The Underwriting Process
Underwriting is the process by which an insurance company evaluates the risk of insuring an applicant and determines whether to issue coverage, and at what premium. Understanding underwriting is essential for both exam success and professional practice.
Purpose of Underwriting
The primary purpose of underwriting is to select and classify risks fairly and accurately. Underwriters protect the insurance company from adverse selection—the tendency of higher-risk individuals to seek more coverage—while ensuring fair premiums for all policyholders.
Key Underwriting Objectives
| Objective | Description |
|---|---|
| Risk assessment | Evaluate the likelihood of the insured dying during the policy term |
| Risk classification | Assign applicants to appropriate risk categories |
| Premium determination | Set premiums that accurately reflect the risk |
| Adverse selection prevention | Prevent high-risk individuals from obtaining coverage at standard rates |
| Profitability protection | Ensure the insurer can pay claims while remaining solvent |
Risk Classification Categories
Underwriters classify applicants into risk categories based on their mortality risk relative to the general population.
Standard Risk Classifications
| Classification | Description | Premium Level |
|---|---|---|
| Preferred Plus/Super Preferred | Excellent health, ideal height/weight, clean family history, no tobacco | Lowest premiums |
| Preferred | Very good health, minor health conditions allowed | Below average premiums |
| Standard Plus | Good health, minor deviations from ideal | Slightly below average |
| Standard | Average health and mortality risk | Average premiums |
| Substandard (Rated) | Higher than average mortality risk | Higher premiums (table-rated) |
| Declined | Risk too high to insure | No coverage offered |
Tobacco Use Classifications
Tobacco use significantly affects risk classification:
| Classification | Description |
|---|---|
| Preferred Tobacco | Would qualify for Preferred/Preferred Plus without tobacco use |
| Standard Tobacco | Would qualify for Standard/Standard Plus without tobacco use |
Exam Tip: Smokers typically pay 2-3 times more in premiums than non-smokers for the same coverage.
Factors Evaluated in Underwriting
Underwriters assess multiple factors to determine an applicant's mortality risk.
Medical Factors
| Factor | Considerations |
|---|---|
| Current health | Existing conditions, recent illnesses, hospitalizations |
| Medical history | Chronic diseases, surgeries, ongoing treatments |
| Height and weight | Build tables compare to ideal ranges |
| Blood pressure | Current readings and history |
| Cholesterol levels | Total cholesterol, HDL, LDL ratios |
| Blood tests | Glucose, liver function, HIV, nicotine, drug screening |
Lifestyle Factors
| Factor | Impact |
|---|---|
| Tobacco use | Cigarettes, cigars, vaping, chewing tobacco all increase risk |
| Alcohol use | Excessive consumption increases mortality risk |
| Drug use | Recreational drug use may result in decline |
| Hazardous hobbies | Skydiving, rock climbing, racing, scuba diving |
| Foreign travel | Travel to dangerous regions may require exclusions |
Personal and Demographic Factors
| Factor | Consideration |
|---|---|
| Age | Primary factor—older applicants have higher mortality risk |
| Gender | Women generally have longer life expectancy (where legally used) |
| Occupation | Hazardous occupations (firefighting, deep-sea fishing, mining) increase risk |
| Driving record | DUIs, accidents, and violations indicate risk-taking behavior |
| Family medical history | Early deaths from hereditary conditions affect classification |
| Criminal history | Felony convictions may result in decline |
The Rating Process
When an applicant cannot qualify for standard rates, underwriters may offer coverage at higher premiums.
Table Rating (Substandard)
Table rating adds a percentage to the standard premium based on the degree of extra risk:
| Table Rating | Premium Increase |
|---|---|
| Table A (1) | Standard + 25% |
| Table B (2) | Standard + 50% |
| Table C (3) | Standard + 75% |
| Table D (4) | Standard + 100% |
| Table E (5) | Standard + 125% |
Higher table ratings (through Table H or beyond) are used for greater risks.
Flat Extra Premium
A flat extra is an additional dollar amount added to the premium, often for temporary risks:
- Example: $2.50 per $1,000 of coverage for a hazardous hobby
- May be temporary (2-5 years) or permanent
Policy Modifications
Instead of or in addition to rating:
- Exclusion riders: Exclude specific conditions from coverage
- Modified benefits: Reduced death benefit for certain causes
- Waiting periods: Graded benefit period before full coverage
Key Takeaways
- Underwriting protects insurers from adverse selection while ensuring fair premiums
- Risk classifications range from Preferred Plus (lowest premiums) to Substandard (rated premiums) to Declined
- Key factors include age, health, tobacco use, occupation, and lifestyle
- Table rating increases premiums by percentage increments for higher-risk applicants
- Flat extras add specific dollar amounts for temporary or specific risks
- Underwriters may use exclusion riders to cover applicants with specific health conditions
The primary purpose of underwriting is to:
An applicant classified as "Table B" (substandard) would pay premiums that are:
Which of the following would most likely result in the LOWEST life insurance premium?
A flat extra premium is typically used for:
12.2 Sources of Underwriting Information
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