used with
premiumpayments due in future are waived o f f by the insurance company in
case of:

¥ permanent disability of the parent pay!ing premium in children plans

Y death of the life insured (parent) in children plans _ ;

Y if there is disablement of the life-assured which prevents him/her from

a

gainful employment after a pre-defined defermentp eriod

In the case o f death o f the life insured (child plan), thec o m p a n yn o to n l y waives
o f f the premium, but also might pay the future premiums till the maturity o f the
policy.

Rakesh Malhotra is lecturer in a college. He has a 4 year old son named Mohan
for whom he purchases a child plan. He takes a waiver o f premium rider along
with the policy.

5 years later, Rakesh dies in an accident. In this case, the policy w i l l continue and
future due payments will be paid by the insurance company so that the child gets
the planned maturity amount at the end o f the policy term.

b) Accidental death benefit ( A D B ) r i d e r

Accidental death benefit rider is used for enhancing the .risk cover against
accidents, where additional amount is offered over and above the sum assured in
the event of death by accident.

The main features o f this r i d e r are:

¥ The amount of benefit can be equal to the basic death benefit (i.e. additional
sum assured) or lower, but never higher than the base sum assured.

v i : .

ne ider Provides cover to the life insured against accidents that might result
IC ? 22 Life Insurance Underwriting

Thedefinition o f ?aceldent? is exhaustive and is carefully drafted. I f the

conditions of accident encountered conform to the criteria detailed in the
policy contract, only then will the accident benefit be payable.

There existconditions wherein the insurer may pay the basic claim but may
repudiate the accident benefit claim, as the accident does not fall within the
scope defined in the wordings of the policy contract.

The underwriter, while evaluating the application wherein the client applies
for an ADB rider, evaluates the occupation and hobbies and the probability
of accidents very carefully before assessing the accident risk and granting the
ADB rider benefit.

The ADB rider can be accepted at standard rates, with a loading or can be
declined i f the application so warrants,

Vijay Singh is a marketing executive who has taken accident death benefit rider
along with his policy. The accident death benefit is for Rs 5,00,000 and the basic
sum assured is Rs 10,00,000.

in case Vijay dies due to an accident within the policy term, then the insurance
company will have to pay Rs 15,00,000 to his nominee/s i f the death has
occurred due to the accident that falls in the scope defined in the wordings of the
policy contract anid the policy is in full force.
a S

i) T P D - T o t a l Permanent disability benefit

v This benefit, is usually a premature pay-out of the payment of the base death
benefit, and becomes payable only when the insurer is convinced that the
medical condition of the claimant (life-assured) is conforming to the pre-
requisites as mentioned in the policy contract and also conforms to the scope
of the definition o f ?permanent disability?

The claim, when applied for, should be backed with supporting evidence that
the claimant has become totally and permanently disabled and hence unable
to follow gainful employment, due to accident, and any improvement in his
condition is not possible.

43
v ep
o n e definition o f ?gainful employment? and ?own occupation? etc,, is aj,,
Pen to interpretation and therefore, the insurers define these clearly in ty,
p o l i c y Contract document with properly worded definitions, 80 that therei s
ho ambiguity in the termso f reference.

V The claims process in settling a TPD needs very careful assessment and may
need medical and legal experts before a decision to pay or not to pay a claim
is taken.

Narendra Mishra has taken a permanentdisabilitybenefit along with an ADB

rider over the basic life insurance cover. In this case, i f Narendra survives an
accident but is permanently disabled (and within the scope o f the definition o f
permanent disability), then the life insurancecompany w i l l have to pay him
survival benefit as per the terms and conditions o f ?disability? in permanent
disability benefit. However, no benefit will be payable under the ADB rider as he
has survived the accident.

d) Term rider

This rider offers an additional amount as death benefit (as covered in the policy)
in addition to the base plan (only in non-TERM plans), in the case o f death of the
life insured. The death benefit is payable to the nominee/s.

Exampie
Fahim had taken a term rider along w i t h his life insurance policy. In the event o f
his death, an amount equal to the sum assured will be paid by the insurance
company to his nominee/s,
? ? E E O

e) Critical illness r i d e r

Critical illness rider provides cover to the insured against critical illnesses that he
may be diagnosed o f in future.

The main features o f the CI rider are:

¥ Benefit is payable to the insured at the time o f diagnosis.

Y Critical illnesses that are covered by the insurance companies may differ.
Some o f the critical illnesses that are covered include paralytic stroke, heart
attack, organ failure, major organ transplant, cancer etc. and are based on the
covers offered under the product o f the insurance company.

44
IC - 22 Life Insurance Underwriting

¥ The definitions o f the conditions for which the CI rider is payable has to be
very accurately and tightly defined by insurance companies to avoid medico-
legal disputes at claim-stage.

v The rider pays s u r v i v a l benefit to c o v e r t h e medical expenses for the

treatment.

v T h einsurance company generally stipulates a time period o f 30 days after the

illness has been diagnosed for paying the benefit. The benefit is paid only i f
the insured survives the period o f 30 days post diagnosis.

Y The difference between a Cl rider and an insurance mediclaim policy: in a CI

rider payout, a lump sum is paid irrespective o f the actual expenditure
incurred on the policy, unlike in a mediclaim policy where only the eligible
hospitalisation expenditure may be paid.

E s tia i d
Gajendar had takena c r i t i c a l illness rider along with the basic life insurance
cover in 2007. In 2012, he is diagnosed with kidney failure due to which he has
to go in for a kidney transplant.

In this case, the insurance company w i l l pay Gajendar a lump sum amount as per
the agreed terms for treatment, i f his medical condition is within the scope o f CI
eligibility and the policy is in full -force subject to satisfactory documentation
provided by him to the insurance company.
? E ? E E E ? ? E ? ? ? ? ?

O e Bn slau
Ina critical illness rider, the benefit is payable at the time o f :

Death o f the life insured

Diagnosis o f the illness
Medical bills being produced
Discharge from the hospital

Premium Loading

The loadings that are imposed on impairments vary from one insurer to another
and also between products. Though the numerical rating is more or less a widely
recognised form o f risk assessment and classification, there is always an element
of individual assessment by the underwriter where he needs to exercise his
expertise in the field o f risk selection.

45
J) IC ? 22 Life Insurance U n d e r w r i t i n g

Terms of Acceptance

a) After the underwriter reviews all the documents necessary for risk selection,
viz., the proposal application form, the age-proof, themedical Teports done as
pre-insurance screening, the persona! health records of the client (if any), the
financial documents the underwriter decides upon the terms of acceptance
.

of the application.

b I f the proposal is highly sub-standard or where the cover is for a very large
amount, or i f the reinsurance treaty mandates certain types of risks to be sent
to the reinsurers the same is referred to them with the recommendations from
the direct insurer, with adequate rationalisation supporting their
recommendations, for their decision.

I f the underwriting outcome is to grant cover to the applicant, thepolicy

contract is issued under one of the following ways:
i) acceptance at ordinary rates / at standard rates
ii) acceptance with extra p r e m i u m when
the life is medically sub-standard
¥ hazardous occupation
v hobbies, city
Y the country or city of residence of the life to be assured

The extra premium is as per the agreed reinsurance treaty guidelines, The
consent for this counter offer (with extra premium with reasonstherefore)
from the life to be assured is a pre-requisite for such applications, before the
policy contract is completed and policy bond issued.

iii) acceptance on modified terms contract can be offered i f possible rather

than an outright declinature. Example: imposing exclusions under the
policy. The consent for this counter-offer (with extra premium with
reasons therefore) from the life to be assured is a pre-requisite for such
applications, before the policy contract is completed.

The terms of acceptance are communicated to the client in the form an FPR
(first premium receipt) and / welcome letters along with the policy document
and the practices vary from one insurer to the other.
IC - 22 Life Insurance Underwriting

4. Explain the concept of dating-back (back-dating) of

policies.
(Learning Outcome d]

4.1 Dating back of policy/ (back-dating of policy)

v Insurers charge premium based on the age at entry for traditional plans as
the concept o f level premium. Insurers sometimes give the client the
benefit o f a lower age, and therefore lower premium during the entire tenure
o f the policy contract, and this is known as date-back the policies.

Y The dating back o f a policy is an option available to the insured to avail the
benefit o f lower age. Under this, the commencement date o f the policy is
taken as the earlier date, against the date mentioned in the proposal form. The
advantage is that the policyholder has to pay a Jower premium amount
because o f his lower age.eg;; a person who is aged 30 yrs at the dateo f
purchasing a policy, can pay @ level premium throughout the policy term at
the premium applicable to a 29 yr old, so long as his policy can be dated back
within the financial year in which he is purchases the policy. Term plans
cannot be back-dated.

June 2011, when a life insurance plan was

Rajiv Mohan was 36 years old in
purchased by him. He has to pay Rs 5,000 annually as premium.

However, i f the date o f commencement o f the policy is shifted back to 1" April
2011, his entry age w i l l then be 35 years. In this case, he w i l l have to pay a lower
premium amount o f Rs 4650 annually. Hence, he w i l l be benefited by wayo f
discount on his premium throughout the tenure of hispolicy.

47
IC 22 Life Insurance Underwriting, |

D i a g r a m 7: G u i d e l i n e s f o r b a c k d a t i n g o af p o l i c y

Guidelines for
backdating of a policy
Policy can be backdated only up
to one year

Interest is charged by some

insurers

D.O.C is different from D.O.R

Onlyi f t h e insured is eligible

4.2 I m p o r t a n t guidelines f o r backdating o f a policy

Y A p o l i c y can be backdated only up to one year. Under no circumstances can

this dating back go beyond the financial year in which the application is
taken for policy issuance. In India, dating back can be up to the beginning o f
the financial year ( 1 " o f A p r i l o f that financial year) only.

¥ Some o f the insurers charge interest when the dating back option is exercised
by the proposer for certain plans.

Y In policies which are dated back, the date o f commencement o fpolicy

(D.0.C) is always different from the date of commencement o f risk (D.O.R),

Y The dating back of a Policy can be done only i f the insured is eligible for
insurance on the date o a
f pplication.

< 7
I f the maximum age of entry for a life insurance policy is 60 years, then the
individual whose age is 61 years at the date o f application cannot be accepted
with dating back o f his policy, so as to make his age fall within the maximum age
at entry criteria for that product.
a E
a
jam an be backdated only up to -within the same financial year.

one year
g T e years
Three years
c
p Five years
I

Summary

In the numerical rating method, numerical rating is

> underwriters for taking decisions to accept or decline the,
risk. employed Py
The concept of extra mortality is applied in the case of sub-standard lives.
>
Extra mortality rate or EMR refers to the excess mortality as compared to the
mortality of standard lives.
The unfavourable aspects of the risk attract addition of extra mortality ratings
(called credits) to the base rating jand for the favourable aspects, the base
ratings attract reduction in the mortality ratings ( and called debits) .

Once all the factors are debited or credited, they are then totaled todetermine
a final rate which would then classify the applicant as standard risk, sub-
standard risk, or highly sub-standard risk.
After assessment o f extra mortality rates, an underwriter classifies the risk as
standard, sub-standard, and highly sub-standard. Based on the level of risk,
an underwriter can choose to accept,postpone /(defer) or reject the risk.
Riders are optional additional benefits that are offered along with the basic
life insurance policy to enhance the benefits that will be payable to the

policyholder. , .
Dating back of policy is an option available tot h e insured to avail the benefit
f lower age, subject to certain pre-definedconditions.
Trower

Answers to Test Yourself

Answer to T Y 1

The correct answer is D.

In the numerical rating method, all the factors eg; personal ict, e K
factors and hereditary factors of the life to be ingured are
evaluation.

49
IC ? 22 Life Insurance Underwriting

A n s w e r to T Y 2

The correct answer is A.

The insurance company communicates its terms of acceptance to the life insureg
via FPR or a welcome letter.

A n s w e r to T Y 3

The correct answer is B.

Critical illness rider benefit is payable at the time o f diagnosis of the illness.

A n s w e r to T Y 4

The correct answer is A.

A policy can be backdated only up to one year.

Question 1

Among the following individuals, which one will be considered to be standard

life by underwriters?

A Individuals with minimum mortality rate

B Individuals with maximum mortality rate
C_ Individuals with minimum E M R
D Individuals with maximum E M R

Question 2
Kamal Kishore Jha had taken an ADB rider along with his insurance policy.One
day, he met with an accident while returning from his office. He survived the
accident, but lost one limb. Which of the following will be true in the case of
Kamal Kishore Jha?

A Survival benefit equal to his medical expenses will be paid to Kama? 1 Kishore
B Death benefit will be payable to Kamal Kishore?s nominee/s
Kamal Kishore has
c No benefit will be paid by the insurance company as
survived the accident.
D A lower sum assured will be payable as he has survived the accident.

50
IC ? 22 Life Insurance Underwriting,

Question 3

Lien is imposed for a limited period, and is applicable in cases where the extra
mortality risk is expected to:

A Remain constant
B Increase in future
C. Decrease in future
D None of the above

Question 4

In numerical rating systems, unfavourable aspects get while

favourable aspects are :

A. Reduction in mortality ratings, addition to base mortality ratings,

B Addition to mortality ratings, deduction in the base mortality ratings
C_ Debited, not given effect
D Credited, not given effect

Question 5

In which o f the following methods is a flat or standard rate applied for expected
extra mortality rate?

A. Extra premium based extra mortality rate

B Standard extra premium
C. Standard premium rate
D Extra premium based mortality rate
?

Answers to Self-Examination Questions

Answer 1

The correct option is C.

An individual with a minimum EMR will be considered to be standard life by

underwriters.

51
IC ? 22 Life Insurance U n d e r w r i t i n g

Answer 2

The correct answer is C.

No benefit will be paid by the insurance company as Kamal Kishore has survive
the accident.

Answer 3

The correct answer is C,

Lien is imposed fora limited period, and is applicable in cases where the extra
mortality risk is expected to decrease in future.

Answer 4

The correct answer is B.

In numerical rating systems, unfavourable aspects get addition to mortality

ratings while favourable aspects get deduction in the base mortality ratings

Answer §

The correct answer is B.

In the standard extra premium method, a flat or standard rate is applied for the
expected extra mortality rate,
e S

52
IC - 22 Life Insurance Underwriting

CHAPTER 3

UNDERWRITING PROCESS AND STRUCTURE

Chapter Introduction

This chapter aims to provide you with an understanding of the insurance

underwriting process. You will also leam about the structure of an underwriting
department, the underwriting philosophy and risk management, use of genetic
testing in l i f einsurance and the challenges facedin underwriting.

Bi Learning Outcomes a e
a) Understand the l i f einsuranceapplication pprocess..
b)- Describe the structure'of the underwriting function.
¢) Explain the underwriting Philosophy. and risk management.
d), Learn about genetic testing in l i f einsurance. |

e ) Understand thechallengesfacedi n
i underwriting

53
IC ? 22 L i f e Insurance U n d e r w r i t i n g >
1. U n d e r s t a n d t h e life i n s u r a n c e a p p l i c a t i o n process,
[ L e a r n i n g O u t c o m ea l

1.1 Sourcing o f insurance proposals

The process of sale o f life insurance policies today is done through various
channels. With the advent o f innovative models o f sale (in addition to the
traditional mode! o f ?insurance agents?), like internet sales, brokers, corporate
agents, etc. newer methods o f processing have become imperative. The more
common o f these are discussed below.

It is note-worthy that the erst-while traditional processing comprising o f data-

entry o f data from the information available in the proposal form till the stage of
policy-issuance, which used to be done at the life insurance office, has now seen
a shift to the ?outsourcing model? through external service providers ,and not
necessarily being done at the life insurance office. This needs a lot o f monitoring
and controls at the office o f the insurer and the service provider (vendor) .The
agreements defining the scope o f the vendor-contract, their respective roles and
the accountabilities have to be clearly outlined and jointly accepted for a good
process, free from adverse legal situations.

Life insurance companies generally employ two processes for underwriting.

Diagram 1: U n d e r w r i t i n g process

j e e r ) process :

1.2 Underwriting process

a) Centralised processing of underwriting / policy issue: most of the

processing with regard to policy issuance is done at the head office of an
insurance office.

b) Decentralised processing of underwriting / policy issue: most of the

processing with regard to policy issuance is done either at a regional office or
at a branch office and not at the head office o f the insurance company.

&4
? IC - 22 Life Insurance Underwritin ig
O O

1.3 Life Insurance Application process

The various steps involved in the life

i

TH life insurance application process are as

Diagram 2: Life Insurance Application Process

of a life insurance quote

a) Step 1: Generation
The life insuranceapplicationprocess begins with ?generation of life insurance

quotes?. These quotes can be generated in two ways:

55
|
IC ? 22 Life Insurance Underwriting

Diagram 3: Life Insurance Quote

ARM L d ;

- i) Generation of s quote online, through a web based application on a

portal

In this method, an individual can get the quotes o f different insurance companies
from a web based application on the basis o f personal information provided by
him. An on-line quote takes just a few minutes and gives the prospective buyer a
comparative analysis o f a wide range o f products and helps the customer to take
an informed decision on the life insurance product he desires to buy.

The customer can choose the product o f his choice. Once the product is selected,
the system sends intimation to the respective insurance company, whose
representative then contacts the customer.

The procedure for generating quotes is as follows:

¥ A customer needs to enter his personal details in the fields mentioned on the
?quotes page?.

vy
T h i s personal information o f the customer is then used to match his
requirement to the best life insurance quotes for his own personal profile.

The Privacy of the personal information ismaintained: accorditig to: the ?privacy
policy? o f the insurance company when he applies. online.
a een ES

kL
IC - 22 Life InsuranceUnderwriting

¥ The system then nuns an automatic check on different insurance p}

the best life insurance products available with the insurance company i n d
meett h eneedso f the customer. The system displays life insuranceproducts
with their indicative premium (also called as anIllustration)

¥ During the online data collection process, the insurance com seek:
on the name, address, phone number, other additions
8

P 88,

r e-mail ID, and any other additional

non-medical or medical information that is relevant to theapplication.

T h esystemw i l l a s k the proposer i f he is ready to schedule hispre-insurance

medical examination or i f he has any queries before proceeding further. Once
this iscompleted, the proposer can submit his/ her Tequest and the process for
purchasing life insurance moves to the nexts tage.

ii) Generation of an insurance quote through Distribution channels

The customer can also obtain a quote through other distribution channels that are
authorised to sell insurance products such as:
¥ insurance agents;
¥ insurance brokers;
¥ Corporate agents etc.

The agents collect information from the customer through a physicala p p l i c a t i o n

form and accordingly advise on suitable insurance products, based on the needs
o f the customer.

b) Step 2: V e r i f i c a t i o n o f data

Some of the insurance companies, after receiving the application form the
customer, (on-line or via distribution channels), verify the information furnished
in the application form. This can be done in two ways:

i) By making a reference call to the customer

A ?reference call? by one o f the insurance company representatives is made to the

customer. This ?reference call? is made for any o f the following purpose/s:

Y¥
T o verify the information submitted
v To answer the queries ( i f any) o f the prospective customer on the product
before concluding the sale process.
v To inform the customer about the medical examination process ( i f
applicable)
For any other clarifications ( i f any)

57
IC - 22 Life Insurance Underwriting

The ?reference call? helps in minimising the t i s k o fmis-selling by the dittey,

distributing channels and helps in the process o f issue o f the policy documeny,

¢) Step 3: Submission o f life insurance proposal f o r m and K Y C (knowY o u r

customer) documents

Every life insurance company requires a detailed ?proposal form? that has to be
duly filled and signed by the proposer. Insurance agents have to ensure that it is
correctly and completely filled and signed by the customer.

Furthermore, the insurance agent ensures that the amount of insurance cover
applied for by the customer is in line with the financial underwriting guidelines
o f the company and is supported with adequate financial documentation.

A communication to the client through a letter and/ e-mail is also be sent t o

Tequest for compliance of any missing information in the application form, or to
inform the customer about the medical examination process (for medically
underwritten cases.).

The insurance agent also needs to collect KYC documents from the customer
along with the proposal form.

or

?know your

customer? noms, whichfiave ?been

?companies: by? the~ Insurance Regulatory: and
DA). These ?norms are used for client identification

The iain: purpose of the KYC norms is identification and risk assessment of the
customer t the time of initial issuance of the policy contract.
According to the guidelines on KYC norms issued by the IRDA:

Life insurance companies to carry out KYC norms by determining

are required
and documenting the true identity of all its customers, Forthis, they need to
collect a recent colour photograph and mandatory documents such as;

a) P r o oo f identity: Documents like driving license, PAN card, Voter Id card,

Of passport can be submitted as valid proofof identity. ;

b) Proof of address: Documents like Passport, electricity and other utility bills,
Ietter. fom the employer or housing society etc. can, be-submitted as valid
proof of address. :

58
TNS .
?Aderwriting

jal documents: these need :

Fins e for.
applied 10 be submittedto: iene: «

psa APP 1 u t y iea

ertain rules have also been recommended foi hich « oy

?tically exposed persons,non-residents, hight Profile persons suchas

c o t e n an ene NC wde
counter checks
e
with hi
and
f ting procedures
lor such clients, €
KYC norms serve a3 part of duediligence:
@
7
assessment process. They also stipulate:that large e e assist in the rik
packed by supporting documents to establish thes ? should be

The customer
: receives communication
a e in the formo f ane i
sMS with respect to the life insurance applicationwithinthe c e o an
which is company-specific and in line with the regulatory norms an ?time,
information in the application is asked for,
as thisi s vital f o r ar io
s ky
missing
i. 4
i
process (underwriting) and for arriving at the premium payableunder i r a n

d) Step 4: M e d i c a l o r non-medical underwriting

Underwriting can be o f two types: medical underwriting and non-medical

underwriting.

i) Medical underwriting

u e
Medical underwriting refers to the underwriting process whereby underwriters
use health related information through a pre-insurance medical screening of a
prospect to take a decision regarding acceptance or rejection of the application,
or the amount o f insurance cover to be provided to the insured.

Medical underwriting can be general or comprehensive, based he the health

conditions of the prospect and the insurance cover that is sought by the
prospect.

ii) Non-medical underwriting

L e e where the insurance

4

Non-medical underwriting refers to theunderwriting Proon-medical basis.

Companies provide insurance cover to the prospects on
Sop pvemane overtonepores
59
1C - 22 Life Insurance Underwriting Bp

As insurance cover is provided to the insured without anym e d i c a l checkup, non,

medical underwriting is considered to be riskier and so the insurance cover i,
priced higher than medically underwritten products.

Diagram 4: Non-medical underwriting factors

In a non-medical underwriting, the following factors are assessed for taking a

decision on accepting or rejecting the risk:

Body Mass Index (BMI)

Personal medical history
Family medical history
Lifestyle and habits
Occupation
Place of residence
Moral hazard
Existing insurance with any other insurance company

(The above points are discussed in great detail in Chapter Nos. 1, 2, and 5)

Agent?s confidential report

The agent?s confidential report (ACR) is also an important tool for assessing the
risk in the absence of a medical screening process.
IC - 22 L i f e InsuranceU n d e r w r i t i n g

assessment of adverse factors

qhe medical history and insurance history of a client with other companies
uid also be carefully checked as against the r i iven

?om for any adverse factors such as: ?sponses given in the proposal

v proposals declined, postponed

/ extra premiumcharged on account of adverse health
¥ reduced benefits like exclusions or
/ reduction in sum assured applied for

such proposals need to be underwritten with caution to elimi

selection at the underwriting stage. sliminate adverse

F o rnon-medical underwriting, each company establishes a non-medical grid for

each of its insurance products based on which risk can be accepted by
underwriters.

Non-medical grids

D r e a
Non-medical /medicai grids are generally a function of the age, the sum assured
and the product.

Diagram 5: Process of medical underwriting

Process of medical underwriting

61
IC ? 22 Life Insurance Underwriting

i
ionately to th fe
icy

i
olicy increases proportionately
Experience sho? ws that ti e d axe o f the client, To determine whether a
increase in sum rassured {
non-medical or medical basis, the insurer, first
is to beu n d e r o falls under the ?mandatory? medical scheme
0 i /
aluates whethert h e applicant an insurance company, i.€., as per the grid, the
non-medical norms laid downb y the t o t a l M S A R ? M e d i c a l - S u m - A t - R i s k is
age of the life to be assured* and
calculated.
?MEDICAL-SUM-AT--RISK? may vaty f r o m one
Whilst the definition o f
which is commonly accepted by most o f the insurers,
insurer to another, the one,
is: i
face-value or sum assured under risku n d e r a c ertain policy. It is
)

i o ctculated as the total sum assured under allpolicies and riders ( except
Premium Waiver Benefit and Accident Benefit) on one life ,issued byt h einsurer
with whom he is applying within a period o f 24 m o n t h s preceding and
including the current proposal o r a p p l i c a t i o n . a t does not i n c l u d e the
amount o f insurance w i t h other insurance companies). Most companies also
add the sum-at-risk o f lapsed policies ( i f any).

The medical test requirements will be based on this medical sum-at-risk. It

should be noted t h a t t h e process o f u n d e r w r i t i n g (assessing, selection a n d
classification o f lives is also done during the revival o f lapsed policy.) based
on specific rules applicable at that point of time. This is documented in the
revival norms of a company.

1. Determine whether the proposal is to be u n d e r w r i t t e n on medical or

non-medical basis:

To determine whether a proposal is to be underwritten on a medical or non-

medical basis, the insurer first evaluates whether the applicant falls under the
?mandatory? medical scheme o r non-medical norms laid down by an insurance
company for the product the individual has applied for. These norms are
generally based on:
v the medical grid;
v the age of the life to be assured; and
v the total medical-sum-at-risk
the product applied for
¥ the personal and medical history o f the life to be assured

In some cases, even though the client falls under the norms applicable
i
: ° 1
for non-
m e e a i e according to the non-medical grid, the underwriter may treat
ve high or v o r i e nB M if the client has some adverse medical history of
ry hi

0 : ? es

guidelines formulated by the odym a s index) etc. relating to the underwriting

62
I C ? 22 L i f e InsuranceU n d e r w r i t i n g

ition to BMI **, other factors and details (incl. the family history), his

a t i n personal and medical history, occupation,residence

In momakoet
fa an important parto fevaluating ther i s k profile of an individual. Hisexisting
insurance (includes life insurance with all insurance companies) and also the one
he has applied concurrently, are a l s o an important part of the risk-selection
rocess. The ACR (Agent?s confidential report), also becomes an important tool
for assessing the risk in the absence of a medical screening process.

4 sample non-medical / medical grid isindicated below for clarity. These grids
may be company-specific and also product-specific,

SAMPLE NON-MED/ M E D I C A L GRID

SUC - (Sum- 0-17 years

under- years | years | years
consideratio and
n) in Rs. above

UPTORs. | NIL NL | NIL | FMR

1,00,000/-

1,00,001 to
Rs. 3 lakhs

Jooooi-to| NIL | NIL | NIL

Rs, § lakhs

§,00,001/- to
Rs. 10 lakhs +EC

10,00,001/-
to Rs. 15
lakhs

15,00,001/-
to Rs. 30
lakhs
o N
IC - 22 Life InsuranceU n d e r w r i t i n g

MR+ FMR | FP

30,00,001"| 0-12 YRS re my eve +X+ m t

and above| -Pediatric Cha | azet | Z e | vHz+ | Zany
FMR 13- THX | + ? | Ty
. | vez+ | MT+
pMRIEC | cxR| CXR | R xe |
GHX+Y+
zZ

C X R to be done f o r cases over Rs. 50 lakhs only

file ;
X=CBC+ ESR + HbAIC+ Lipid pro Serum uric -acid) + Lpy
= . creatinine, BUN, Ser -

( G G T SGOT-SGPT. Alkaline phosphates) + aia Ube Mirece 4

Indirect + Total Bilirubin) + Serum protein + S. albumin, 5

Z= FBS+RUA
e e aay

* * Body mass index (BMI)

numeric
a s i a osimple
i measure of a person's ?fatness? ora "thinness",ig
professionals
allen r surance to evaluate whether person

Overweight or underweight. Overweight persons have a higher BMI ascompared

to the standard values,and conversely, thin persons have a BMIw h i c h is onthe
lower side as compared to the standard values, BMI provides areliableindicator
of body fat for most people ?and is used to screen for weight categories that may
lead to health problems.

BM1 is expressed as weight (in kg) / height in (mm * 2)

Medico-actuarial studies have Proven the extra risk associated with a person who
is either overweight or underweight. A t younger ages, being underweight is seen
to be adverse as it may point towards tuberculosis, anaemic conditions or some
other serious infections, .

Excess weight and obesity have proven to be more harmful at middie or higher
ages, and could potentially lead tohypertension, cardio-vascular diseases etc,,
which are degenerative in nature and are risk parameters, Build charts/ tables are
based on mortality and morbidity studies catried out by experience studies over a
large groupof insured lives, It Consists of standard weights for males and females
for different heights, which are used as indicators to predict the mortality. The
chest Birth in addition to the height and Weight give an estimate of the mortality

? ? ? ? ? r e
?e
64
IC-22 Life Insurance Ung ? ?
rwriting

2 Calculation of medical-sum-at-risk a g |AR)

Medical-sum-at-risk( M S A R )

Definition sk ret

edical-sum-at-risk refers to the total face.

w e i policy ffor ascertaining thfe ?value or sum
type of medical tests assured under tisk for
to be done by the life
8
proposed as pre-insurance screening,

Medical-sum-at-risk takes? i
to
policies with the insure
ridr
+

Highlights of the above section:

¢ Medical-sum-at-riskexcludes the sum assured of ?waiver of premium benefit

rider? and ?accident benefit rider?.
¥ Only those insurance policies that have been issued by the insurance
company from which the applicant has applied for insurance cover are
considered.
MSAR does not include the amount of insurance with other insurance
companies, within a period of 24 months preceding and including the current
proposal or application.
The medical test requirements for the prospect will be based on the medical-
sum-at-risk that has been calculated.
It should be noted that underwriting (assessing, selection and classification of
lives) is also done during the revival o f lapsed policies, based on specific
rules applicable at that point of time, as documented in the revival norms of a
company.

3. Caleulation of financial-sum-at-risk (FSAR)

Financial-sum-at?risk (FSAR)

Another important aspect that is taken into account at the underwriting stages
calculation of the FSAR??Financial -Sum -at r i s k ? . This differs from the
definition o f ?MSAR-Medical -Sum-At -Risk? mentioned to above.

65
IC ? 22 Life Insurance Underwriting

The FSAR is used for financial underwriting and covers the total sum assureg
existing and proposed with all the insurance companies put together and not
restricted only to the companies that the client is currentlyapplyingf o r , but of aij
insurance companies that he has policies he has with. Companies also include the
sum-assured o f the policies which are in the lapsed-state and are within the
eligible period o f revival with A L Linsurers.

e) Step 5: M e d i c a l e x a m i n a t i o n

Once the proposal form and the signed quote is received by the life insurance
on sod
ines that the company follows ,a pre-
office , based on the underwriting guidel i m 0

insurance medical examination is called for A t times, additional medical tests or

documents which are necessary, are also called for, from the customer. Based
on the intemal processes followed by different insurance companies, these are
conducted, either through the services o f their own medical panel or through
external service providers called the TPA?s (Third Party Administrators), whose
services are regulated and licensed by IRDA.

Once the medical exam has been ordered, the client is contacted within 2-3
business days to schedule the examination appointment.

The medical examination involves:

Y Measuring the height, weight and blood pressure and examining the organs
and systems of the human body.

v May also entail taking of body fluids such as blood and urine sample along
with cardiological tests like ECG, TMT, X-Rays etc. A sample format of an
FMR-Full Medical Report) is provided in the ?Annexure? section in the
book.

The tests that need to be conducted are based on the underwriting rules
applicable to the product that the client has applied for and the medical condition
and age of the applicant at the point of sale.

In some cases, the clients are requested to complete certain relevant

questionnaires based on their personal and medical profile whose life is to be
insured such as:

Y Diabetes questionnaire
¥ Tumor questionnaire
¥ Deformity questionnaire
¥ Armed-forces questionnaire etc.
o s
IC - 22 Life InsuranceUnderwriting

I f the premium to be charged comes to 4 higher value than when the clien,
applied for through the quote , (as seen in some sub-standard lives) , a consent
for the revised rates through a new quote along with the requisite additiong
premium with leviable taxes thereon will be called for, f r o m the client. This
extra premium is charged at a higher rate to covert h ee x t r a risk that the client
brings to the portfolio . This is explained further in detail in a separate chapter, 1,
is at this stage that the final premium is set and may sometimes over-ride the
initial quote generated at the pre-underwriting stage. This happens i f a counter.
offer needs to be issued on grounds o f sub-standard health, certain hazardous
occupations, country of residence etc.

An important point worth noting is the fact that the underwriting norms to either
decline or to defer acceptance of a proposal or a decision to charge an extra
jum

may differ from one insurer to another and from onep roduct to another
therefore needs careful evaluation at the underwriting stage without getting

judgmental.

(e.g. an insurance company ?A? may decline a proposal for a certain medical
condition for a Critical Illness or Term product but may accept a U L I P policy on
modified terms o f acceptance like charging an extra premium to cover the extra
risk that the client brings to the portfolio).

I f the client agrees to the final terms o f acceptance (counter-offer), as conveyed

by the insurer througha l e t t e r , the policy contract comes to a conclusive phase
the client does not
and a policy document stands issued to the client. In case,
agree to the terms o f counter-offer suggested by the insurer, the initial premium
money paid by the client is refunded as perrules.

Insurance companies now apply different techniques to reduce the processing

be reduced to just one day.
time for underwriting. In some cases, this period can
Some o f the recent and popular techniques use!d by insurance companies for the
underwriting process are discussed below.

a) Automated rule engine (also known as Black-box underwriting)

Many insurance companies now use pre-defined ?underwriting rule engines?

for automating the process of insurance applications and the underwriting
process. In this process, hundreds o f policies can be underwritten through
electronic means without the intervention of underwriters by passing the
information in the application form through building the underwriting business
rules. This is generally done for non-medical proposals, so that the underwriters
can focus on the medical underwriting and complicated cases where they cannot
be done through the automated mode.

68