Underwriting in LIC

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UNDERWRITING

CHAPTER 5


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Underwriting :-U :- Understanding

N :- Necessary

D :- Details

&

E :- Evolving

R:- RationalW :- Weightage

of

R:- Risk

&

I :- ImportantT :- Truths

I :- Influencing

N :- Normal

G :- Grade


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What is Underwriting?

The assessment or verifying thelevel of risk is calledselectionor

underwriting.


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What is the need for

underwr it ing ?

Underwriting is needed to assess the risk & to

decide whether risk is acceptable at Standard

rate or with extra premium or with somerestrictions or to decline the risk.

Once the nature of insured lives is decided

premiums will be charged accordingly.


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What w i ll happen i f the r isk is

w rongly assessed?

Premiums will be charged either less ormore

A lower premium affects the solvency of

the fund & cost of additional risk haveto be borne by the rest of thepolicyholders.

i.e.If lower premium is charged, Insurers

claim experience will not be as anticipated &it will have adverse effect on Insurers fundsto meet the additional claims & profits.


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Terms of accep tance

If there are no additional risk factors(adverse features) affecting mortality thenthe proposal would be accepted atOrdinary Rate(O.R.)orStandardRates.

If there are additional risk factors (adversefeatures) proposal will be accepted withsuitable extra premium/restrictions

(modified terms)ordeclined.


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Classification of Risks

Hazards These are the factors whichaffect the risk. They are as follows.


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Phys ical Hazards1)AgePremiums 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 toperson of 50 years age.

Overweight at advanced age & underweight at young age needcareful assessment.

eg. Proposer aged 20 years & underweight will be at higherrisk of death due to Tuberculosis or Asthma compared toproposer aged 40 years & underweight.

eg. If proposer is 50 years old, overweight & having cardiacproblem then risk is more than person who has cardiac

problem but not overweight.


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Contd.

Certain risk increase with age & certain risk decrease with

age.

eg. Risk on the life of an underweight person at younger age is

of decreasing type.

2) SexMortality 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.


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Contd.

3) BuildIt reflects the health of the proponent.

eg. If a proposer is underweight then chances ofTuberculosis

is high & if a proposer is overweight then chances of

Hypertensionor Heart problemis high.

4) Physical conditionMedical 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 Strokeor Heartattack.

eg. High Pulserate suggests the tendencies towards heartproblem.


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Contd.

5)Physical impairments

These are the hazards which affect the mortality (probability) ofthe death.

eg. If proposer is Blind, Deaf, Paralysed or having poliomyelitisthen he is prone to accident.

6)Personal history

Gives the information about health & life style of person.

eg. If proposer is a habitual smokerthen the chances of hissuffering from Lung disease are higher compared to

non-smoker.

eg. Similar is the case with an alcoholicwhose chances ofsuffering from Kidney&Liver problems are more.

C td


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Contd.

7)Family HistoryReveals the hereditary diseases like diabetes &

cardiac illnesses.

eg.If proposers parents had Diabetesthen hischances of suffering from Diabetes are

greater.


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Occupational HazardIt arises out of ones occupation.

eg. 1)Flight duties on aircraft.

2) Working at heights.3) Working with high speed machine.

Proponents involved in above jobs are prone toaccident.

Nature & place of job have effects on the worker.eg. 1) Inhalation of dangerous fumes. Therefore people

working in chemical factories are likely victims ofvarious respiratory diseases such as Tuberculosis or

Asthma.2) people working with high voltage electricity areprone to electrocution & burns.3) People working in mine industries

Suitableextra remiumsare char ed.


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MORAL HAZARD

It refers to the intentionsof 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 extrapremium will be appropriate & the proposal has to be

declined.


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Examples o f moral hazard

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 anotherwithout insurable interest.

5) Nomination in favour of a stranger.

6) Medical examination at place other than residence oroffice place.


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FINANCIAL UNDERWRITING

Assessment of proposers financial standing.

It is necessary to check whether income issufficient to support the insurance.

The source of income, age & amount of

insurance plays a vital role.


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Contd.

We calculate the allowable insurance after multiplyingthe average of last three financial years income by age

related factors.

Age group of theProponent

Cover as a multiple ofAverage of 3 years

Annual IncomeAge up to 30 years 22 times

Age up to 40 years 17 times

Age up to 50 years 12timesAge 51 years &above

10 times


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DATa OF UNDERWRITING

1)Proposal form provides the information aboutproposer, his health, habits, personal history &family history & income.

2) Medical Report It provides the informationabout the proposers physical condition.

3)Agents confidential report &Moral Hazardreport

4) In case of large Sum Assured, special reports&Special Moral Hazard Reportcontaininginformation about life style, Social status, health,habits, occupation & income from senior

officials are called for.


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Contd.

Depending on the sum proposed the proposal will be

underwritten at different levels as follows. ( Standard Life)

Sum proposed Level

Up to 10 lacs Branch office

Up to 25 lacs Divisional office

Up to 60 lacs Zonal office

Above 60 lacs Central office


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ASSESSMENT OF RISK

For assessing the risk underwriter has to avail ofassistance of doctor called medical referees.

Medical referees have specialised knowledge about the

effect of various impairments & diseases onmortality.

In case of large Sum Assured, proposal is referred tothe reinsurer.

The assessment of risk is a matter of individualjudgement. However the underwriter has to followNumerical Rating System.


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Numerical Rating System

Standards are laid down for each factors such asheight, weight, pulse etc.

Variations are given values.

Values are then grouped & tabulated showing the extramortality.

Depending on the extra mortality extra premium ischarged.

Variation up to 20% - Standard or First Class

20% to 35% - Class I

40% to 60% - Class II & so on.


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Types of Decision

Acceptance at Ordinary Rates or Standard Rates

Standard life & tabular rates of premium.

eg. Proposer has no adverse features & hence proposal

is accepted at standard rates.

Acceptance with Extra

Substandard life & the premium is increased by the

amount of extra

eg.If proposer is having Diabetes then depending on the

values of fasting blood sugar & post lunch blood sugar

suitable extra premium is charged.


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Contd.

Acceptance with Modified TermsLife 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 covereg. JeevanSuraksha

eg. If proposer has deformity due to disease & two limbsare

affected. Then Risk plans are not allowed. Simple

Endowment plan can be offered with some restriction

according with the nature of deformity.


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Contd.

Acceptance with Clause

Here clause is imposed to restrict the risk cover if death occursdue 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 30clause 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 policyhas

commence before the expiry of 3 years from the date ofthis

policy, then only premiums will be refunded.

Contd


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Contd.

Postpone

Proposal is not be accepted at present but can bereconsidered 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 thenproposal will be postpone until 3 months from date of deliveryif menstruation has started.

Decline

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.


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Non-Medical Underwriting

Why insurance is allowed under Non Medical?

Even after medical examination more than 90% proposals are acceptedat Ordinary Rates

Unavailability of Qualified doctors.

The insurer will save on medical fees & devise some standard format ofProposal Form which will elicit major information relating to his

Income, Personal & FamilyHistory, Health & Habits which willhelp the underwriter to assess the risk & safeguard from adverseselection.


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Non Medical General

Classes of Lives Age Maximum SumAssured

Professionals such asDoctors, Lawyers,

Teachers etc.

Up to 45 years Rs. 6 lacs

46 50 years Rs. 3 lacs

Major males & literatefemales with ownincome

Up to 40 years Rs. 2 lacs

40 - 45 years Rs.1 lacs

46-50 years Rs. 40000

Self employed Women(category III)

40 years Rs. 1 lacs

on e ca pec a


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on e ca pec a

Classes of Lives Age Max. Sum

AssuredLiterate major males &SSC passed femalesworking in Government,

Quasi Government,Industrial undertakingetc. with length ofservice 1 year

up to45

years

Rs. 8 lacs

46 50years

Rs. 2 lacs

Commissioned officer inarmed forces not belowmedical category A-I &length of service ofatleast 1 year

Up to45

years

Rs. 10 lacs

46 50

years

Rs. 4 lacs

S h


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Scheme

Applicable to undertakings operating forminimum period of 3 years.

Average turn over of Rs. 50 crore.

Submission of leave record for the last 3 years isnecessary.

Maximum Sum under consideration is Rs. 10lacs.

Scheme is applicable to LIC employees also.


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Why High Sum Assured fo r NMS?

Employment in reputed organisation.

eg. Bank, LIC, GIC etc.

Leave records are maintained.

Medical check up at entry.


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INSURANCE ON FEMALE LIVES

Female categoryIWorking & educated females.Professionals such as Doctors, Lawyers, C.As etc.Treated on par with males i.e no limit on insurance.

Female categoryIIIncome through businessUnearned income attracting Income tax.

eg. Income from House property, Share, Bonds etc.Maximum insurance allowed is Rs. 1 crore.

Contd.


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Female CategoryIII

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 areadequately insured.

Women observing pardah are notconsidered.

U d iti b A t


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Underwriting by Agent

Agents are called primary underwriter because they are indirect contact with the proposer.

Agent must disclose all facts which are material to the risk& see to it that the proposer also discloses all materialfacts.

Agents confidential report is the first Moral Hazard Reportwhich safeguard insurer from Moral Hazard.

Underwriter will use the data from Agents report &

Proposal form.Agent owes the responsibility to the insurer & the insured.


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Recent TrendsAdvances 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 arenow insurable.

eg. Proponent with Cardiac diseases such as Bypass operationetc.

Underwriters find that most of the proposers have the habits ofdrinking & smoking.Insurers charge extra premium for drinking& smoking


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Always remember that - - - - - - - -

The contract of Insurance is basedon Uberrima Fides i. e. the principle ofUtmost GoodFaith whereby proposer isrequired to disclose all the information infull in the proposal form for properassessment.

ance


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ance

contd


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U/W ;- Underwriting

P.F.Q. :- Personal Financial QuestionnaireI.T.R. :- Income Tax ReturnO.R. :- Ordinary RatesPhy. :- Physical

Cond. :- ConditionN.M.G. :- Non Medical GeneralN.M.S. :- Non Medical SpecialN.M. Exp. :- Non Medical ExpressP.F. :- Proposal FormA.C.R. :-Agents Confidential ReportF.M.R. :- Full Medical ReportSpl. Reports :- Special Reports


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Underwriting in LIC

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