Life & Health Chapter 19 | Health Chapter 10: Health Insurance Underwriting and Policy Issue

Adverse Selection

This is the tendency for a disproportionate number of poor risks to seek or buy insurance or maintain existing insurance in force (i.e., the selection against the insurance company). Sound underwriting reduces adverse selection.

Age Change

This is the date that’s halfway between birthdays when the applicant’s age changes to the next higher age. Some insurers base insurance policy age on the applicant’s nearest birthday, while others base it on the insured’s last birthday.

Agent’s Report

This report—also referred to as an agent’s statement—is where the agent records personal observations about the proposed insured. It’s a confidential way for the agent to provide relevant underwriting information to the insurance carrier.

Applicant

This is the person who’s completing the application to the insurance company for the insurance policy. In most cases, the applicant is also the proposed insured, but this is not always the case.

Application

This is the statement of information that’s given when a person applies for insurance. The insurance company’s underwriter uses this information as a basis in determining whether the applicant qualifies for acceptance under the company’s guidelines. Applications are attached to and made a part of all individual contracts.

Attending Physician Statement (APS)

Insurers request an attending physician’s statement when underwriters need additional detail regarding a medical condition that’s revealed on an application. The statement or report is provided by the applicant’s attending physician, and it may elaborate on a past condition or some other issue that currently impacts the prospective insured’s health. Because of the need to respect physician/patient confidentiality, the applicant must sign an authorization, which allows the physician to release information to the insurance company’s underwriter.

Avocation

This is a hobby or non-occupational activity. Some avocations, such as fishing or studying chess, don’t require additional underwriting because they don’t measurably increase risk. However, Other activities, such as sky diving or mountain climbing, could require more scrutiny during the underwriting process in the form of a special questionnaire.

Backdating

This is the practice of making the effective date of a policy earlier than the application date. Backdating is used to make the issue age lower than an applicant’s real age in order to obtain a lower premium. State laws typically limit the amount by which an insurer may backdate a policy to six months. Backdating is not allowed in variable contracts due to the nature of the investment.

Binding Receipt (Unconditional Receipt)

Upon the completion of an insurance application and the applicant’s payment of the initial premium, this is one type of receipt that’s given by an insurance company. Insurance becomes effective on the receipt date and continues for a specified period or until the insurer declines the application.

Buyer’s Guide

This is a pamphlet that compares various forms of life or health insurance and describes the key characteristics of the policy type being purchased. This information helps consumers make an informed decision when purchasing insurance coverage. The producer must provide this guide to a consumer when the producer is attempting to solicit insurance.

Claims Experience

This is an insured’s history of claims or rate of loss. The greater the claims experience, the higher the required premium.

Community Rating

Insurance carriers generally base community ratings on their overall claim experience and healthcare costs in a geographical area.

Conditional Receipt

This type of receipt is issued by an insurer when agents collect the initial premium with an application. Agents leave signed receipts as proof of payment and temporary guarantees of coverage as long as a specific condition is satisfied. Coverage can conditionally begin on the date that’s specified in the receipt—on the date of application or date of a required medical exam—whichever is later. Coverage commences if the proposed insured demonstrates insurability. If the applicant proves to be uninsurable, no coverage takes effect, and the premium is refunded. Without a valid receipt, no coverage is in force until the policy is issued, delivered, and accepted with the initial premium paid.

Constructive Delivery

This occurs when an insurance carrier gives up all control of a policy and releases it for unconditional delivery to a person who’s acting for the policy holder, including the company’s own agent.

Consumer Report (Investigative Consumer Report)

This report is a detailed background investigation that may include an interview with co-workers, friends, and neighbors about an applicant’s character, reputation, lifestyle, etc. Insurers are allowed to conduct a consumer report to obtain additional information as long there’s no invasion of privacy present. A common type of consumer report involves a credit report.

Counter-Offer

This is the legal description of what happens when an insurer declines a paid application for insurance with a standard rate classification but is willing to offer a “rated” or substandard policy that will require a higher premium. The insurer rejects the initial paid offer and makes a counter-offer in reply.

Credit Report

This is a summary of an insurance applicant’s credit history (e.g., credit score, debt levels, repayment history, and assumed creditworthiness, etc.) as determined by an independent organization that has investigated the applicant’s credit standing. Credit reports are typically obtained from one of the three major credit bureaus—Experian, Equifax, and TransUnion.

Declined Risk

This describes an individual whose application for coverage was rejected by an insurance company.

Delivery Receipt

Insurance companies require producers to obtain signed delivery receipts as proof of delivery. The delivery receipt is important because it designates the start of the policy’s free-look period.

Disclosure Form

This is a comparison form that various state regulatory agencies require to be given to every policy owner who replaces an existing policy with another.

Earned Premium

This is a pro-rated amount of paid-in-advance premiums allocated to the portion of the policy term that has already elapsed.

For example, let’s assume that a policy’s term is 12 months, and the first three months have elapsed. Therefore, 25% of the policy term is in the past. That portion of risk has been covered. If the premium were $1,000, then $250 or 25% would be earned.
(See Unearned Premium.)

Effective Date

For an insurance policy, this date identifies when coverage is actually in force and establishes the date by which the policy owner must pay future annual premiums.

Evidence of Insurability

This represents a statement or proof regarding a person’s current health status and history that qualifies him for coverage.

Expense Factor

This factors in the insurer’s operating expenses into the premiums. Some of these expenses include commissions, administrative costs, overhead, profits, and regulatory reserves. The expense factor is also referred to as the “load” or “loading factor.”

Fair Credit Reporting Act

This is a federal law that was passed in 1970, which provides an insurer with the right to receive additional information about insurance applicants. This law permits an insurer to conduct a consumer report on applicants and proposed insureds. An applicant for insurance must be informed of the purpose of the report. If the insurance company declines coverage due to information in the report, the insurer must provide the name and address of the reporting agency so that the applicant can secure a copy of the information in the report.

Field Underwriter

This is the agent or producer who completes the consumer’s insurance application.

Field Underwriting

During this process, the producer determines which risks are desirable and submits those to the underwriting department for approval. The producer provides any required disclosure of information practices to an applicant, such as a notice regarding replacement, a Buyer’s Guide, an outline of coverage, or a policy summary.

Free-Look Period

All health insurance policies must include at least a 10-day free-look period. This period begins when the producer delivers the insurance policy. If the policy owner decides to return the contract to the insurer during this period, she will receive a full premium refund. Mail order or direct response insurers must include a free-look period of at least 30 days.

Health Insurance Premium

The formula for a health insurance premium is (morbidity – interest + expenses). (See the definitions of Morbidity, Interest, and Expense Factor for additional information.)

Information and Privacy Protection Act

Each insurer must conform with state and federal privacy laws. This act prohibits insurers from basing their decisions solely on previous adverse underwriting decisions.

Inspection Receipt

This receipt documents the temporary release of a new policy to the prospective policy holder without payment. It allows the prospective insured to review the contract before actually buying it. The free-look period that’s required by all states makes this inspection receipt relatively obsolete.

Inspection Report

This is a report that contains general information regarding the health, habits, finances, and reputation of an applicant. This report is developed by a firm that specializes in rendering this type of service.

Insurable Interest

This describes the financial or emotional relationship between two or more parties. In health insurance, insurable interest exists if the applicant is in a position to suffer a loss if the insured incurs medical expenses or is unable to work due to a disability.

Interest

This represents the income that insurance companies earn from investing the paid premiums. Premium calculations assume an expected rate of return.

Issue Date

This is the date on which the insurance company finishes underwriting a risk exposure and generates the insurance contract. Coverage is already effective if there was a premium receipt. If no premiums were paid, it goes into effect when delivered, assuming the first premium is paid, and a Statement of Good Health is obtained.

Load

(See Expense Factor)

Loading Factor

(See “Expense Factor)

Medical Information Bureau

This is a service organization that collects medical data on life and health insurance applicants for member insurance companies.

Medical Report

This is a report that may be needed to provide further underwriting information. This report may be based on a recent examination with the applicant’s physician or an examination that was conducted as a part of the underwriting process.

Mode

(See Premium Mode)

Moral Hazard

This is an applicant's habit or lifestyle that indicates a higher-than-average level of risk for the insurer. Such habits include excess drinking, recreational drug use, and dishonest business practices.

Morbidity

This describes the level of risk that a person has of suffering a disability—usually within a given year, a given age, and as part of a defined population group.

Non-Medical

This refers to an application that’s evaluated without a medical exam.

Outline of Coverage

This describes the basic benefits, conditions, and other terms of an insurance policy without using industry jargon.

Payor

This is the person who’s responsible for paying the policy premium.

Policy Fee

This is a small transaction fee that’s charged by some insurers for the first or subsequent policy years.

Policy Summary

This summarizes the basic terms of an insurance policy, including the conditions, coverage limitations, and premiums.

Policy Term

This is the period during which a policy will remain in existence when premiums are being paid. It can also be described as a single renewal period for renewable policies.

Policy holder

This is the person who can exercise the rights or options conferred by the policy. The policy holder is also typically the payor.

Preferred Risk

This describes an applicant who represents the likelihood of risk which is lower than that of the standard applicant, typically due to better-than-average physical condition, occupation, mode of living, and other characteristics when compared to other applicants of the same age.

Premium

This is the initial payment and subsequent periodic payments that are required to keep a policy in force. This represents the relatively small, certain price paid for the right to transfer a potentially large uncertain risk to the insurer. Insurance premiums are always paid in advance.

Premium Mode

This refers to the frequency of premium payments. If the policy has an annual premium, the insurer can assess an extra charge if premiums are paid quarterly, semiannually, or monthly.

Premium Receipt

When an agent collects a premium at the time of application, that producer must give a premium receipt to the applicant. This receipt is proof that the applicant paid the initial premium with his application. The type of receipt that’s used by the insurer will determine when coverage becomes effective and what conditions apply.

Proposed Insured

This is the person whose life is requesting to be insured. Typically, but not always, the proposed insured is also the applicant.

Rated Policy (Rating Up)

A “rated policy” is the basis for an additional charge to the standard premium because the person being insured is classified as a higher-than-average risk. The above standard rates are typically the result of impaired health or hazardous occupations.

Rated-up Policy

(See Rated Policy and Substandard Risk Classification)

Rated-Up Premium

This is the additional amount that’s added to the standard premium to account for the additional risk involved in underwriting a substandard loss exposure.

Replacement

This is a legal activity in which a producer convinces a prospective client to lapse or surrender a life or health policy and purchase a new one. Producers must provide a “Notice Regarding Replacement” to the consumer when this activity may occur. The producer must also notify the insurer that a replacement is occurring.

Representations

Most state laws specify that the applicant’s statements on an application are considered representations and not warranties. Representations need only be substantially accurate to the best of the applicant’s knowledge. Generally, a representation is considered fraudulent if it relates to a situation that would be material to the risk and that the applicant made with fraudulent intent.

Reserves

These are funds that are set aside to pay future claims. Some reserves are required by state statute (statutory reserves).

Risk Classification

This describes the underwriting category into which a risk exposure is placed depending on the applicant’s susceptibility to injury, illness, or death.

Special Class

This describes an applicant who cannot qualify for a standard policy but may secure one with a rider that waives the payment for a loss involving certain existing health impairments. The insurer may require the applicant to pay a higher premium or accept a policy other than the one for which he has applied.

Special Questionnaire

This form gathers more detailed information about a non-medical aspect of an applicant’s life—typically about an activity that often entails a greater-than-average level of risk. The requested information may be about aviation, an avocation, foreign residence, finances, or a person’s occupation. The most common of these special questionnaires is the aviation questionnaire.

Standard Risk

This risk describes a person who, according to a company’s underwriting standards, is considered an average risk and insurable at standard rates. High-risk or low-risk candidates may qualify for increased or discounted rates based on their deviation from the standard.

Substandard Risk (Impaired Risk)

This describes an applicant whose physical condition fails to meet the typical minimum standards. If the substandard classification is due to adverse health, the application may be declined or written with a “rated-up” premium. An applicant may be in excellent health but considered substandard due to their activities, hobbies, or avocations (e.g., scuba diving, skydiving, etc.).

Statement of Continued Good Health

When insurers deliver policies to applicants who include the initial premium with their applications, those insurers require the applicants to affirm their health has not changed during the interim.

Temporary Insurance Agreement

(See Binding Receipt)

Trial Application

This is an application that’s submitted without the initial premium. There’s no offer because, by itself, the application is not sufficient consideration to form a contract since the other half (the premium) is missing. In effect, the consumer is using the application to solicit an offer from the insurer.

Underwriter

This is a person who identifies, examines, and classifies the degree of risk represented by a proposed insured to determine whether coverage should be provided and, if so, at what rate. An underwriter applies the insurer’s standards when making decisions during the company’s underwriting process.

Underwriting

This is the process of selection, classification, and rating risks. Underwriters analyze information that’s obtained from various sources pertaining to an applicant for insurance and then determine whether the carrier should decline the application, issue an insurance policy as requested, or offer either a modified policy with restrictions or a contract with a higher required premium.

Unearned Premium

This is a pro-rated amount of a paid-in-advance premium that’s not yet been “earned” by the insurer. Put another way, it’s a pro-rated amount of paid-in-advance premium that’s allocated to the portion of the policy term which has yet to elapse.

For example, let’s assume that a policy term is 12 months, and the first three months have elapsed. Therefore, 75% of that policy term is in the future. That 75% of risk has yet to be covered, and that percent of the premium has yet to be earned. If the premium were $1,000, then $750 would be unearned.

Unearned premiums appear as a liability on an insurance company’s balance sheet because the insurer must re-pay any unearned premiums if it cancels an insurance policy. (See Earned Premium)

Uninsurable

A loss exposure is uninsurable if the risk of covering it is so great that an insurance carrier cannot do so profitably. If an applicant is considered uninsurable, the insurance company will reject the application. An insurer may also reject an application if the level of risk is unknown or cannot be reasonably estimated.

USA PATRIOT Act

This is an anti-terrorism legislation that also addresses anti-money laundering provisions.

Warranties

Most state laws specify that the applicant’s statements on an application are considered representations and not warranties. A warranty must be absolutely and literally true. Breaching a warranty may be sufficient to void the policy regardless of whether the warranty is material, or the breach had contributed to the loss.