Life Insurance Underwriting

Life insurance providers handle different risks situations, and as such would need a technical guide or approach to determining how much risk it could cover especially in times of claims. It is important to know that not all insurance companies would accept one’s application of life insurance cover and that is where the concept of ‘underwriting’ comes into play.
Definition and Purpose

It is the process by which insurance companies evaluate, determine and measure the level of insurability of an insured individual. The word underwriting brings to mind the concept of Risk assessment.
This involves certain guidelines and process so as to come to a logical conclusion about a prospective insured individual. No insurance company would want to run at a loss of covering an individual who would present greater risk than the amount paid as premium, as such Underwriting professionals are hired by the insurance company to evaluate prospective clients and determine their status. These professionals employ actuarial means to determine your rating which is then used in determining the premium to be paid by the insured, not to forget that for every premium paid to an insurer, a pool of money is accumulated and it is from that pool of money that claims would be paid and it would be so unfair if in a group of term life insured individuals, one person presents greater risks than the others at the same amount of premium; it might even lead to a loss to the insurer eventually.

Method
What are the guidelines used in determining if a person’s application should be accepted or if it should be turned down or if the premium should be increased?

a. The process of underwriting follows after an application is received by the insurer, the client would be asked to fill out a questionnaire on his medical and family history, and it is required of the client to answer all questions truthfully and honestly to the best of his knowledge. He would be denied acceptance if through the underwriting process it is discovered that some false information were included in the answers submitted to the insurer.
The following are the main questions that are inquired about by the underwriter:

Age- This is because life expectancy reduces with increasing age
Sex- Females are deemed to have higher life expectancy than males
Smoking habits- Smokers have shorter life span than Non smokers
Health history
Family history
Height and weight
Occupation
Alcohol habit
Foreign travel (some out of region travels are seen as risky)
Driving history (This is to know the risk of car accidents)

b. The next step is medical examination carried out by a medical professional e.g. A Nurse and the medical tests carried out include the following:

Blood Cholesterol level, Blood pressure, exposure to radioactive substances, arthritic conditions, asthma and so on.

Rating
This involves classifying the insured into any of four classes; the standard categories are
Preferred, most preferred, standard and tobacco
The healthy ones are put into the most preferred and based on this the charge on the premium would be the standard amount and standard terms of contract. The preferred group means the individual has a history of a medical condition or illness or even a family history of a particular medical ailment; such individual’s charges would be higher or in extreme cases the person would be denied an agreement or acceptance. The standard category is the most popular class where people fall into and also comes with standard terms of contract or with some minor modifications. For instance an individual with a job that comes with high risk, instead of denying such a person a policy; there could be an exclusion clause that no claim would be paid if he dies as a result of occupational hazard. There are also times where the policy could be put on hold till actual confirmation of health status especially after a surgery has been carried out to determine the health status after the surgical operation.

The process of underwriting clearly tells us that in the world of insurance, most especially life insurance that there is no one straight way to determining how much one is liable in premium, the final amount would all be a combination of the outlined variables.