Insurance Chapter 4 Flashcards

Underwriting Process

• Underwriting involves selection, classification, and rating of risks to assess if a risk is acceptable.
• The underwriting process progresses after agreement to purchase insurance: application submission, policy issuance, and delivery to the policyholder.
• Key roles in underwriting include the applicant (person applying for insurance) and the policyowner (who pays premiums and accepts the policy).

Essential Definitions

• Insured: Individual covered by the insurance policy.
• Beneficiary: Individual named to receive policy benefits, usually aligns with the applicant and policyowner.
• Third-party ownership: Scenario where the policy is owned by someone other than the insured, common in business insurance.

Underwriter's Role

• An underwriter identifies acceptable risks for the insurance company, protecting against adverse selection, ensuring a profitable risk distribution.
• Information sources for underwriting include insurance applications, medical histories, physician statements, consumer reports, MIB, and credit reports.

Application Components

• Parts of Application:
  • Part I: General information (name, address, birthdate, etc.)
  • Part II: Medical history, current condition, and risky activities.
• Signature requirements include those of the applicant, proposed insured (if different), and agent.

Information Validation

• Underwriters may seek additional information through Attending Physician's Statements (APS).
• Medical exams may be required if the insurance amount is significant and are conducted at the insurer's expense.

Privacy and Confidentiality

• HIPAA regulations govern the confidentiality of health information, protecting patient information during the insurance process.
• Insurers cannot inquire about sexual preference but may ask about AIDS if relevant to insurability.

Financial Considerations in Underwriting

• Insurers assess mortality/morbidity, interest, and expenses to determine insurance rates.
• Mortality tables help estimate death rates to inform premium costs, while aggregate claims reflect total cost predictions for health insurance.

Premium Structures

• Loading: Additional costs to cover acquisition, overhead, contingencies, and immediate claims.
• Gross Premium: Total cost for the policy, factoring in mortality risk, interest, and expenses.
• Premium modes vary in payment frequency (annual, semi-annual, quarterly, monthly), affecting total costs due to interest and administrative expenses.

Loss Analysis

• Loss ratios are calculated to evaluate the performance of insurance policies by relating losses to total premiums received, influencing underwriting practices and renewal decisions.### Expense Ratio
• Calculated by dividing an insurer’s operating expenses (including commissions) by total premiums.
• A combined loss and expense ratio of 100% indicates the insurer breaks even.
• A combined ratio over 100% signifies an underwriting loss.
• A combined ratio under 100% reflects an underwriting profit or gain.

Reserves

• Legally required portion of premiums must be reserved for future claims and contractual obligations.
• Reserves represent an insurer’s liabilities to policyholders.
• The reserve amount, along with interest and future premiums, should match all contractual obligations.
• Surplus is defined as the amount by which an insurer’s assets exceed its liabilities.
• Policy dividends are distributed from the insurer's surplus.