The underwriter's role requires a range of skills including a good knowledge of medical disorders and other issues which affect the chances of people dying or being disabled.
In simple terms, the underwriter's job is to decide whether any risk presented to them is acceptable to the insurer they work for. Each application form received by the insurer represents a risk. The process of dec-iding whether a risk is acceptable is called risk selection.
This process is not as black and white as its sounds. Rather than answering with a simple yes or no, underwriters must decide on standard and substandard categories of risk as well as those where cover cannot be granted. The job is then to assign each application form to a class of risk in a process known as risk classification.
These classes of risk are decided by those setting underwriting philosophy within the insurer, including the chief underwriter, the actuaries and chief medical officers. Studies of mortality (concerning death) and morbidity (concerning disability) will be consulted in making their decisions. Premiums are then determined for each class of risk.
The risk selection process starts when the prospective client completes the application form. This is the basis of the contract and the answers to the questions on the application form will determine whether the risk is acceptable.
In simple terms, the fundamental risks which impact on mortality and morbidity are age, sex and smoking habits. As a group, females live longer than males and non-smokers live longer than smokers.
After classification by age, sex and smoking habits, the next step is to decide which risks should fall into non-standard categories, thus attracting non-standard or rated-up premiums. By far the most common factor in classifying non-standard risks is the prospective client's state of health. Medical impairments account for the vast majority of ratings (where a client is accepted for cover at a higher premium than standard risk) and declinatures (where cover is declined) in life and disability underwriting.
The ratings applied for different medical disorders are usually developed from a variety of sources including the company's own experience, inter-company studies, medical literature and current clinical opinion on death and disability in light of developments in medical treatment and surgical procedures.
In addition to information presented on the application form about medical history and present health, companies may use physical measurements including height, weight and blood pressure. A urine analysis is a common test.
Tests are more frequently used where there is a high level of sum assured in order to ascertain whether an individual who currently has no obvious symptoms of a medical disorder has a potential issue that they need to address. For this type of prospective client, blood tests are routinely conducted to assess liver and kidney function, among other things, as well as tests for cholesterol. Electrocardiograms conducted both at rest and exercise to test for heart disease can also be requested.
It is important to note that most proposals are accepted using the information included on the application form alone. If an underwriter requires clarification of an answer, they can write to the client or the client's GP. When completing an application form, the IFA and client should never assume that the insurer will automatically contact the GP.
Where a medical history has been disclosed, the insurer may request a medical examination with or without medical tests. However, this will very much depend on the impairment and other information which the underwriter can obtain. Asking for a medical examination is much more common when the client is requesting a policy with the potential of a high claim value.
Although past and current state of health is by far the most common reason for an increased premium rate, there are other risk factors which can increase the overall risk classification of an individual.
Occupation is a major risk factor in disability underwriting, where payouts are directly linked to the individual's ability to carry out their own occupation. The more manual or specialised the occupation, the higher the risk. The combination of occupation and past and present medical history can be the difference between a rated premium and a declined risk. This is particularly important in the underwriting of income protection and the total and permanent disability and waiver of premium elements of critical illness or life-only products. Nevertheless, there are occupations which attract loadings for life-only contracts including deep-sea divers, tower crane operators and some occupations associated with offshore drilling.
Those who participate in hazardous sports may also be classified as having additional risk. These can extend both to professionals and amateurs. Mountaineering, scuba diving at depth, private flying and hang-gliding may all attract premium loadings.
People who are residing in or travelling to areas of war or civil unrest may be subject to a premium loading or, indeed, declinature is some circumstances. Extensive travel to underdeveloped countries may also result in an additional loading.
Although it is something not generally considered by those outside the technical areas of insurance companies, a very important feature of the underwriting process is that the underwriter checks for the presence of insurable interest. This ensures that the person who stands to benefit from the policy sum assured has a real interest in the continuing survival or ability to work of the life assured. Its presence at the policy outset is core to the contract and is key to ensuring that fraud or overt selection against the company does not take place.
The overall objective of risk classification is to protect the insurer and control its mortality and morbidity experience by segmenting the risks with which it is presented into the correct categories, thus ensuring the correct premium is paid in relation to the risk which each individual brings to the insurance pool.
As a result of selection, the risks placed in the standard category have a much lower mortality and morbidity rate than the average of the general population at any given age.
The lack of appreciation of the impact of selection is one of the biggest areas of contention with the insurance-buying public and the majority of the medical fraternity.