2. Life & Health: Underwriting

What is underwriting?

The process of evaluating risk to determine if it’s acceptable based on established insurance company guidelines.

Agent/Producer = frequently called “field underwriter”

Application confidentiality

Highly personal information is gathered during the application process. Agents hold this information in the strictest confidence and producers must never violate that confidence.

Application accuracy

Producers must be diligent in getting and recording the correct answer to every question on the application. The company underwriter relies on the accuracy to assess and rate this business.

Changes in the application

Corrections can be made if a producer has mistakenly recorded applicant information.

The applicant must certify an error occurred and place their initials next to the correction.

Application completeness

Incomplete applications cause delays and prolongs the application process. All required information must be available for the Underwriter Review Department before it can be approved and issued.

If an incomplete application is approved, the underwriter/company waives their right to the information and cannot deny if a claim arises.

Application backdating

Some insurers allow backdating for lower premiums.

Most state laws allow life insurance applications to be backdated up to 6 months.

Who’s signatures are required on the application?

• applicant

• producer/agent

• insured (parent or legal guardian for a juvenile policy)

What is the Producer’s Report?

Part III of a life insurance application is the Producer’s/Agent Report, or Producer’s statement.

Information included:

• Producer’s/Insured relationship

• what the agent knows about the applicant’s financial status, habits, and character.

• never seen by the client

Not attached to the policy at issue

What is the Disclosure Notification?

State law requires that applicants are given advanced written notice on:

• who is authorized to disclose personal information

• the kind of information

• and the reason the information is being collected

By signing the disclosure form, the applicant gives consent to gather and disseminate information described in the notice.

Collecting the premium

An “offer to buy” insurance exists when the first premium is submitted with the application. There is no benefit until the premium is collected.

Once the premium is collected, the producer must provide the applicant with a “receipt”.

What is a conditional receipt?

The premium paid with the application.

The insurance is effective—the later of:

• on the date the application is completed & signed

OR

• after a medical exam (if required)

If the insurer dies before the policy is issued, the death benefit is paid only if they would have been accepted had they lived. If not, the premium is returned and no death benefit.

What is a binding receipt?

Temporary, 30 - 60 days from the date of application, even if the applicant is uninsurable.

Binders are mostly used for auto and home insurance, rarely life.

Life insurance binders = temporary insurance agreements

What are the 3 Parts of the application?

Part 1 — General Information

Part 2 — Health Information

Part 3 — Producer’s Report

What is the Attending Physician’s Statement (APS)?

When the underwriter asks the insured’s regular doctor for an Attending Physician’s Statement (APS) to find out about their current condition, medical history, or ask for copies of their medical records.

When would an insurer underwrite on a non-medical basis?

When the death benefit is below a certain level, the applicant is evaluated on the health information on the application.

Medical exams are required for larger death benefit amounts.

What are the requirements/considerations for AIDS?

Questions about being diagnosed with AIDS (Acquired Immune Deficiency Syndrome) or ARC (AIDS-Related Complex) to determine a medical condition can be asked.

AIDS testing can be required with the applicant’s written consent. If required, they must be informed of the purpose of the test and that results are reported to the insurer.

If positive, a report is sent to the Medical Information Bureau (MIB) that an individual has abnormal blood test results.

The presence of AIDS is never revealed, reported, or shared and can only be released to persons designated by the applicant. If the applicant does not designate a medical provider, state law may require the results forwarded to the State’s Department of Health.

AIDS tests are paid by the insurer.

What is the HIPPA Disclosure?

The Health Insurance Portability and Accountability Act

• Medical providers, insurers, and producers need to follow strict guidelines regarding the disclosure of the insureds’ health information.

• health information must remain confidential to protect the insured’s privacy.

If shared, applicants must be notified of:

• the insurer’s information-sharing practices

• their right to maintain privacy

• an opportunity to refuse the release of their information

What is the Medical Information Bureau?

A non-profit insurance trade association that stores applicant information gathered during the underwriting process.

When member companies discover unfavorable information about an applicant, they report it to the MIB using codes signifying certain conditions.

If the applicant applies for insurance elsewhere, other members’ companies will have access to the information.

e.g. medical history, hazardous jobs or hobbies, and poor driving record.

— applications can’t be denied on the MIB information alone.

— insured must be informed of the MIB

What are Consumer Reports?

Used to determine a consumer’s eligibility for personal credit (credit report).

— insured must be informed of a consumer report.

Underwriters use it learn how reliable a person is with paying their monthly bills and what to expect when paying their premiums.

What are Investigative Consumer Reports?

Information gathered by interviewing individuals such as associates, friends, and neighbors, who know something about the consumer.

— insured must give consent

What are the 7 Underwriting Sources of Information?

AMAAMCI

“A Man And A Match Can Ignite”

• application

• medical tests & exams

• (APS) attending physician statement

• AIDS testing

• (MIB) Medical Information Bureau

• consumer reports

• investigative reports

What are the 4 classifications of risk in underwriting?

SPSD

Standard risks = average health and normal life expectancy. Risk can be insured for standard rate.

Preferred risks = excellent health. Risk of loss is below average and insured at preferred or discounted rates.

Substandard risks = below average life expectancy, high-risk life insurance. Risk of loss is above average and only accepted by charging higher rates. Called “rated up” or just “rated”

Declined = applicant is not insurable at any price. The application or risk is declined.

What are the 4 things considered as unfair discrimination?

• race

• religion

• national origin

• place of residence

Some states include people that are blind or victims of domestic violence.

How is a policy delivered?

When a policy is issued, it must be delivered to the policyholder. It can be mailed, but it’s the producer’s responsibility to deliver in person.

What does the producer review with the policyholder during the delivering appointment?

The policy, riders, exclusions, and other details to make sure they understand.

What is the statement of good health?

During the delivery appointment, the agents collects the first premium if not paid at time of application. Also, the policyholder must sign a statement of good health attesting their health is the same as when they applied for the policy.

If health changed — agent can’t deliver policy.

What is the effective date of coverage, and the 3 options?

1. when the premium is collected at the time of the application, the effective date is the date of the application or date of medical exam, if required.

2. If substandard risk, a higher premium is required, so the effective date is the date the policy was delivered with the additional payment. If applicant denies and does not pay the additional premium, coverage has never been in effect.

3. If an application is sent without the premium, but paid at policy delivery, the effective date is the date the policy was delivered.

What is the Fair Credit Reporting Act (FCRA)?

Fairly adopt procedures when they collect and share information, with respect to confidentiality, accuracy, relevancy, and proper use of information.

— must comply standards w/ 3rd party information

— consumers must be made aware that an investigative consumer report may be made and personal information included

What is a Notice to Applicant?

Notice that informs the applicant a report will be ordered for credit history and any other life and health insurance they’ve previously applied for.

— notice must be given to the consumer no later than 3 days after a report was requested

— consumers may make a written request for a complete disclosure of report, disclosure must be made in writing within 5 days after the request was made.

What are the “Consumer Rights” of a consumer?

If consumers feel information in their files or reports are inaccurate, they can dispute and agencies are required to reinvestigate, correct or delete information. Consumers can also send corrective information to the reporting agency.

What are the penalties for violating the Fair Credit Reporting Act?

• fines (max of $5,000)

• imprisonment 1 year

• pay damages, punitive damages, attorney fees

What are producers liable for?

Mistakes, omissions, misstatements, and promises of coverage.

What is STOLI / IOLI?

Stranger-owned life insurance / investor-owned life insurance.

— investors are named as beneficiaries

— banned in most states

What is the USA Patriot Act?

Designed to prevent and detect money laundering and financing of terrorism.

Under the Patriot Act, companies that issue permanent life insurance, annuities, or products that have cash value or investment features must have procedures for recognizing and reporting potential money-laundering activities.

— department must have a compliance officer to implement the program and training, and tested for success.

What are the types of suspicious activity insurers must report, according to the Patriot Act?

• receipt of cash payments over $10K

• request of a refund paid to someone not related to the purchaser

• interest in early termination over performance

• false or reluctance to provide identification

• maximum borrowing soon after a product is purchased

What is the Employee Retirement Income Security Act (ERISA)?

Protects the interests of participants employee benefits plans & their beneficiaries. Mostly pension plans, but some group insurance plans. Anyone who manages the plans has fiduciary responsibilities.

What are the types of information that must be available to plan participants, beneficiaries, Department of Labor (DOL) and IRS according to the Employee Retirement Income Security Act (ERISA)?

• summary plan description to plan participant & DOL

• summary that details changes in any plan description to plan participant & DOL

• annual return or report (form 5500) to DOL

• summary annual report to plan participant

• any terminal report to DOL