Life Insurance Underwriting Explained

The term underwriting is derived from the early days of maritime insurance when those willing to take on an insurance risk wrote their names under the risk information. Underwriting is the process of providing cover against specific risks in return for a premium. The underwriting process refers to the assessment of risks associated with insurance. In addition, underwriters may be involved in assessing the merits of an insurance claim.

In the life insurance industry, underwriting covers a number of roles related to the acceptance of life (or more properly death) cover. The underwriting process actually begins before anyone has even applied for life insurance cover. The underwriting process includes the establishment of policies that govern the conditions that determine whether a potential client will be accepted as a viable risk or not. These underwriting policies include establishing premium levels for high risk individuals, possible policy loadings for high risk activities, and those events that may be excluded from cover altogether.

The insurer will also determine what portion of the risk it will cover itself and how much will be re-insured with one of the reinsurance companies.

A typical application for life insurance includes a section that includes a number of medical questions. These are derived from the company’s underwriting policy as well as its own underwriting experience. The type of medical information that is required for life cover is another policy that is set by the underwriters. Typically, the extent of medical information will vary according to the risk. Whenever the risk is larger, the information requirements become greater. Insuring for a large sum usually means that more medical information and possible medical examinations and tests are required.

The life insurance application usually carries questions about hazardous activities. The underwriting policy may determine whether the insurer will cover the risks of aviation or mountain climbing (for example) and any additional premium required to provide cover for these risks.

The occupation of the applicant is another important piece of information that can influence the underwriting policy. Some occupations carry a higher level of risk than others. Prostitution, participation in the armed forces or the police may carry a high level of risk resulting in a premium loading while an administrative job is accepted without a problem.

A poor underwriting experience occurs when certain types of risks result in a high level of claims. An underwriting loss may result in changing the insurer’s underwriting policies.

The establishment of a comprehensive set of underwriting policies makes it possible for the insurer to evaluate applications for life insurance quickly and efficiently. The use of a scoring system may result in the automatic acceptance or decline of a life insurance proposal. The establishment of these underwriting policies has made it possible for life insurers to automate much of the underwriting process using a variety of expert systems.

Underwriting policies may vary from one life insurer to the next and may change over time depending on the prevalence of certain risks. The maintenance of underwriting policies is an ongoing process resulting from careful evaluation of the environment and the changing nature of certain risks.

Much of the underwriting process has been automated using expert computer systems. The underwriter may set-up the rules of the underwriting software using the company’s underwriting policies.

The assessment of life insurance proposals (or applications) is an integral part of the underwriting process. The underwriting system may accept the majority of proposals automatically, but those that are not accepted by the system may be referred to an underwriter for an underwriting decision. This provides a degree of flexibility as the system may not have access to comprehensive information. The system also lacks the intuitive knowledge held by an experienced underwriter.

A life policy proposal may be referred if it is borderline or when the system has recommended declining a policy. The underwriter (or underwriting system) may call for additional information to determine the outcome of the proposal. Armed with additional information, the underwriter must make a decision to accept the proposal, to reject, to make an offer to grant life cover with a premium loading, additional exclusions and limitations.

The final stage in the underwriting process lies in the claim stage of the policy. Where there is a claim as the result of a death (or disability) the underwriting process examines the policy and the cause of death. The underwriter checks that the claim is not excluded from the policy under the original terms accepted. Examples of common exclusions are for hazardous activities such as sky-diving. Death caused by suicide is often excluded.

Depending of the cause of death, the underwriter may call for a more detailed investigation. Non-disclosure of pre-existing medical conditions are grounds for refuting a claim. Undisclosed smoking may also be grounds for refuting a claim. Evidence that the insured smoked but was insured as a non-smoker may be grounds for refuting a claim.

To summarise, life insurance underwriting involves all aspects of assessing the risks associated with the provision of life cover to clients.