THE UNDERWRITING PROCESS PART I June Web viewMost are issued standard, ... [“renting” or “leasing” is perhaps a more appropriate word]) ... THE UNDERWRITING PROCESS PART I

The Financial Advisor Guide to The Underwriting Process – Part 1

Self-Study Course # 28

OVERVIEWUnderwriting is the most important aspect of the life insurance application

process - and the least understood. It is also more an art than a science.

Life insurance underwriters base their decisions on three broad categories of

information:

what they know

what they think they know

and what they don’t know

The first category includes just the facts, the second category could include

inaccuracies that the underwriter thinks are facts and the last category may

include information that the underwriter would like to see, but can’t (for example,

the underwriter might want to see the pathology report on the lesion that was

removed from your back 10 years ago, but can’t because the report is not in your

physician’s file and the dermatologist you were referred to has long since retired).

Before rendering a decision, underwriters need to gather evidence and

information on the health, finances and lifestyle of an applicant. This information

comes in the form of test results, medical files, reports from physicians and

specialists, tax returns, motor vehicle reports, etc.

Here’s where the problems start. Medical records can be tricky to assess for a

number of reasons. It is not uncommon for one’s medical records to include

incomplete, inaccurate or entirely incorrect information or diagnoses. And

medical records can be difficult to interpret and understand. If you’ve ever had a

prescription, you know what a doctor’s handwriting looks like – not pretty. How is

an underwriter supposed to make any sense of it?

It is also very important to note that Underwriters are not medical professionals

making decisions about an applicant’s health.

- 2 - The Underwriting Process (Part 1) – SSC #28

Pro-Seminars Limited © 04/ 2012

They are business people making risk decisions for an insurer that is entering

into a policy contract to provide a benefit.

As in any business, underwriters have internal business objectives against which

they are monitored through regular audits. No underwriter wants their audit to

show that they have accepted bad risks and charged too little premium.

In light of this, field underwriters can play a vital role in helping to bring the facts

to the table so that fair and appropriate decisions can be made.

THE UNDERWRITING PROCESSLife Insurance underwriting is the process of choosing who the insurance

company decides to insure. This is based on a risk assessment that takes into

consideration medical, financial and lifestyle considerations. It is pretty much the

"behind the scenes" work in an insurance company where they determine who is

insured and how much in insurance premiums they will charge the insured

person. However, the field underwriter also plays an important role in the

process.

The process of underwriting consists of two separate functions: Selection and

Classification.

Selection is the process of determining whether the applicant meets the

insurability criteria and standards of the insurance company, and to measure the

risks involved. The next step is that of Classification. This is the process wherein

an underwriter assigns the individual to a “class” or group of insured’s, who have

approximately the same loss probabilities.

Underwriting begins in the field, where an applicant for a life insurance product

completes an application and any related forms.



Then the application papers are submitted to the underwriting department of the

insurance company’s head office, where an underwriter reviews them to

determine if the risk for insurance will be accepted.

Underwriting benefits an insurance company by limiting its exposure to risk. This

results in fewer claims for the insurance company which can make it more

profitable. Underwriters assist agents who sell insurance policies by consulting

with them to ensure that the policy they are about to write will meet established

eligibility guidelines.

Underwriters should possess strong analytical skills to evaluate information found

in documents. They also must have the ability to make decisions based on their

findings. Underwriters correspond frequently with agents and occasionally with

policyholders, so good communication skills are essential.

Simple ApplicationsWhen the underwriting department receives applications, the underwriter first

decides if they can be underwritten easily or if additional information will be

needed. S i m p l e applications can be underwritten quickly and a policy can

usually be issued within a few days. This is because the applicants’ medical

history, lifestyle and the amount of insurance being applied for fall within the life

insurance company’s parameters for policy issue.

Complex ApplicationsSometimes, the underwriter is unable to make a decision based on the

submitted information and requires additional details concerning the applicant’s

lifestyle, medical background and income. In such a case, the information may

be obtained from the applicant, who could be contacted directly, or through the

agent.

In other cases, the information may be obtained from third-party sources.



SOURCES OF ADDITIONAL INFORMATION:The MIB Group (MIB)MIB Group, Inc. is a membership corporation (sometimes described as an

"industry trade association") owned by approximately 470 member insurance

companies. Once known as the "Medical Information Bureau," MIB has been in

continuous operation for over 105 years pursuing its primary mission of detecting

and deterring fraud that may occur in the course of obtaining life, health, disability

income, critical illness, and long-term care insurance. MIB's fraud detection and

deterrence saves its member companies, on an annual basis, an estimated $1

billion by allowing them to avoid fraudulent insurance applications and early

claims. These savings may be passed on to insurance buying consumers in the

form of lower premiums (and higher dividends payable by mutual companies),

which may allow them to buy more insurance at affordable premiums.

MIB is defined as a "nationwide specialty consumer reporting agency" because it

is a "consumer reporting agency" that issues "consumer reports" that are not

credit reports. A "consumer reporting agency" is broadly defined under FCRA as

anyone who assembles information about consumers for the purpose of

furnishing consumer reports. Among other things, a "consumer report" includes

any communication of information by a consumer reporting agency bearing on a

consumer's eligibility for insurance, including information on a proposed insured's

medical conditions and avocations.

The information contained in the MIB database is highly sensitive because it

contains information of underwriting significance (medical and avocation

information) about North American consumers who have applied for life and

health insurance with MIB member companies. Accordingly, MIB has long been

an advocate of protecting the confidentiality of, and safeguarding, the individually

identifiable information entrusted to it.



As a nationwide specialty consumer reporting agency, MIB protects consumer

files as consumer report information containing medical information. Because

MIB member companies are governed by Gramm-Leach-Bliley Act (GLBA) and

numerous state privacy laws, and some members issuing health insurance are

regulated under the Privacy Rule promulgated under Health Insurance Portability

and Accountability Act (HIPAA), and Canadian members are governed by the

Personal Information Protection and Electronic Documents Act (“PIPEDA”), MIB

conducts its business in a manner that satisfies its commitments to its members

on the protection and safeguarding of individually identifiable information and

thereby allows them to comply with such laws.

Physical ExaminationIn many cases (older applicants, applications for large face amounts of

coverage or instances where the applicant has a troublesome medical history)

the insurer may also ask for additional medical evidence.

If a physical examination is necessary, the doctor or paramedic conducting the

physical will complete a form prescribed by the insurance company. Copies of X-

Rays, EKG’s, EEG’s and other test results may also be required.

These examinations are very important and many medical conditions can be

discovered through these exams, but they are not fool-proof as many applicants

attempt to conceal health problems, and may come prepared for the physical by

dieting and exercising prior to the exam. Paramedical exams are usually used for

smaller policies, but at a predetermined threshold, a “full” examination by a

physician may be needed.



Laboratory TestsLaboratory testing became more common because of the exposure to AIDS and

illegal drug use. With the public awareness of other health risks, such as

cholesterol readings, laboratory tests are used more and more and have been

found to be cost-justified.

Tests usually consist of blood and urine specimens. Urine testing is used to test

for controlled substances, medications, and nicotine.

New genetic research finds that genetic testing can be invaluable for insurers,

but Insurance companies do not order genetic testing as part of the underwriting

procedure.

Attending Physician’s Statements If the application completed by the insured contains medical history, it is common

practice (mandatory with some companies) to obtain copies of the medical

records. These are called “Attending Physician’s Statements”, better known as

“APSs.” In some cases, the agent or agency will request an APS at time of

application. In some situations and with some companies, the company will pay

for the APS (usually if the charge is within reason as some physicians have

discovered that this is a good source of added income).

The medical record of an individual is legally confidential between the physician

and the patient, therefore the application will contain, either as a “tear-off” part of

the application, or on a separate form, an authorization for a copy of the insured’s

medical records to be submitted by the physician or medical facility, to the

insurer. The APS is generally considered as the most important underwriting

source, but they can be subject to delay (the doctor’s offices are notorious for not

being in a hurry to copy and mail the records) and on occasion, physicians have

been known to refuse to submit records.



The medical records of the patient belong to the patient, and occasionally an

agent or the underwriter must request of the applicant that they obtain their own

medical records.

Inspection CompaniesUnderwriters order inspection reports from inspection companies which interview

the insured (or in some cases, a member of his family, neighbours, employer and

others, depending upon the request by the insurer). Inspection reports are now

referred to as “consumer” reports and the inspection companies are called

“consumer reporting agencies.” These reports are ordered routinely if the amount

of insurance applied for exceeds a certain amount (such as $100,000), and if the

applicant is over a certain age.

These reports look at things like the consumer’s creditworthiness, credit

standing, credit capacity, character, general reputation, personal characteristics,

or mode of living. They are used or expected to be used in whole or in part to

establish eligibility for credit, personal insurance, employment or certain other

purposes.

An “investigative consumer report” is a consumer report containing information

on the consumer’s character, general reputation, personal characteristics or

mode of living, and this information is obtained by personal interviews with the

consumer’s neighbours, friends or associates.

When the amount applied for triggers an inspection report, the report may be

ordered from the home office of the insurer, or in some cases, by a field office.

The completed report is always submitted to the underwriting department of the

insurance company.



The type of report will usually depend upon the size of the insurance amount

applied for.

Insurers may require a short form that verifies the address, occupation and

employment of the applicant, or an intermediate form that requires more

information. For very large amounts, particularly if it is for business purposes, a

very detailed report is requested and may require interviewing the applicant’s

bank, accountants, and other business affiliations. The insurer pays for

inspection reports.

Insurers are becoming more comfortable with personal interviews and have

discovered that underwriting information that would not otherwise be known can

be obtained by a personal interview in the hands of a professional. Some

insurers of other lines, such as Long Term Care, use personal interviews

frequently.

HAZARDOUS SPORT QUESTIONNAIRESAdditionally, if the life to be insured engages in hazardous sports (like scuba

diving) or other activities (like piloting a private plane) the insurer will likely

request that special questionnaires be filled out.

Some of the more frequently encountered activities are listed below with a

representative rating. Note that these ratings are only a guide – the actual rating

imposed in a given situation may be higher or lower. The ratings quoted below

are extra annual premiums per thousand dollars of face amount.



Auto RacingAll-Terrain Vehicle (ATV) Standard

Auto Crash - Dive bomber, Roll over, "T" Bone $2.50

Drag Racing - Top Fuel Dragster (TF), Funny Car (FC) $7.50

Midget - To 100 mph $2.50

Midget - Over 100 mph $5.00

Off Road - Desert (Baja) $2.50

Other Sports

Balloonists Standard to $3.50

Boxers - Amateur Standard to $5.00

Boxers - Professional $7.50 - $20.00

Hang Gliders and Ultra-Light $3.50 - Decline

Mountain Climbers $5.00 - Up

Motorboat - Unlimited Hydroplane $15.00 - Decline

Motorboat - Others Standard to $15.00

Motorcycle Racing Standard to $10.00

Rodeo - Amateur Standard

Rodeo - Professional $2.50

Skiers Standard

Skin Divers Standard

Scuba Divers diving in open water to:75 feet or less Standard

76 to 100 feet $0 - $2.50

101 to 130 feet $2.50 - $5.00

131 to 150 feet Generally $3.50 - $5.00

Over 150 feet Usually Decline



A head office underwriter can either accept an application for life insurance as

applied for, decide that the policy should be issued with a rating (see below),

or decline (not issue) it. On average, about 98% of all life insurance policies

applied for are issued. Most are issued standard, while a few are rated.

The underwriting process continues after policy issue because, when the agent

delivers the policy, he or she must ensure that there has not been a change in

the life insured’s situation (health, vocation, etc.) during the time since

completing the application. If there has been a change, information relating

to the change must be submitted to the underwriter for further review. If

there has been no change in the applicant’s health, the policy contract may be

delivered as issued.

THE AGENTS / BROKERS ROLE IN THE UNDERWRITING PROCESSAn agent is in a special position because he or she will receive personal

information about the applicant’s income, habits and medical background directly

from the applicant. Both the applicant and the agent will want to create a

relationship of confidence and trust built upon the understanding that all

information supplied will be kept confidential. An application for life insurance

requires the applicant (and the life insured, if different from the applicant) to

provide substantial medical, personal and financial information and related

details so that the head office underwriter can make a valid decision to (ideally)

accept the risk and issue a policy.

As noted, underwriters ultimately can make one of three decisions concerning

an application for a life insurance policy. An application can be approved,

declined or rated.

When an application is rated, the underwriter approves it, but the applicant is

charged a higher than standard premium, because the insurance company

believes that the life to be insured is a higher than standard risk.



The higher premiums compensate the insurance company for the greater risk it

is assuming by accepting the substandard (rated) risk. A rating will protect the

insurer from assuming excessive risks and yet still allow the applicant to obtain

insurance.

The agent is often the only representative of the insurance company to see the

prospect in person and, therefore, initially qualifies the person for insurance.

This is accomplished by general observation and conversing with the prospect.

The agent must ask the applicant all the questions on the application and

related documents and record the customer’s responses fully and accurately and

include all relevant details.

It is not the agent’s responsibility to conclude that a customer will or will not

qualify for insurance. Although the agent may have a “hunch” that a policy

may or may not be issued “standard,” he or she simply does not have the

knowledge or qualifications to make that decision. That is the role of the

head office underwriter. But, in instances where a rating is likely, the agent

can assist the situation by mentally positioning the applicant to expect that a

policy may not be issued, or at least not issued “standard.”

The agent must review the information with the applicant to ensure that it was

recorded accurately and with all the relevant details (in the case of medical

information, this would include the ailment, the treatment and outcome and the

date, along with the attending doctor’s name and address). Securing the

applicant’s signature on the application papers is important because the

applicant (and the life to be insured, if different) is confirming that the

information is complete and accurate. A first premium payment is secured to

initiate the insurance coverage from that point forth as long as the policy is

subsequently issued. It could take days or weeks to issue a contract, so it is

important that an initial payment is made so the insurance may take effect.



The agent usually completes a report on the life insurance application

providing additional information on the applicant as to why the customer is a

prime candidate for the insurance. This information could include, but is not

restricted to, the customer’s employment, moral and ethical stability.

Any information can be included on the report that the agent feels with assist

the underwriter in deciding whether or not to accept the risk.

Pre-sale ServiceA characteristic of an agent’s job is that he or she can initiate business with

anyone he or she wishes. Obviously, it is prudent for the agent to do business

with those people who realize that insurance can solve a personal financial

problem and who have the ability to pay for it on an ongoing basis. Therefore,

it is imperative that the agent qualify the prospect before he or she becomes an

applicant. This can be accomplished when the agent first acquires the name of

the prospect as a referred lead and when subsequently meeting with the

prospect.

The agent must be very diligent in securing all of the information and details

on the application so that the underwriter can accurately review the risk. In

the realm of the insurance underwriting process, pre-sale service for the

agent is ensuring that the prospect is qualified and that all information

obtained is complete and accurate. This ensures that the risk can be

properly assessed by the insurance company and a policy contract may be

issued.

Post-sale ServiceAfter submitting the application for insurance, the role of the agent is not

necessarily completed. The agent may be asked by the underwriter to obtain

some clarification with respect to the information provided by the applicant. For

example, a medical question may have been overlooked, so the agent will have

to contact the applicant to obtain the missing information, such as dates seen by



a physician and results of the consultation.

Once that information is provided, the underwriter can finish assessing the risk

for this applicant.

Sometimes an underwriter will be able to accept the risk and issue a policy

contract subject to that information being provided at a later date, usually upon

policy delivery. In this instance, it is imperative the agent obtain the information

and signature of the applicant on a receipt of policy form before the delivery of

the contract. In all cases, when delivering a policy, the agent must ascertain

that there was no change in the life insured’s medical history since submitting

the application.

The agent has an important role in post-sale service to ensure that a policy

contract is issued based on the full disclosure of relevant information, both

before and after the sale.

If all of the information provided by the applicant meets the insurance

company’s criteria for a “standard” issue policy, the contract will be issued

within a few days, without further requirements.

If the application is incomplete or the information provided warrants further

investigation, the underwriter will requires further input from the agent, the

applicant, or third-party sources. Ultimately, the policy will be either “issued as

applied for (standard),” or “issued with a premium rating,” or “declined.”

CLASSIFICATION PROCESS As noted above, Life insurance underwriting consists of two phases, selection

and classification. Up to this point, the discussion has focused on the selection

process. At the next stage, the underwriter must determine whether the applicant

is insurable, and if so, on what basis. If the applicant does not meet the

underwriting criteria of the company, then the application is declined and the

process ends. - 14 -

The Underwriting Process (Part 1) – SSC #28 Pro-Seminars Limited © 04/ 2012

The only other choices are whether the applicant is to be accepted at standard

rates, at substandard rates (either temporary or permanent) or whether the

application will be postponed for a period of time (in those cases where the effect

of a medical condition can be better determined at a later date).

In the early years of life insurance, decisions regarding medical difficulties

primarily were reviewed by the underwriter, an independent doctor or the

company’s medical director (who was a doctor), the actuary, and anyone else

that may have some expertise in the area. Basically, the application was either

issued or declined, with little other classification. This “judgement” method of

underwriting obviously left a lot to be desired, so the numerical rating system was

devised.

THE RATING SYSTEMThe numerical rating system (or alphabetical system described later) starts with

the “standard” rating of 100, i.e., a “standard” risk has a rating of 100. From this,

any factor that has an effect on the mortality of the applicant is judged by debits

or credits, generally in 25 “points” increments. The ratings range is usually from

75 or less to a high of 500 or more, with 125 or less considered as standard. Any

application with a 500 of more rating is usually declined, or at least considered as

experimental underwriting. Many companies consider ratings of 75-85 as

“preferred,” 100 to 125 as standard, 150 to 500 as substandard.

Generally, underwriting decisions are in multiples of two, expressed as “Tables.”

For instance, if the medical condition falls within 50 additional points, then the

application would be classified as “Table 2.” If the conditions were more severe,

then it would normally be rated at Table 4.



There usually is no Table 3,5,7, etc. in normal underwriting practice with most

companies, but they could be used if there were a combination of “positive

factors”, such as an applicant who is slightly underweight but is active and other

than a particular health problem, is in above-average condition. The rating might

be a Table 4 for the health problem, but reduced by a Table for the good health,

and the policy could be issued at a Table 3 – depending upon whether the

company has Table 3 rates. Normally, however, the inclination would be to issue

at Table 2 for competitive purposes with typical ordinary life insurance

applications.

Some underwriters interpolate the numerical ratings into alphabetical ratings. For

instance, a Table 4 would be Table D (the 4th letter).

Underwriters use Underwriting manuals which are either based upon their own

experience on their own business (usually only the very large companies) or

manuals provided by the reinsurance companies. Most illnesses, impairments

and diseases are listed, with descriptions and with suggested ratings.

If an individual has more than one illness/disease/impairment or ratable

condition, as happens very frequently, often the two rating are not added

together, but an additional rating is added when there are multiple conditions. An

overweight person who has a little coronary problem would be rated at more than

the combination of the two, or could even be declined because of the two, but

would have been accepted if it were only overweight or only coronary.

RATING IMPAIRED RISKSThere is a large (huge, actually) market for impaired risks, i.e., substandard risks

applying for life insurance. The life insurance industry continues to change, and

as new medical advances appear, the industry takes them into consideration.

Many of the standard or slightly substandard policies available today could not

have been issued only a few years ago.- 16 -


Thanks largely to computers, insurance companies are able to compile statistics

that enable them to better understand the effect of an impairment on the

expected mortality of a particular class of business. Many advances in impaired

risk underwriting are a result of the influence of reinsurers. Reinsurers, and in

particular, foreign (European mostly) reinsurers have been pioneers in

underwriting impaired risks. Reinsurers have competed vigorously for impaired

risk business, many of them accepting substandard risks with the understanding

that they will also participate in standard business written by the insurer.

Reinsurers have conducted seminars in underwriting, participated in industry

underwriting and actuarial conventions and have created and furnished

underwriting manuals for underwriters (most life insurance underwriters have at

least one, and frequently several, reinsurance underwriting manuals) at no cost

to the underwriters.

Reinsurers are generally able to accept business that smaller companies cannot

accept, because of the large block of business that they have in force.

Reinsurers “reinsure” among each other (technically called “retroceding”), so

compared to a “regular” life insurance company, their number of insured lives is

very large so they are able to base underwriting decisions upon their own

experience.

Recent studies indicate that about 75% of all applicants for life insurance that

have been declined have been declined for health reasons. Approximately 90

percent of substandard ratings have been related to physical impairments, such

as heart murmurs, obesity, diabetes and hypertension (high blood pressure).

RATING PROCEDURES

The most common method used for substandard ratings is the multiple table

extra method, discussed above.



Premium rates are based on mortality experience that corresponds to the

average numerical ratings in each class. Taking it one step further, many

companies use the same nonforfeiture values and dividends that they do for

standard risks – a few do not. Some companies do not permit the extended term

option on highly rated cases.

Companies vary premium rates for substandard risks by plan, with the extra

substandard premiums being lower for the higher cash value plans because the

net amount at risk decreases over the life of the policy so the insurer has less

exposure. With the exception of level premium plans, substandard premiums do

not increase in proportion to the degree of extra mortality expected, as the

loadings in cash value policies do not increase proportionately to the mortality

risk. In other words, the expenses, such as commissions, etc., do not increase

significantly if a policy is substandard. It is typical for an insurer to pay

commissions only on the standard premium and not on the substandard portion

of the premium. If commissions were to be paid on substandard premiums, then

the premiums would have to be raised to accommodate these commissions.

Table ratings reflect the extra mortality expected for individuals with the same

ratings. The substandard premium reflects a percentage of standard mortality,

and does not include loading or other expenses.



The following is an example of substandard mortality classifications:

Table Mortality(% of standard mortality)

NumericalRating

1 125 120-1352 150 140-1603 175 165-1854 200 190-2105 225 215-2356 250 240-2607 275 265-2858 300 290-32510 350 330-38012 400 385-45016 500 455-550

Uninsurable Table 16 or rating over 550

FLAT EXTRA PREMIUMSThe flat extra premium is used when the substandard risk is expected to remain

static, regardless of age, permanently or temporarily. A flat extra premium is

added to the regular premium and the policy is considered as “standard” for

dividends and nonforfeiture values.

The flat extra premium is most commonly used for hazardous occupations and

avocations (as discussed earlier) as the additional mortality risk is considered as

static, regardless of age. It is also used where the substandard extra risk is

temporary in nature, such as after surgery, or where there is a single health

event, such as a coronary rating which frequently consists of a table rating plus a

temporary flat extra.

After a policy has been issued with a flat extra premium (or given a substandard

rating in a few situations) the insured may apply to have the extra premium

removed if the situation has changed for the better.



If the extra premium was assessed because of occupation, then a change of

occupation could eliminate this extra premium. However, the burden of change in

status is the responsibility of the insured, and they must notify the insurer of the

change and be able to fully document this change. Usually when a request for

change involves occupation or avocation or change in residence, there will be a

probationary period of 1-3 years before the premium is lowered. This is obviously

a requirement so that an insured cannot revert back to the former occupation,

avocation or residence as soon as the extra premium has been dropped.

Companies usually provide a form at policy issue notifying the insured that after a

specified policy anniversary, they may submit evidence of insurability or other

proof satisfactory to the insurer, to have the rating removed. This helps to keep

the policy from being dropped if the insured is able to purchase standard

insurance elsewhere because of a change in their condition or situation.

OTHER RATING SYSTEMSThe graded death benefit contract is a method of rating substandard risks, as is

the limited death benefit (for a period of 1-3 years usually). Before the table rating

system was developed, it was common practice to limit the amount of insurance

in certain health situations. This had the same effect as increasing the premium

but was much less “scientific.”

Companies will often allow an individual who is not severely impaired to

purchase a permanent insurance policy as the company is obtaining the interest

in premiums “paid in advance,” or to put it another way, they are accumulating

reserves which help to soften the blow of an early death.

UNINSURABILITY

As discussed earlier, anything above a table 16 is, in most situations,

uninsurable.



Many insurance companies, primarily the smaller companies, will only keep

(retain) risks that are lower than table 10 or 12, but issue the policies by using

reinsurance facilities as most reinsurers will accept substandard applicants rated

Table 16.

Individuals who are uninsurable are often “desperate” as they realize that they

may not be able to leave their families with funds for them to continue their

standard of living, to say the least. An uninsurable individual can use annuities, if

they have the funds, to set up an “estate,” with tax benefits to the survivors.

Several years ago, it was possible for an individual to be accepted for credit life

insurance covering a loan amount, usually $10,000 maximum, but more in some

cases. This was a guaranteed issue situation, regardless of health. The approach

for some people that had good credit but were uninsurable, would be to borrow

as much as possible that would be covered by credit life and set the borrowed

money aside to pay off the loan. Therefore the “premium” for the life insurance

would be the credit life premium (and sometimes the lending institution would

pick up some or all of those premiums) plus the interest on the loan.

There is a documented case of an individual amassing $1 million in credit life

insurance, and since it was his practice to pay off each loan at the end of a year

and reinstate the full amount in a new loan, he was quite successful, leaving

nearly $1 million in “paid-off loans” to his family when he died within 18 months

after taking out the loans. The credit life companies complained bitterly when this

was discovered, but there was nothing illegal about it at that time.

A much better course for an uninsurable is to use a “substandard broker” who

specializes in getting insurance on the substandard risk. Some insurance

companies actually have arrangements with insurers who accept these

substandard risks, so that their agents can automatically rewrite the application

into the other company.



Usually an uninsurable is an uninsurable, but many with high ratings can find

insurance if they search, or have their agent search, the market. A declination

from one company is not necessarily a declination from all companies.

REINSURANCEAll insurance companies place a ceiling on the amount of life insurance coverage

(risk) that they are willing to assume on any one life. This ceiling- the insurer’s

retention limit – might be as low as $100,000, in the case of one company, or as

high as $10,000,000, for another. The purpose of the retention limit is to restrict

the insurance company’s loss exposure upon the happening of a single event

(e.g., the death of one life insured), in order to maintain the future financial

stability of the insurer.

That is not to say that an insurance company will not accept a policy that is in

excess of its retention limit; merely that the retention limit is the maximum

amount of coverage that the insurer will retain on that life. Instead, any amount

in excess of the insurer’s retention limit is transferred to (“ceded” to or

“reinsured” with) another insurance company, called a reinsurer. This results in

the risk being shared with one or more other insurance companies.

Reinsurers may, in turn, transfer some of the risk that they have assumed by

reinsuring it with yet another reinsurance company (in a transaction called

retrocession).

Reinsurance is a specialized field and there have been textbooks written about

the subject, most of which is beyond the scope of this discussion. However, one

should be aware of how the reinsurers function if they are to really understand

the insurance business.



It is safe to say that the life and health insurance would be completely different in

the number of policies offered, the issue of other than standard risks, the number

of insurance companies, the financial status of smaller insurers, the size of

insurance policies, and even, in many cases where a smaller or newer insurer is

involved, in the amount of commissions paid to the agents through financial

reinsurance arrangements.

One very important fact about reinsurance that should be kept in mind: there is

no legal relationship between a reinsurance company and an insured. The

reinsurance contract is only between an insurance company and the reinsurance

company.

Simply put, reinsurance is the transfer of all or a portion of an insurer’s risk

through an insurance policy, to another insurance company – insurance of an

insurance company, if you will. But a reinsurer does so much more, as evidenced

by the definition of Reinsurance in the Dictionary of Insurance Terms, Third

edition (Harvey W. Rubin, Ph.D., CLU, CPCU) – “..A form of insurance that

insurance companies buy for their own protection, a “sharing of insurance.” An

insurer (the reinsured, ceding company, or “direct writer”) reduces its maximum

loss on either an individual risk or a large number of risks by giving (ceding

[“renting” or “leasing” is perhaps a more appropriate word]) a portion of its liability

to another insurance company (the reinsurer).

Reinsurance enables an insurance company to (1) expand its capacity; (2)

stabilizes its underwriting results; (3) finance its expanding volume; (4) secure

catastrophe protection against shock losses; (5) withdraw from a class or line of

business or a geographical area, within a relative short time period; and (6) share

large risks with other companies.”

In all probability, all life insurance companies (worldwide) rely upon reinsurance.



It is truly an international business, as most of the life reinsurance on policies

sold in Canada and reinsured on one basis or another, is with foreign

reinsurance companies. The oldest reinsurers are a Swiss company and a

German company (for those who are curious, during WWII, the German

reinsurers transferred their business to non-German companies, and became

more-or-less dormant until after the war). Most reinsurance companies provide

reinsurance for life and health exposures, and either are owned by or affiliated

with, a property and casualty reinsurance company. Some reinsurers are

reinsurance departments of “direct-writing” companies. Most of the reinsurance

business has been transferred to “professional” (meaning they only do

reinsurance, and is not a reflection on the professionalism of other companies)

reinsurance companies, most of them foreign.

RetentionRetention is the amount of insurance that an insurance company is willing to

accept in its own account. The excess over the retention is reinsured. Without

reinsurance, it is possible that there would only be two or three insurance

companies in Canada.

The retention amount is usually determined by the actuary as it is a function of

the company surplus, i.e., what can the company stand to lose in case of a single

death, without impairing their surplus. Actually, when a life insurance company is

formed, a rather modest amount is kept by the company as there is no “spread of

risk” or pool of insured’s to cushion a sudden death claim. It is to the company’s

best interest to keep as much as they can on their own books, as it costs the

company to reinsure (reinsurers are profit-minded companies). In practice, when

a company is formed, the Board of Directors makes the decision on how large a

claim they feel comfortable paying, without hurting the company or causing a

stockholder rebellion.



A few – very few companies, used to pride themselves on the fact that they did

not need reinsurance as they had retentions of $1 million or more, and would not

issue any policy above that amount. Today, with so many new types of policies

on the market, even the very large companies feel the need to spread the risk

among reinsurers.

TYPES OF REINSURANCEThere are two “types” of reinsurance – proportional reinsurance and

nonproportional reinsurance.

1. ProportionalProportional reinsurance refers to the arrangements where the reinsurer and

the direct-writing company share the risk and the premium on some sort of

pre-determined contract. Most reinsurance falls into this category.

2. Nonproportional Nonproportional is the simplest (by concept) type of reinsurance. In these

arrangements, the reinsurer pays a claim only when the amount of the loss

exceeds a predetermined loss limit. The effect of this type of reinsurance is to

stabilize the claims of the direct-writer.

There are three forms of nonproportional reinsurance

1. Stop-loss reinsurance

The direct-writer determines the total amount of claims that it can sustain (or

wants to sustain) during a year. The reinsurer then pays for the claims above

that amount. Premiums usually are adjusted annually to reflect actual claims

experience. While this form or reinsurance is simple, it has not worked well to

any degree as insurers that have tried this, almost always will practice a form

of adverse selection with the reinsurer.



The direct-writer will become more “flexible” with their acceptance of risks –

after all, if they have too many claims the reinsurer will pay for the direct-

writers mistakes.

In property and casualty, it called “Excess of Loss Ratio” and as the President

of a large property and casualty reinsurer stated at an industry meeting, “the

fields are covered with the remains of reinsurance executives who promoted

Excess of Loss Ratio reinsurance treaties.”

2. Catastrophe ReinsuranceThis is a common and successful type of reinsurance, where multiple insured

losses which arise from a single accident or incident are covered. Many

insurance companies have catastrophe reinsurance, particularly where they

have a large concentration of risk, such as writing a lot of group or travel

insurance.

3. Spread-Loss ReinsuranceSpread-loss is similar to Stop-loss, except if there are claims with the

reinsurer, the claims are spread over a specific number of years which then

allows the ceding company to spread its losses over several years.

REINSURANCE TREATIESThe reinsurance contract traditionally is called a “treaty” and in the transfer of risk

under proportional reinsurance, there are two types of treaties.

Facultative TreatyFacultative reinsurance is a method of reinsuring where each application is

underwritten individually and reinsured individually. The reinsurer may or may not

accept the application (risk), may rate the policy because of health or other

reasons, or may accept it on the same basis as that of the ceding company.



The ceding company may keep a retention on the case – which may vary by

table rating – or cede the entire amount.

Facultative cases are many times submitted to a reinsurer in order to obtain the

expertise of the reinsurance underwriting department (which are well-

experienced and technically trained, including a medical underwriting

department), and after the reinsurer has rendered its decision, the ceding

company decides how much of the policy they will keep, if any.

The ceding company may submit the case to more than one reinsurer

simultaneously or later if it wishes. If the amount is large, the reinsurer may

reinsure some of the policy with another reinsurer (this is called a retrocession),

or if the reinsurer is unable to find another reinsurer willing to accept part of the

risk, then the reinsurer may restrict the amount it is willing to accept.

The disadvantages of facultative reinsurance is that it takes time to do all of the

underwriting, particularly since most cases involve medical records, and

therefore the applicant may purchase insurance elsewhere. Also, it costs money

to reinsure, so there is less profit for the ceding company.

AUTOMATIC TREATYThe Automatic Treaty requires the ceding company to reinsure a portion of all of

its reinsurance in excess of its retention at the time the policy is issued, and the

reinsurer must accept the reinsurance.

The treaty allows the ceding company to “bind” the reinsurer for only a certain

amount on each life (a “cap”) – usually a multiple of the company’s retention,

such as “three-time retention” - and there can be an agreement to distribute the

excess to another company – usually a reinsurance company, but not

necessarily. Many direct-writing insurance companies use more than one

automatic reinsurer, and traditionally the business is split on an alphabetical

basis. - 27 -


For instance, all surnames starting with letters A through M go to one reinsurer,

those with letters N through Z go to another reinsurer (it may be split more than 2

ways by dividing up the alphabet, but generally, two automatic reinsurers are all

that a ceding company wants, for administrative reasons, unless the ceding

company has an unusually large amount of reinsurance).

The automatic treaty does affect the facultative treaty(s) as those cases are

usually excluded from the automatic treaty. Some automatic treaties may require

that they see the facultative cases also, but at the same time, allow other

companies to review them also.

FACULTATIVE OBLIGATORYA “cross-breed” type of treaty “obligates” the ceding company to submit all

facultative business to the reinsurer, who then reviews the case and may or may

not accept the policy. Some of these treaties allow the ceding company to place

the policy with the facultative-obligatory reinsurer if any other reinsurer has made

a “better offer” on the case, in which case the “fac-ob” reinsurer must accept that

underwriting decision also, but generally the ceding company must keep part of it

also.

Remember that a policyowner must look only to the direct-writing company for

any payments that the policyowner is entitled to under the policy. The direct-

writing company is responsible for these payments, regardless of the types and

terms of any reinsurance agreement between the insurer and reinsurer.

ACCURATE FIELD UNDERWRITINGResponsibilities of the AgentAs mentioned, the agent is the first line contact with an applicant for a life

insurance policy and it is his or her responsibility to accurately and completely

record all pertinent information concerning the applicant’s financial, medical and

personal background.



The information is not only the basis for accepting the risk and issuing a policy

contract, but also is the basis for pricing and claims administration.

The only type of life insurance policy that pays off is the one that is valid and in

force at the time of the death of the life insured. It is also the agent’s duty to

educate the applicant with respect to the consequences of incorrect information

being provided in the underwriting process.

It is not the objective of an insurer to deny claims; rather, it is their desire to pay

legitimate claims. This can only be accomplished if the applicant truthfully

provides complete and accurate information on the life insured’s background and

it is correctly recorded. If not, the policy contract could be voided or the ensuing

death claim may be denied.

A misrepresentation is a false statement made by an applicant when applying for

life insurance.

Fraudulent misrepresentation is a false statement made by the applicant to

influence the insurance company to issue a policy from which the company could

suffer a loss.

Incorrect information, whether given verbally by the applicant or recorded

accidentally, or on purpose, by the agent, can render the contract void or

voidable. A “void” contract is one that is invalid from the outset and cannot be

corrected. A “voidable” contract is one that can be corrected as long as the

applicant provides the correct information.

An insurance contract becomes incontestable after two-year period has elapsed

from the policy’s inception, except in the case of fraud. Incontestable means

the insurance company cannot declare this policy void because of a

misrepresentation by the insured.



However, if the misrepresentation is fraudulent in nature, the policy can be

voided at any time.

It is very important for an agent to be sensitive to collecting accurate and

complete information on the life to be insured during the underwriting process,

to help to ensure that the proceeds from the policy contract will be paid to the

beneficiaries at claim time when the money is needed.

Witnessing SignaturesIt is normally the agent who actually completes the application for insurance

with the customer’s responses to the questions. These responses should then

be reviewed in detail with the applicant. It is then the agent’s signature that

witnesses the signature of the customer (the applicant and, if different, the life

insured) who, by signing the document, is stating that the information is correct,

complete and accurate.

The main reason for an agent to witness his or her client’s signature on the

application is to confirm that the person signing the application is indeed the

same person whom all the information is about and that person did in fact sign

the application.

THE APPLICATION FORMThe application form provides vital information to the insurance company.

The following is a description of the content required for each section of a typical

life insurance application form, along with an explanation of the purpose of the

information requested.

UNDERWRITING FACTORSFactors primarily used in the home office underwriting process and included on

the application include age; sex; physical condition and personal health history;

family health history; financial condition; use of alcohol or drugs or tobacco;

occupation; and avocation. - 30 -


At times, aviation and residence location are also considered.

Age Since expected future mortality is correlated with age, the older a person, the

higher the mortality risk. While many people are “young for their age”, or vice-

versa, there is no way to measure the biological age of a person, so the

underwriters (and actuaries) have to use chronological age only.

Age is not a key factor in whether a risk is acceptable, except in the very early

years and in the later years, and some insurers will not insure a new born baby

or a person of advanced years (such as age 75). For the older ages, the

premium might be so high that it is not attractive to persons of that advanced age

(or if it were available, adverse selection might rear its ugly head again). With

the very young, the mortality rate is also very high for a short while. In any event,

the insurance company would probably not insure enough people in those

categories to have a sufficient spread of risk.

Proof of age is not required at time of application as few people misstate their

age and verification of age is relatively easy, if necessary.

Besides, the “misstatement of age” provision in the policy takes care of adjusting

the premiums or risk accordingly.

Sex

Sex, like age, by itself, is rarely used for selection of risk, but is a classification as

mortality tables show that the mortality of males and females are different – the

mortality of females are better (lower) than that of males. Interestingly, this was

not always true as insurance companies used to charge the same premiums

during child-bearing years, as they felt that the increase in mortality because of

the hazards of childbirth offset any other mortality advantage of females. Today

the childbirth-hazard has diminished to where it generally is no longer a factor.



Since females should be charged lower premiums for life insurance based on

lower mortality, it also then follows that females should be charged higher

premiums for annuities. While this is true, the question arises whether it is

socially acceptable for males and females to be charged different rates, which

has led to “unisex” rates, i.e., there is one premium for both male and female.

Physical Condition

In underwriting, the most important factor is that of the physical condition of the

insured. There are several primary factors of the health of the applicant that are

carefully scrutinized. Health information about the applicant comes from several

sources, as discussed later, but primarily from the statements of the insured on

the application and from physician’s statements regarding past health history

admitted by the applicant.

Build

Build includes height, weight and the distribution of the weight. Everyone is

aware that being significantly overweight can cause an early demise, but an

underwriter also has to be aware of how even moderate overweight can affect

other physical conditions, such as diabetes or a heart condition.

Abnormalities

The mortality experience of an applicant will depend upon certain physical

abnormalities as they affect the important parts of the body, such as the nervous

system, digestive, cardiovascular, respiratory or genitourinary systems and other

glands. It is outside the scope of this course to go into detail as to how various

problems in this area affect mortality, but some of these are obvious.

Problems with the circulatory systems, such as high blood pressure, a heart

murmur, or fibrillation’s of the heart (irregular or erratic heartbeat) are of

considerable interest as they can lead to higher than normal mortality.



A urine specimen can discover internal problems, particularly with the blood

and/or kidneys. Conversely, low blood cholesterol; normal or lower-than-normal

blood pressure and non-use of tobacco are “plusses.”

There is always concern about AIDS because it spreads so easily and it can be

fatal. When AIDS first was diagnosed, there was a lot of concern about privacy

of medical records and unfair discrimination. Today most of the issues about

privacy, confidentiality and discrimination have been resolved, and insurers now

treat AIDS like any other disease, but the right to test individuals for AIDS is still

controversial and in some jurisdictions, testing is prohibited.

Personal Health History

Insurance companies inquire into the background of their applicants in those

areas that would have an impact on future mortality. This includes the

individual’s health records and other non-health area, such as driving records

and possible over insurance.

As indicated earlier, most of the health history comes from the application and

from attending physicians and/or hospitals.

As noted, the applicant for life or health insurance signs a form (usually at the

bottom of the application) which gives any doctors or hospitals permission to

furnish medical records to the insurer.

In many cases, if an individual has not had a physical examination for a

significant number of years, the insurance company can ask the applicant to

submit to a physical examination, usually, but not always, at the expense of the

insurance company. Para-medical examinations, which are performed in the

applicant’s home or business office, are quite common. If the underwriter

requires a more detailed examination, such as a stress test, these are usually

performed at the expense of the applicant.



If there is or is suspected of being, a cardiovascular problem, an

electrocardiogram (EKG) may be requested and copies of past EKG’s may be

requested also. Insurers either have a medical director on staff, or the

application and medical records may be sent to a reinsurer for their interpretation

and evaluation. (Reinsurers have expert medical underwriting staffs.)

Over-insurance discovered through insurance history is important. If an applicant

has more insurance than normal, and perhaps more than is financially justified,

the underwriter has to ask himself, “What does he know that I don’t?” Records

from other insurance companies can be requested, however in most jurisdictions

an insurer may not render an underwriting decision based upon only the records

of another insurer.

Family History The magic word here is “heredity.” Many diseases can be transmitted from

generation to generation and family health history is heavily influenced by

inherited genetics. If the parents of an applicant lived to a “ripe old age,” then

genetically speaking, there is a good possibility that the applicant will also.

Conversely, if both parents died of heart conditions at an early age, then the

underwriter will pay particular attention to any coronary problems, overweight,

cholesterol, etc.

Tobacco Use Insurance companies are now well aware that smoking and other tobacco use

causes mortality experience to worsen, even in the absence of other physical

factors. In addition, smoking can aggravate many other health problems.

Most insurance companies now have smoker and non-smoker rates. Even

though the smoker rates will be considerably higher, in many cases they are not

adequate, particularly if the person is a heavy smoker. Actually, female smokers

have higher mortality than the non-smoking male. - 34 -


Where there is no differentiation, most insurers consider the “standard” grouping

as 75 percent non-smokers who have about 85% of expected mortality, with the

remaining 25% having about 150% of expected mortality. This differs by age and

as an example, those ages 40-49 that are tobacco users have about twice the

mortality rate of the non-smokers.

It should be understood that the non-smokers are not a “superstandard” class,

and because of the continuing decline in smoking in Canada, the non-smokers

will soon be (and in some cases, already are) the “standard” classification. The

smokers will be (or are) considered “substandard” and will pay additional

(substandard) premiums.

Financial ConditionThe reputation of the applicant in meeting financial obligations can indicate the

moral risk involved with the applicant. Financial condition, which includes

personal net worth, size of income, sources of income, and permanency of the

income, are very important underwriting factors.

The relationship between the income and financial worth of the individual and his

life insurance coverage, in force and applied for, can indicate good or bad

financial and estate planning. However, if the amounts are quite large, then the

underwriter must start questioning as to the reasons for the difference in amount.

Again, what does the applicant know that the underwriter does not know?

Financial condition can have a huge impact on the acceptability of a given risk.

Consider the story of a cattle rancher from Alberta who applied for life insurance

in the amount of approximately $15 million. The inspection company did not fully

verify the finances of the applicant, and they accepted the word of the applicant

as to his net worth without precise verification, as he was very well known and

influential in Alberta.



13 months later, the insured was found in the basement of his home, stabbed

and bludgeoned to death. Nearby was his injured “bodyguard,” an ex-convict

who claimed that the “assailant” had stabbed him.

Claims investigations discovered that the insured was on the verge of bankruptcy

and it was suspected, but not proven, that he owed a lot of money to the Mafia.

It was also discovered that the partner of the General Agent who had written the

policy, was discovered to be a former “Mafia hit man” and was found murdered in

a rural area in Canada, not far from the body of another known hit man.

The murder was never solved. The insurers settled for a little over 50% of the

face amount of the policy.

If the underwriters (and each reinsurer underwrote the case in addition to the

company underwriter – there could have been as many as 25 or more

underwriters review the application and records) had been aware of the financial

difficulties, it is extremely doubtful that this policy would have been issued, at

least for that amount.

Alcohol and Drugs If the applicant is known to be an excessive user of alcohol, they can be either

given a substandard rating or declined. Participation in a support program or

alcohol treatment program can cause the application to be accepted or declined

for a specific number of years without use of alcohol. The use of alcohol will

severely affect the health of the applicant in any event, and such tests as liver

function tests, may be required.

For other drugs, if there is use of “hard” or illegal drugs, then the applicant is

declined. If the drugs have been prescribed by a physician, then the underwriting

concern is the overuse of the drugs, and the reason for the drug treatment.



A person who has used occasional or recreational use of drugs, and has not

used them for an extended period of time since the last usage, and can show

reliability and responsibility, etc., is probably insurable, depending upon the time

frame.

OccupationOccupational hazards used to be much more significant than they are today,

thanks to safety measures taken by various industries. The hazards today are

still present in three specific areas.

The occupation may create an occupational hazards, such as working where

drugs and/or alcohol are sold &/or used. The occupation may have an effect

upon the health and well-being of the individual because of environmental or

other factors, such as inhaling chemicals or whose working conditions may be of

such a nature that diseases are rampant or frequent, such as close, dusty and

cramped quarters. There is also a risk from accidents, and people who are

susceptible to accidents are carefully scrutinized, such as race car drivers, crop-

dusters, etc. Years ago, private pilots could not get life insurance or the rates

were prohibitive. Now, insurance is available and the rates depend upon the

experience of the pilot.

A person who is rated because of occupation, may change occupations to one

that is safer. As a general rule, the insured would have to remain at the new

safer job for a certain period of time, then apply for a rate reduction. In initial

underwriting, the practice is usually to ignore a hazardous occupation if the

applicant has been away from that occupation for a year or more.

Avocations With a higher standard of living than previous generations, many of the newly

rich (and those not so rich) spend more time and money than ever before in the

pursuit of exhilaration.



This has shown an increase in such sports as scuba diving, rock climbing,

parachute jumping (sky diving), hang gliding and competitive racing. These

activities can often be considered hazardous and should be considered in the

underwriting process. As noted earlier, a flat extra premium will be added to

cover the added risk and in some situations, and the applicant will be declined in

others.

AviationThere are two other areas of concern to an underwriter, but they do not arise

often. Aviation risks apply to private pilots, but can also apply to commercial

pilots and military pilots. Where there is a definite aviation hazard, the applicant

will be asked to complete an aviation questionnaire and based upon these

answers – which are concerned primarily with experience, type of aircraft and

frequency of flying as a pilot – an additional premium may be charged. Flights by

fare-paying passengers are not considered as a hazard and there are no extra

premiums charged. Most scheduled airline pilots and experienced private pilots

are issued insurance with no aviation restrictions.

Residence

The other area is that of residence. If a resident of Canada is going to take up

residence in a foreign country, depending upon the living standards of the

country and the political atmosphere, there may be an extra premium charged,

and in some cases, the application may be declined. For a foreign resident

moving to Canada, the big problem is developing underwriting information. And

then if a claim should occur, obtaining claims information is a problem. The

currency problem in other countries can come into play also.

ADDITIONAL FORMSThe applicant may be required to fill out additional, separate forms for

specialized circumstance (e.g., and aviation form for those who fly their own

plane).



As well, the agent will have a spot on the application to provide Agent’s

Comments or an Agent’s Report, where the agent can provide details of such

specific factors as policy replacement or any other additional information that the

agent feels will be important to the insurance company in the underwriting

process. This could include details explaining the rationale behind the amount of

insurance applied for, further information regarding the applicant’s personal or

family health history, something that the agent knows about the applicant or life

to be insured or has observed that seems to be inconsistent with the applicant’s

answers on the application, or any other relevant miscellaneous information,

such as a client who lives alone and is a professed non-smoker but who has full

ashtrays scattered about her house.

LIFE INSURANCE POLICY DETAILSInformation concerning the policy being applied for is necessary for the

underwriter to assess the risk.

I n f o r m a ti on re qu i re d t y p i c a l ly i n c lud e s:

the type of policy being applied for or its name, amount of life insurance, the

premium amount and mode; that is, are the premiums to be paid monthly (by

automatic withdrawal from the applicant’s bank account), annually, semi-

annually or quarterly

riders being applied for, if applicable

the name of the policy beneficiaries and their relationship to the life insured

a list of all life insurance on the life insured, including the insurance

company’s name, the amount and when the insurance came into force

the amount of insurance in force on the life insured’s spouse (if applicable)

confirmation as to whether the policy being applied for is intended to replace,

or cause a change to, any existing contract of insurance.



If such a replacement or change is planned or contemplated, additional

details regarding the replacement or change (e.g., placing a policy on “paid-

up” status or changing its dividend option to pay premiums) will be required,

including the appropriate provincial replacement comparison papers for both

the “old” and the “new” policies. These documents provide disclosure to the

consumer regarding the comparative features, benefits and values of the two

contracts, so that he or she can make an informed decision regarding

replacement.

OTHER INFORMATION REQUESTEDThe application also consists of an Agent’s Report, where the agent provides the

name, address, etc. for the applicant and the life insured (if different).

Specifically, the agent is asked how well he or she knows the applicant.

Concerning the policy itself, the agent is asked to confirm the premium amount

quoted and whether a receipt was issued.

A specific question to the agent typically is: “To the best of your knowledge, is

this insurance intended to replace, or will it cause a change in, or involve a loan

under, any insurance or annuity policy on the proposed life insured or owner?” If

“yes,” explain in full and complete comparison papers. The comparison papers

are sent to the insurance company holding the existing policy to allow that

company to attempt to conserve the existing contract.

All of the aforementioned information submitted is needed by the underwriter to

assess the risk. The type and amount of policy is important because the

underwriter will want to make certain that an exorbitant amount is not being

purchased, based on the applicant’s means. It is the role of the agent to fully

explain why the amount of life insurance is appropriate.



THE DANGERS OF INCOMPLETE INFORMATIONOne of the most common, and vexing, problems faced by insurance companies

is the lack of care given to the completion of the application. All too many

agents, unaware of the importance and use of the information requested,

become lax in completing the application (particularly the Non-medical

Questionnaire). The result is an application that contains inaccurate and/or

incomplete information.

It is vital that the agent understand the importance of providing complete and

accurate answers to all relevant portions of the application and that he or she

appreciate the possible consequences of failing to complete the application

properly.

A nu m b e r of poss i b l e s ce n ar i os can e m e r g e :

MisrepresentationIn the worst-case scenario, if the agent fails to ask relevant questions or records

incomplete answers on the application, the issue of misrepresentation could

arise. If, within two years of the issue of the policy, the insurance company were

to discover that a material piece of information had been left out of the

application or was incorrectly stated, it could cancel the policy for material

misrepresentation. This remains so even if the applicant was never asked the

question or answered the question but his or her answer was not (or was

improperly) recorded. When the applicant (and/or the life insured) signs the

application, he or she is warranting that the information contained therein is

complete and accurate – and thus becomes liable for the information.

Mistaken Assessment of the RiskIf the agent is careless in recording data, the application could give the wrong

impression to the underwriting department with regard to an applicant’s medical



or financial status. At best, this could delay the underwriting process while the

correct information is obtained.

At worst, the underwriting department might accept the information at face value

and either reject a risk that it should have accepted or accept a risk that it should

have rejected.

The Need for More Complete InformationObviously, incomplete information on the application leads to the corollary – the

need for more complete information. This will lead to a slowdown in the

underwriting process – as the needed information is asked for and obtained. If

the underwriting process slows down too much, the client may grow impatient

with the process and simply cancel the application.

MisidentificationIf data regarding the applicant or the life to be insured is inaccurate (a wrongly

spelled name, an incorrect address), the result could be the gathering of

inaccurate information by the insurance company and its investigators, since it is

looking for information about the wrong person.

Mismatch with Other Information SourcesIf the agent incorrectly records a given piece of information on the application,

and the insurance company subsequently discovers (from another source) that

the information was inaccurate or incomplete, the veracity of the applicant may

come into question.

And the natural inclination of the underwriter might be to wonder, “If she lied

about this, what else did she lie about?” This could cause delays and distrust in

the underwriting process, even if the matter at issue was not material.

The bottom line for agents is, when in doubt, put it in …and put it in correctly.

And have the applicant carefully and fully check every question and answer for

accuracy and completeness before signing the application. No underwriting - 42 -


department of any life or disability insurance company ever rejected an

application because too much information was provided!

THE TEMPORARY INSURANCE AGREEMENT (TIA)In most instances, an application for insurance must undergo an underwriting

process to ensure that the applicant meets eligibility requirements. An insurer

and applicant often enter into a temporary insurance agreement (TIA) which

provides temporary coverage during this evaluation period.

Typically, one of the least understood documents that the agent handles is the

Temporary Insurance Agreement. Few agents fully appreciate the terms and

limitations of the TIA; fewer still ever properly explain them to the applicant; and

the “rules” regarding when a TIA should be issued can be vague at best.

A Temporary Insurance Agreement is a legal agreement between an insurer and

a proposed policy owner (applicant) that provides a guaranteed amount of

temporary (or an “interim”) life insurance coverage on the life to be insured for a

specific period of time. The TIA is usually in force for the duration of the

underwriting process (from date of application to policy delivery).

The TIA is a contractual obligation between the applicant and the life insurance

company: it is not mandated by the Uniform Life Insurance Act. The TIA is

usually combined with a Premium Receipt, given to the applicant to acknowledge

receipt by the agent of consideration (a premium cheque) tendered with the

application.

The TIA allows the life insured to be insured from the date of the application

even before a policy contract is issued.

However, the issuance of a TIA is not automatic in the case of all applications

and the coverage (or the existence of coverage) under a TIA is generally subject

to a number of conditions:

a minimum premium must have been paid- 43 -


a maximum age (over which a TIA may not be issued) will be specified

the maximum amount of insurance that can be provided under the TIA will be

specified

the period after which the coverage provided under the TIA will terminate

(often a maximum of 60-90 days)

the TIA is subject to cancellation by the insurance company at any time

coverage provided under the TIA is only valid if the policy can be issued as

applied for, at standard premiums rates, as of the date of application

the TIA will be covered by the same terms and conditions as the underlying

policy (e.g., its provisions will be subject to a suicide clause).

FeaturesA TIA typically includes certain conditions. For instance, if the applicant for a life

policy dies during the application process, the company may provide coverage

only if the underwriting process eventually determines that he would have been

eligible for coverage had he lived. If the applicant was struck and killed by a car

due to no fault of his own, for example, the company would honour the

agreement.

SignificanceEven though a TIA is only meant to provide coverage for a short period of time, it

still is a significant document. For example, if a claim occurs during the

agreement period, the insurer may still be liable to pay the full amount of a claim

unless the agreement specifies other conditions.

Time FrameDepending on the line of insurance for which it is issued, a TIA may last from

several days to a few months. In the case of life insurance, for example, a TIA

could be in force for as long as 90 days.



ConsiderationsCertain situations may make a TIA null and void or reduce the amount of benefits

paid if a claim occurs while it is in force. For example, if the insured was found to

have lied about not having a certain medical condition, the insurer may have the

right to rescind coverage and not pay the claim.

The two most common types of TIA are:1. The “insurability agreement” - that provides for the temporary insurance to be

in effect once the medical evidence and a premium cheque have been

submitted to the insurance company, provided that the applicant (or the life to

be insured, if different) is insurable at that time at standard rates under the

insurer’s normal underwriting rules.

2. The “approval agreement” - which only provides coverage once the final

required medical evidence and a premium cheque have been submitted,

provided that the applicant (or the life to be insured, if different) is insurable at

that time at standard rates under the insurer’s normal underwriting rules.

WHEN NOT TO ISSUEThe agent should only issue the TIA if a suitable premium payment has been

made with the completed application and he or she has reason to believe that

the proposed life insured is “insurable” at standard rates. If either of these

factors is not in place, then the TIA should not be issued.

There are (as noted) some limitations regarding the insurance coverage

provided under a TIA, such as a maximum amount of coverage provided

(regardless of the amount applied for).

The agent should not issue the TIA receipt to the applicant if it appears doubtful

that the coverage will be issued, or will be issued at substandard rates. This is

the most subjective, and difficult, decision for the agent to have to make during - 45 -


the sales and application process.

If there are aspects of the answers on the Non-medical Questionnaire that give

rise to concern as to whether the life to be insured would be insurable at

standard rates, the TIA should not be issued.

If there is collateral evidence apparent to the agent that makes it questionable as

to whether the policy could be issued at standard rates (or issued at all), the TIA

should also not be issued.

NOTE: In circumstances like the above, in addition to not issuing the TIA, the

agent should also take care to note his reasons for not issuing the TIA, on the

Agent’s Report section of the application. This will put the insurance company’s

underwriting department on notice to pursue the matter.

The agent should also not accept a first premium cheque from the applicant for

an amount of coverage greater than the maximum allowable under the TIA (or

the amount applied for, if less).

In fact, some insurers require that, in circumstances where the amount of

coverage applied for exceeds the TIA maximum, the agent should take two

applications from the client: one for a face amount of coverage equal to the TIA

maximum (for which a premium cheque will be taken and the TIA will be issued

to the client) and one for the full face amount of the coverage desired (for which

no premium cheque will be accepted and on which no TIA will be issued). In this

way, there can be no doubt about the maximum amount of liability that the

insurer is accepting.

Generally, if a TIA has been issued, but the underwriter determines that

additional information will be required, the underwriter may revoke the TIA by so

advising the applicant in writing – in order to get the company “off the risk” for the

duration of the underwriting process.



The bottom line is that agents should not consider the issuance of a TIA to be an

“automatic” part of the sales process and should be careful in explaining to the

applicant the amount and extent of coverage (and restrictions) applicable under

the TIA.

SUMMARYUnderwriting is one of the aspects of insurance that makes most people’s eyes

glaze over. Underwriters deal with statistics — they’re number crunchers. Many

people who have an insurance policy don’t even know that at some point their

application passed through an underwriter’s hands.

But underwriting is one of the most important parts of the insurance process. And

knowing what an underwriter does — and why it’s so important — is helpful for

people who are shopping for a new policy.

The insurance company makes up for the risk it takes on by charging premiums

and setting deductibles. If a company charges too little, it could go bankrupt

when large claims are filed. But if a company charges too much, it will lose

business to its competition.

An underwriter’s job is to make sure that the insurance charges just the right

amount for the coverage it provides. They figure how much risk you represent,

how much coverage the company can offer you, and how much that coverage

should cost.

Insurance companies want to stay competitive and stay open for business — and

the key to both is underwriting.



http://www.insurelane.com/why-deductibles.html

http://www.insurelane.com/lowering-premiums.html