PreferredVs

Simplified Issue Underwriting

By: Aakash Mishra, GMIsland Life Assurance Co LtdMauritiusat OESAI LIFE INSURANCE TECHNICAL TRAINING, TANZANIA ,11th Nov 2015

Objectives

Underwriting : Key Principles1

Main distinguishing features 2

Advantages and Disadvantages

3

Challenges Ahead4

5 Current Trends5

What is underwriting? Underwriting is the process of

examining, accepting or rejecting insurance risks, and

classifying those selected, in order to charge the appropriate premium for each.

The purpose of underwriting is to spread the risk among a pool of insured in a manner that is equitable for the insureds and profitable for the insurer.

RiskThe possibility of any adverse deviation from a desired outcome that is expected or hoped from any occurrence

What does an Underwriter do? The underwriter is an employee of the

insurer who-

Underwriter

B

C

D

AEvaluates

risk

Accepts Applications

Declines Applications

Determines appropriate premium

The decision to provide insurance coverage or not is

commonly referred to as an underwriting

decision

The decision to provide insurance coverage or not is

commonly referred to as an underwriting

decision

These decisions greatly affect the success or failure of an insurance company

Why is sound underwriting important?

Sound underwriting is beneficial to the insurance company, the insured and the insurance sales persons:

Helps insurance companies remain competitive and financially strong.

An insurer’s profit is primarily determined by controlling expenses, accurately pricing products and exercising sound judgment in underwriting

SoundUnderwriting

Underwriting is considered to be sound if each risk is evaluated accurately, classified properly, approved for an appropriate premium amount, or denied accurately

An insurer must charge premium amounts that correspond to the risk that each proposed insured represents.

Sound underwriting benefits sales agent because they can use an insurer’s sound underwriting practices as a selling point to demonstrate the company’s focus on fairness to policy owners and its commitment to financial strength.

Why is sound underwriting important?-Contd

SoundUnderwriting

Underwriting is considered to be sound if each risk is evaluated accurately, classified properly, approved for an appropriate premium amount, or denied accurately

What are the objectives of Underwriting?

Just like insured should be charged premium amounts that are appropriate for the level of risk they present, insurance companies should also be compensated for the level of risk they accept on each policy.

All insurance companies, require sound underwriting to help assure favorable financial results.

Although underwriters are only indirectly involved in establishing a company’s premium structure, underwriters’ decisions are crucial in producing actual morality results that correspond to the actuaries’ morality projections, and, thus, produce profitable business.

Profitable to the insurance company.

Simplified issue underwriting is the minimum underwriting by which a risk could be assessed approximately

Preferred underwriting is the detailed underwriting by which a risk could be assessed appropriately

From Simplified issue to Preferred underwriting

Preferred Simplified issue Guaranteed issuance

Basic definitions: When an underwriting is done on minimal number of questions, upto a certain sum assured, without any medical tests , such underwriting is called Simplified issue underwriting.

In Preferred underwriting, the Full underwriting is carried out based on build, family history, medical test report, hobbies, occupation , Lifestyle, smoking/non smoking etc.

Preferred: Traditionally, life insurers have looked at risk assessment and product pricing on the basis of your age, gender, smoker/non-smoker status, and overall “standard” health. Preferred Underwriting takes into account your lifestyle and physical build, along with your personal and family health history.

Guaranteed Issuance: The product is priced in such a manner that risk element is minimal.

Factors affecting Preferred Underwriting

7 Factors

F1

F6

F2

F3

F7Age

Gender

Build

Lifestyle Habits

F5 F4Family Medical

History Personal Medical

History

Other factors in Preferred underwriting

B

C

AInsurable interest for the cover

Life Income Multiple calculation.

Premium Paying Capacity.

First step of establishing financial eligibility is to ensure that there is Insurable interest in offering the cover

· A person has an "insurable interest" in something when loss or damage to it would cause that person to suffer a financial loss or certain other kinds of losses.

· A basic requirement for all types of insurance is the person who buys a policy must have an insurable interest in the subject of the insurance.

Subsequent step would be establishing Financial eligibility

The final step is establishing Premium paying capacity. Financial eligibility and Paying Capacity can be assessed by the current annual income of the proposed.

Other factors (contd) There are 5 different classes of occupations depending on

the varying degrees of risk associated with that particular occupation:

Occupation ClassOccupation Class

Class 5Class 4Class 3Class 1 Class 2

Mostly ‘White Collar’ workers

working inside an office and are not subject to other factors, which

would increase their risk

Mostly ‘White Collar’ workers

working inside an office and are not subject to other factors, which

would increase their risk

Some ‘White Collar’ workers whose occupations are subject to some

hazardous factors and whose duties

are outdoor or traveling.

Some ‘White Collar’ workers whose occupations are subject to some

hazardous factors and whose duties

are outdoor or traveling.

Skilled or semi-skilled industrial

workers involving either manual

labour or the use of light machinery

Skilled or semi-skilled industrial

workers involving either manual

labour or the use of light machinery

Industrial workers whose occupations require the use of

heavy machinery or other unskilled

labourer.

Industrial workers whose occupations require the use of

heavy machinery or other unskilled

labourer.

The risk is higher than Class 4 and

therefore has to be individually considered

The risk is higher than Class 4 and

therefore has to be individually considered

Basic approaches of the two types of underwriting

Preferred

•Risk- Reward balance•Lower &’Specific” premium is charged due to various debits and credits.

•Most of the risks can be underwritten and can be adequately priced. For Eg loading on diabetes, HIV etc.

Simplified

•Risk- Reward balance•Insurer takes higher risk and charges higher &’generic’ premium

•Various restrictions on product, Age, SA, Riders etc

Advantages and Disadvantages of each type

Preferred

Simplified

Challenges ahead

Traditional u/w methods are on the wane. In the digital world, everything is quick. Willing to pay

slightly more for quick service.

Insurers also cant afford to spend heavy cost on underwriting ,

based on medicals, other questionnaires etc. Can have higher

Risk appetite

Simplified- Mass products but costly for customer. Insurer need to do rigorous data analysis, lower admin costs, build

process efficiencies to gain market share

Reputational risk due to claim

repudiation in simplified- Non

disclosure

Sales would always ask for quick issuance. Simplified helps

in this regard

Current trends and digital age- New Markets, New Products, New Distribution models

Trend towards mass

customization of products and

services . increase in variety and customization

without a corresponding

increase in costs.

Increased and upward revision in

medical u/w grid

Better Health care and longevity.

Insurers can afford to

launch Simplified products

Digital nature of things to

come- Website, mobile

insurance, Outbound call

Centre

Bancassurance channelWorksite

MarketingMicro

insurance

Any Questions

Thank You..!