Insurance Chapter 4 Flashcards

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Questions and Answers

What is the purpose of level premiums?

To increase premiums based on policyholder age

To solve the problem of increasing premiums (correct)

To provide a fixed premium for the entire policy duration

To reduce the cost of mortality in later years

What is premium mode?

The frequency with which a policy premium will be paid

How is the loss ratio calculated?

By dividing losses by total premiums received

When the combined loss and expense ratio exceeds 100%, an underwriting profit has occurred.

False Signup and view all the answers

What is the purpose of reserves in insurance?

To set aside a portion of every premium against future claims and obligations Signup and view all the answers

What is underwriting?

The process of selection, classification, and rating of risks. Signup and view all the answers

What happens after a prospect agrees to purchase an insurance contract?

The underwriting process begins, the application is submitted, and the policy is issued or declined. Signup and view all the answers

Who is referred to as the applicant in insurance?

The individual who fills out the application and applies for the insurance. Signup and view all the answers

What is a policyowner?

The individual who pays the premium and accepts the policy. Signup and view all the answers

Who is insured under an insurance policy?

The individual whose life is covered by the policy. Signup and view all the answers

What is a beneficiary in the context of insurance?

The individual or individuals designated to receive the benefits of the policy. Signup and view all the answers

What does third-party ownership mean?

A situation where the policy is owned by someone other than the insured. Signup and view all the answers

What is the main job of an underwriter?

To select risks that can be insured at a reasonable price and reject others. Signup and view all the answers

What is the process of underwriting?

Reviewing the background information and medical history of the applicant. Signup and view all the answers

What is adverse selection?

When the group of risks insured is more likely to experience loss than the average group. Signup and view all the answers

List some sources of underwriting information.

Insurance application, medical exams, attending physician's statement, consumer reports, MIB reports. Signup and view all the answers

What is the importance of the application in insurance?

It is a vital document attached to the insurance contract. Signup and view all the answers

What are the two parts of most insurance applications?

Part I—General Information and Part II—Medical Information. Signup and view all the answers

What might Part II of an insurance application require?

Medical history, current physical condition, and questions about drug and alcohol use. Signup and view all the answers

What does a medical examination in the underwriting process entail?

A doctor's assessment required for high amounts of insurance applied for. Signup and view all the answers

What must insurers do if they require AIDS-related testing?

Obtain the applicant's written consent and keep results confidential. Signup and view all the answers

What does an agent's statement include?

Agent's knowledge about the proposed insured's financial status and character. Signup and view all the answers

What is required for inspection reports in underwriting?

An independent report covering the applicant's financial and moral information. Signup and view all the answers

What is an investigative consumer report?

Information obtained through investigation about a consumer's character and habits. Signup and view all the answers

What does the Medical Information Bureau (MIB) do?

Maintains medical information on applicants for life and health insurance. Signup and view all the answers

What is the National Do Not Call Registry?

A registry managed by various federal and state officials to restrict unwanted calls. Signup and view all the answers

What does HIPAA impose on health care providers?

Requirements regarding the disclosure of insureds' health information. Signup and view all the answers

What is field underwriting?

The process where an agent initiates the insurance application process. Signup and view all the answers

What signatures are required to complete a life insurance application?

Applicant, proposed insured (if different), and the agent soliciting the insurance. Signup and view all the answers

What happens to incomplete applications sent to the underwriting department?

They are returned to the agent for completion. Signup and view all the answers

What is necessary for an insurer to avoid unfair discrimination?

Using actuarially sound principles in assessing risks and premiums. Signup and view all the answers

What is a declined risk in insurance?

A risk that an insurer has decided not to insure. Signup and view all the answers

What is the final step in the underwriting process?

Rating of the risk or the determination of the premium. Signup and view all the answers

What factors are used in determining insurance rates?

Mortality, interest, and expenses. Signup and view all the answers

What is a mortality table?

A table based on statistics about mortality by age and sex. Signup and view all the answers

How is the mortality rate defined?

The number of deaths per 1,000 people. Signup and view all the answers

What does morbidity refer to?

The likelihood that a person will suffer an accident or require medical care. Signup and view all the answers

What is a claim frequency rate?

It measures how frequently claims occur among a particular population. Signup and view all the answers

What is an aggregate claim?

The total claim amount calculated by multiplying claim frequency rate and average claim amount. Signup and view all the answers

How do insurance companies use interest in premium calculations?

They invest premiums to earn interest, which lowers the premium rate. Signup and view all the answers

What are expenses in the context of insurance premiums?

Costs associated with mortality and operating expenses. Signup and view all the answers

What is a net premium?

The premium without expense loading. Signup and view all the answers

What constitutes loading in insurance?

Acquisition costs, general overhead, contingency funds, and claim payments. Signup and view all the answers

What are acquisition costs?

Costs incurred in putting the policy on the books. Signup and view all the answers

What is general overhead loading?

Consideration of salaries and costs associated with managing the insurance company. Signup and view all the answers

What is meant by loading for contingency funds?

A provision in premiums to account for unforeseen future events. Signup and view all the answers

What is involved in the immediate payment of claims?

Assuming all claims will be paid throughout the year for accurate premium estimation. Signup and view all the answers

What is the gross annual premium?

The amount the policyowner actually pays for the policy. Signup and view all the answers

Study Notes

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.

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Description

Explore key terms and concepts in insurance with these flashcards focusing on underwriting and the insurance contract process. Perfect for students delving into insurance studies or professionals seeking a refresher on essential terminology.