INTRODUCTION TO UNDERWRITING CHAPTER 6. Underwriting :- U :- Understanding N :- Necessary D :- Details & E :- Evolving R :- Rational W :- Weightage of R :- Risk & I :- Important T :- Truths
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INTRODUCTION TO UNDERWRITING
U :- Understanding
N :- Necessary
D :- Details
E :- Evolving
R :- Rational
W :- Weightage
R :- Risk
I :- Important
T :- Truths
I :- Influencing
N :- Normal
G :- Grade
What is Underwriting?
The assessment or verifying the
level of risk is called selection or underwriting.
What is the need for underwriting ?
Underwriting is needed to assess the risk & to
decide whether risk is acceptable at Standard
rate or with extra premium or with some
restrictions or to decline the risk.
Once the nature of insured lives is decided
premiums will be charged accordingly.
Premiums will be charged either less or more
A lower premium affects the solvency of the fund & cost of additional risk have to be borne by the rest of the policyholders.
i.e. If lower premium is charged, Insurer’s claim experience will not be as anticipated & it will have adverse effect on Insurer’s funds to meet the additional claims & profits.
A higher premium charged would not be fair
to the proposer.
Insurance cover will not be allowed to
proposer at appropriate rate.
Insurance may be given to a person
who is uninsurable (Anti selection)
If there are no additional risk factors (adverse features) affecting mortality then the proposal would be accepted at Ordinary Rate(O.R.) or Standard Rates.
If there are additional risk factors (adverse features) proposal will be accepted with suitable extra premium/restrictions (modified terms) or declined.
Hazards – These are the factors which affect the risk. They are as follows.
Premiums are based on age & as age increases probability of
death increases. Therefore age is an important factor.
eg. Person aged 25 years will be at lesser risk compared to
person of 50 years age.
Overweight at advanced age & underweight at young age need careful assessment.
eg. Proposer aged 20 years & underweight will be at higher
risk of death due to Tuberculosis or Asthma compared to
proposer aged 40 years & underweight.
eg. If proposer is 50 years old, overweight & having cardiac
problem then risk is more than person who has cardiac
problem but not overweight.
Certain risk increase with age & certain risk decrease with
eg. Risk on the life of an underweight person at younger age is
of decreasing type.
Mortality of female lives is greater than male lives at younger ages.
eg. This is due to the inadequate care in maternity cases among
poor & uneducated sections.
It reflects the health of the proponent.
eg. If a proposer is underweight then chances of Tuberculosis
is high & if a proposer is overweight then chances of
Hypertension or Heart problem is high.
Medical Report provides the data regarding blood pressure, pulse etc. which will reveal the condition of important systems of the body.
eg. Hypertension may result into Paralytic Stroke or Heart
eg. High Pulse rate suggests the tendencies towards heart
These are the hazards which affect the mortality (probability) of the death.
eg. If proposer is Blind, Deaf, Paralysed or having poliomyelitis
then he is prone to accident.
Gives the information about health & life style of person.
eg. If proposer is a habitual smoker then the chances of his
suffering from Lung disease are higher compared to non-
eg. Similar is the case with an alcoholic whose chances of
suffering from Kidney & Liver problems are more.
Reveals the hereditary diseases like diabetes &
eg. If proposer’s parents had Diabetes then his
chances of suffering from Diabetes are greater.
It arises out of one’s occupation.
eg. 1)Flight duties on aircraft.
2) Working at heights.
3) Working with high speed machine.
Proponents involved in above jobs are prone to accident.
Nature & place of job have effects on the worker.
eg. 1) Inhalation of dangerous fumes. Therefore people
working in chemical factories are likely victims of
various respiratory diseases such as Tuberculosis or Asthma.
2) people working with high voltage electricity are
prone to electrocution & burns.
3) People working in mine industries
Suitableextra premiumsare charged.
It refers to the intentions of the proposer.
It exists when the intention is to take undue advantage.
It has to be judged with reference to life style, income,
reputation , need for insurance etc.
It is not measurable.
If moral hazard is suspected suspect no amount of extra
premium will be appropriate & the proposal has to be declined.
1) First insurance for large amount at advanced age.
2) Large insurance with inadequate income.
3) widow with no income & having major children.
4)Insurance proposed by someone on the life of another without insurable interest.
5) Nomination in favour of a stranger.
6) Medical examination at place other than residence or office place.
Assessment of proposer’s financial standing.
It is necessary to check whether income is sufficient to support the insurance.
The source of income, age & amount of insurance plays a vital role.
We calculate the allowable insurance after multiplying
the average of last three financial years income by age
1) Proposal form – provides the information about proposer, his health, habits, personal history & family history & income.
2) Medical Report – It provides the information about the proposer’s physical condition.
3) Agent’s confidential report & Moral Hazard report
4) In case of large Sum Assured, special reports & Special Moral Hazard Report containing information about life style, Social status, health, habits, occupation & income from senior officials are called for.
Depending on the sum proposed the proposal will be underwritten at different levels as follows. ( Standard Life)
For assessing the risk underwriter has to avail of assistance of doctor called medical referees.
Medical referees have specialised knowledge about the effect of various impairments & diseases on mortality.
In case of large Sum Assured, proposal is referred to the reinsurer.
The assessment of risk is a matter of individual judgement. However the underwriter has to follow Numerical Rating System.
Standards are laid down for each factors such as height, weight, pulse etc.
Variations are given values.
Values are then grouped & tabulated showing the extra mortality.
Depending on the extra mortality extra premium is charged.
Variation up to 20% - Standard or First Class
20% to 35% - Class I
40% to 60% - Class II & so on.
Acceptance with Lien
The risk is not permanent throughout the term.
it is going to decrease after few years.
Sum Assured would be reduced to the extent of lien, if death
occurs within the specified period.
Lien could be constant or decreasing.
Acceptance with Modified Terms
Life is substandard.
Proposed plan & term is not allowed.
A different plan or term or reduced S. A. or a combination of
these is allowed.
Certain plans are accepted without risk cover eg. Jeevan Suraksha
eg. If proposer has deformity due to disease & two limbs are
affected. Then Risk plans are not allowed. Simple
Endowment plan can be offered with some restriction
according with the nature of deformity.
Acceptance with Clause
Here clause is imposed to restrict the risk cover if death occurs due to specific reasons.
e.g. First pregnancy, Full Medical Report at vesting, Suicide
clause, clause 4 B.
e.g. Female proponent under Cat III, housewife up to age 30
clause 4B is imposed so that if death occurrs as a result
of internal self injury, suicide or attempted suicide, insanity,
accident other than an accident in public place or murder at
any time on or after the date on which risk on the policy has
commence before the expiry of 3 years from the date of this
policy, then only premiums will be refunded.
Proposal is not be accepted at present but can be
reconsidered in near future.
Fresh Medical Report & other special reports will required
if reports are not valid at future date.
eg. If proposer who is pregnant for more than 24 weeks then proposal will be postpone until 3 months from date of delivery if menstruation has started.
Risk on the life of proposer is too heavy to be insured.
eg. If proposer is suffering from Cancer, AIDS, Quadriplegic
having income arising out of farming.
Why insurance is allowed under Non Medical?
Even after medical examination more than 90% proposals are accepted at Ordinary Rates
Unavailability of Qualified doctors.
The insurer will save on medical fees & devise some standard format of Proposal Form which will elicit major information relating to his Income, Personal & FamilyHistory, Health & Habits which will help the underwriter to assess the risk & safeguard from adverse selection.
Non Medical Business
Employment in reputed organisation.
eg. Bank, LIC, GIC etc.
Leave records are maintained.
Medical check up at entry.
Female category – I
Working & educated females.
Professionals such as Doctors, Lawyers, C.As etc.
Treated on par with males i.e no limit on insurance.
Female category – II
Income through business
Unearned income attracting Income tax.
eg. Income from House property, Share, Bonds etc.
Maximum insurance allowed is Rs. 1 crore.
Female Category – III
Single women, Widows are covered.
self employed women such as vegetable vendor, fisher women etc. are covered.
Married women are covered for 10 lacs if husbands are
Women observing pardah are not considered.
Agents are called primary underwriter because they are in direct contact with the proposer.
Agent must disclose all facts which are material to the risk & see to it that the proposer also discloses all material facts.
Agent’s confidential report is the first Moral Hazard Report which safeguard insurer from Moral Hazard.
Underwriter will use the data from Agents report & Proposal form.
Agent owes the responsibility to the insurer & the insured.
Advances in medical sciences.
Many dreaded diseases of the past are controllable.
eg. Polio, Diabetes etc.
New diseases have surfaced.
eg. AIDS which have to be declined.
Persons who would not have been allowed insurance in past are now insurable.
eg. Proponent with Cardiac diseases such as Bypass operation
Underwriters find that most of the proposers have the habits of drinking & smoking.Insurers charge extra premium for drinking & smoking
Always remember that - - - - - - - -
“The contract of Insurance is based on Uberrima Fides i. e. the principle of Utmost Good Faith whereby proposer is required to disclose all the information in full in the proposal form for proper assessment.
Underwriting At Glance
U/W ;- Underwriting
P.F.Q. :- Personal Financial Questionnaire
I.T.R. :- Income Tax Return
O.R. :- Ordinary Rates
Phy. :- Physical
Cond. :- Condition
N.M.G. :- Non Medical General
N.M.S. :- Non Medical Special
N.M. Exp. :- Non Medical Express
P.F. :- Proposal Form
A.C.R. :- Agent’s Confidential Report
F.M.R. :- Full Medical Report
Spl. Reports :- Special Reports