Chapter Eight

Underwriting

 

 

Why Underwriting Is Important to You

 

As you know, the underwriting function is primarily the responsibility of the insurance company home office underwriting department. However, agents also perform preliminary underwriting tasks that are commonly known as field underwriting.  In the first part of this chapter, we'll discuss the vital role agents fulfill through careful and complete field underwriting techniques. After that, we will look at home office underwriting, including techniques and tools plus the critical underwriting factors that result in a decision about issuing the disability income policy. We'll conclude with a review of the concepts underlying group insurance underwriting.

 

The quality of field underwriting you perform before submitting an application sets the stage for what occurs at the home office level. Underwriters rely heavily on agents to screen out obviously unacceptable applicants, to provide the insurer with complete and accurate information, and to assist in obtaining additional data when needed to complete the underwriting process. Your advance underwriting, coupled with the quality of information available to the home office underwriter, is the key to underwriting approval and, ultimately, the completion of your sales effort.

 

Field Underwriting

 

Pre-Qualifying the Applicant

 

As an experienced agent, you have certainly learned the importance of pre-qualifying applicants for any type of insurance. You know that prospects must display certain characteristics that suggest they are good candidates for the insurance policy you are offering. The fundamentals of pre -qualifying applicants for disability income insurance are essentially the same as for life insurance policies, with slightly more emphasis on certain characteristics as explained in the following paragraphs.

 

Remember first of all the markets we've emphasized throughout this text. Professionals and other high­ income earners and businesses comprise a large pool of prospects for disability policies paying high monthly benefits. This pool represents prospects with the ability to pay premiums and the potential for additional related insurance sales. From an underwriting standpoint, individuals such as these are among the highest quality and lowest risk of all

 

 

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prospect groups. In general, you can count on the greatest number of home office approvals for applicants from these markets.

 

You'll find the greatest numbers of potential applicants by extending your prospecting efforts to include upper middle-income earners as well. Income alone, however, does not adequately qualify good prospects for disability income insurance, so you must also identify, to the best of your ability, characteristics such as:

 

*Type of work-actual duties, degree of physical hazard, nonseasonal, full time.

 

*Job stability-number of years in the same line of work, number of different

  employers, stability of current employer's business.

 

*Financial condition-estimated income level and insurable income, apparent ability   to pay premiums, perceived standard of living.

 

*Lifestyle-hobbies, avocations, recreational interests, friends and associates.

 

*Physical or medical conditions-absence of obvious problems that increase the

  chances of future disability.

 

Early in your prospecting efforts, some types of information are readily apparent, while other information requires more inquiry on your part. Until a prospect actually agrees to hear your sales presentation and/or apply for insurance coverage, he or she may be reluctant to divulge a great deal of personal or financial information. Many facts become available to you only when you are actually completing the application as discussed in the next section.

 

The Application for Insurance

 

After you pre-qualify a prospect, your complete and accurate completion of the application for insurance is the most significant contribution you can make to the underwriting process. For this reason, you should be fully aware of the information requested on the application by having studied it carefully before the sales interview. And, while different insurers require the same general types of data, you should also know the differences between various insurers applications. Most importantly, fill out the application completely and accurately. Every question has a purpose: otherwise it would not appear on the application. And to be certain every item is complete and accurate, read carefully to determine the amount of detail the insurer requires, then provide that depth of detail.

 

 

 

 

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General Information

 

Applications always ask for certain general information that includes name, home address, and number of years at the residence, Social Security number, age, sex, weight and height. This type of data, of course, helps identify the applicant and it also provides some preliminary information about insurability as well as identifying areas that need further investigation. These act as clues that can help focus the underwriter's evaluation.

 

For example, incongruent weight and height might indicate a health problem that increases the risk of disability or the potential for disability to occur. Or, if the applicant's age indicates he or she might be approaching retirement, the applicant may be ineligible for coverage or require a modified policy. Even the applicant's history of changing residences can raise a flag about stability as a factor that needs further investigation. Experienced underwriters are able to use general information in the context of other data about an applicant to decide which areas require additional underwriting attention.

 

Occupation Information

 

For disability income insurance underwriting, perhaps the most significant single item on the application concerns the applicant's occupation. Earlier in the text, we've referred to the occupational classes as being more or less risky and to the "best classes being eligible for the most liberal DI policies. The occupational classification, then, ultimately determines:

 

1.      Whether the policy will 'be issued and, if so.

 

2.      At what price.

 

As the agent, you must be able to quote a premium for the policy at the point of sale, which means you have to determine the occupational class. Insurance companies provide guides or schedules with detailed job descriptions to help agents and underwriters determine the correct occupational class. You must be familiar enough with these guidelines to complete the application and quote an estimated premium. Additionally, you should know the guidelines well enough to terminate a sales interview if you discover the individual's occupation makes him or her ineligible for coverage.

     best rates           slightly higher     restricted, slightly   Benefits more    Most limited

                                                                         benefits,

                                                                       highest rates

*with some exceptions, personal services are the primary source of income.

+Occupations may be divided into two classes, e.g.. Class 5 and Class 6;

certain occupations listed may be uninsurable with some insurers.

 

indicate occupations that are uninsurable by that particular insurance company. Some of these include certain jobs listed under Class 5 above. A few occupations are considered uninsurable by the majority of DI insurers. These include extremely hazardous jobs in which the likelihood of accidental injury is great, such as mining and high-rise construction and possibly firefighters and police.

 

You also need to know how the insurers you do business with handle hazardous hobbies or leisure activities, such as sky diving, scuba diving, amateur auto racing, parachuting and similar activities. For example, a highly compensated executive in a job with no apparent physical hazards typically qualifies for the best classification. However, if this individual is licensed to pilot the small plane he owns, the insurer takes that activity into consideration as well.

 

Additionally, recent changes in U.S. society have resulted in some increase in hazards-particularly physical violence-for the medical and legal professions especially. Exactly how these hazards will affect occupational classifications for DI insurance is not yet clear, but you will want to watch how events unfold and be aware of any changes insurers make in response.

 

Importance of Classification

 

We cannot overemphasize the importance of your determining the correct classification to the best of your ability when you are completing the application. Because disability income insurance underwriting is generally more exacting than underwriting any other type of insurance, a misclassification isn't likely to go unnoticed. Reclassifying an occupation at the home office level can result in the applicant's job being classified as more risky, which in turn means the DI policy will cost more and possibly provide less liberal benefits than requested on the application. This situation can place you in the position of reselling the DI policy with more restrictive benefits at a higher premium to an applicant who is less willing to purchase the policy on that basis.

 

Having classified the risk and gathered all of the necessary information described earlier in this chapter, the underwriter is now prepared to evaluate the risk and decide whether to issue the disability income insurance policy and, if so, on what basis.

 

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The Underwriting Decision

 

Compared to life insurance, the underwriting of disability income insurance results in a relatively high number of rejected applications and substandard ratings that require premium or benefit adjustments or other changes in the way the policy is written. Two factors are largely responsible for stringent underwriting in the DI area:

 

1.      Many medical and health conditions are more likely to contribute to disability rather than to death.

1. The nature of the applicant's occupation bears a closer relationship to the risk of loss from disability than to loss of life.

 

Figure 8-1 illustrates the contrasts between DI and life insurance in the percentages of uninsurable applicants and policies issued with adjustments because of a substandard rating.

 

As illustrated, statistics indicate that from 5% to 10% of applicants for disability income insurance are judged uninsurable, compared to 3% or less of life insurance applicants. As for adjusting policy provisions for substandard conditions, 15% to 20% of DI policies require such adjustments. Only 5% to 8% of life insurance policies require additional premium or some other modification.

 

The final underwriting decision takes one of three basic forms:

 

1.      Issue the policy as a standard risk that meets the insurer’s underwriting guidelines.

2.      Decline to write the policy because the risk is uninsurable according to the insurer's guidelines.

3.      Issue the policy as a substandard risk requiring one or more significant adjustments in order to make the risk acceptable according to the insurer's guidelines.

Figure 8-1

DI vs. Life Insurance Underwriting

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Standard Risks

 

Most disability income insurance policies are issued on a standard basis, which means the insured is believed to have an average risk of becoming disabled. Individuals who are classified as standard risks pay the standard rates established for people with similar characteristics and occupational classifications. Standard rates are those the insurer established and filed for a particular classification when the DI policy was developed.

 

Classifying a risk as standard, however, doesn't necessarily mean the policy is issued exactly as requested. Adjustments can result from inadvertent errors in classifying the occupation or from information gathered during the underwriting process. For example, if the applicant's occupational class is changed, the premium might be higher than originally estimated because the standard rate for the different class is higher. Or perhaps the relationship of earnings to insurance requires that the monthly benefit be slightly lower than requested. The risk is still standard, as are the rates, but the benefit cannot be as high as the applicant desired. Adjustments such as these do not mean the risk is substandard. Rather, the risk is standard from the insurer's point of view, but on a somewhat different basis than anticipated when the application was completed.

 

Uninsurable Risks

 

Some applicants pose more risk than the insurance company is willing to assume, so the underwriting decision is to decline to write the policy. From the insurer's viewpoint, these are uninsurable risks. We mentioned previously that certain extremely hazardous occupations are uninsurable and what these are specifically differs from insurer to insurer. Other factors that can result in rating an applicant as uninsurable are the insureds medical and financial conditions and dangerous hobbies or leisure activities. Sometimes it is a combination of factors, rather than a single thing, that results in the decision to reject the application. However, while more DI policies are declined than are life insurance policies the number of rejections is still a small proportion of all applications for disability income insurance.

 

Substandard Risks

 

An individual is rated as a substandard risk when one or more of the elements that are given considerable weight in the underwriting process pose a problem that the insurer must resolve before accepting the risk. In a case such as this, the insurer decides that, while the risk is insurable, certain alterations in the terms of the policy must occur before the policy will be issued. The following paragraphs address various adjustments that insurers commonly make in order to issue the DI policy on a substandard basis.

 

 

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Increase the Premium

 

One method to make the risk more acceptable to the insurer is to increase the premium while retaining all the benefits and provisions originally requested. This is an adjustment you can present in a most positive light to the applicant. Certainly no one is thrilled to hear something costs more than anticipated, but you can emphasize that the desired benefits remain intact-the monthly benefit, the benefit period, the elimination period and all other features are still available. Additionally, the insurers will review and consider adjusting the premium in the future if their actual experience is good.

 

The extent to which a premium might be increased varies by insurer and according to the particular factor that influenced the increase. Typical increases range from 10% to 50% of the standard premium.

 

Add an Exclusion Rider

 

Adding an exclusion rider is another means used to write a substandard policy that is acceptable to the insurance company. An exclusion rider specifies a particular condition or situation that will not be covered as a cause of disability. The condition might be related to the individual's health or physical condition. For example, if an insured has a history of back problems associated with a herniated disk that prevented working in the past, the rider would stipulate that coverage does not apply when disability results from anything related to the herniated disk. You might be interested to know that back problems are among the most common reasons for adding an exclusion rider to a DI policy.

 

An individual's leisure activities might be another source of concern that could be handled with an exclusion rider. Earlier we mentioned an executive who is also a licensed pilot and flies his own small airplane. In order to retain the highest classification and best insurance rates for which this executive would otherwise be eligible, the insurer can exclude disability resulting from any incident associated with his aviation activities.

 

Insurers also deal with certain conditions, especially those of a medical nature, by means of a more limited exclusion rider. One way this might work is to defer paying benefits for the specified condition during the first 90 days of disability. Then, if the insured is still disabled after 90 days, benefits are payable for the full benefit period. Alternatively, the insurer might limit not only the first days of coverage, but also the length of the benefit period for that condition. For example, if the benefit period for all other disabilities under the policy is to age 65, the insurer might limit the benefit period for disability associated with the particular condition to three years.

 

Riders stipulating full or limited exclusions differ according to the insurer's rules, the specific

 

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condition or situation involved, and the insureds history. After you gain some experience with an insurer, you will be able to describe to your clients the potential exclusions and how they might work. In the meantime, be tuned in to any potentially hazardous situations or conditions that might raise a red flag with underwriters. The best time to alert applicants to the possibility of underwriting adjustments is when you're completing the application. It is far better to return to an applicant and say that the condition caused no changes or minimal changes than to return with a surprise exclusion or reduction in benefits.

 

Other Modifications

 

Finally, Insurers have the option to make other modifications to policy provisions in order to issue the DI policy on a substandard basis. While the possibilities are many and varied, the most common adjustments include:

 

            *Shortening the benefit period.

            *Extending the elimination period.

            *Reducing the amount of the monthly benefit.

 

Modifications may be applied Individually or in some combination, depending on the actual circumstances. The primary advantage of this type of adjustment is avoiding a premium increase or making an absolute exclusion for a medical condition or other situation. As an example, suppose an insured has a history of short-term debilitating migraine headaches. Rather than completely excluding coverage for disability associated with migraine headaches, the insurer could specify a longer elimination period for this condition, whereas the elimination period for other conditions is shorter.

 

Insurers often use various combinations of the three major ways to handle substandard risks described above in order to issue the DI policy on some basis rather than rejecting the application completely. From the applicant's viewpoint, adjustments are preferable to the only other alternative-not issuing the DI policy in any form. The stringency of DI underwriting can understandably be a source of frustration for agents, but most underwriters make every effort to find a creative solution to underwriting problems. It is important for you to cooperate with underwriters to find solutions and to present the positive aspects of policy modifications to your clients.

 

Group Underwriting

 

Some of the basic principles of group disability income insurance underwriting were presented in Chapter Six. These dealt with group eligibility, the savings associated with large numbers of insureds that result in lower costs, the absence of significant medical and financial underwriting and similar principles. If you need to review any of these underwriting

 

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considerations, please see Chapter Six. In the remainder of this chapter, we will look at other factors of concern in group underwriting.

 

The Group Sponsor

 

In deciding whether to provide disability Income insurance for a specific group, underwriters must evaluate the group sponsor, which is often a business. The underwriter investigates the company's financial stability, its standing in the marketplace, the stability of its product or service, the presence of any hazardous occupations, the company's management practices, size and geographic location. Some indications of good group sponsors include:

 

            *Good reputation in the marketplace and in the community.

            *A history of successful operations.

            *Demonstrated flexibility to adjust to change.

            *Products or services that fill stable needs or demands.

            *Not unduly affected by economic conditions.

            *Physically located in an economically stable area.

 

Poor indicators include:

 

            *Short and/or poor business history

            *An industry subject to financial peaks and valleys.

            *Inherently hazardous occupations.

*Questionable need for products or services offered.

            *Physically located in an economically depressed area.

 

These are just a few examples. As is always true of the underwriting process, the underwriter looks at the group sponsor's characteristics in the context of every other underwriting consideration.

 

History of the Group

 

Underwriters also look at the insurance history of the group itself, primarily in terms of claim experience and employee turnover. A history of high and/or frequent claims doesn't necessarily mean the trend will continue, but such a history requires the underwriter to look for causes. For example, if the claims experience results from the particular type of business operations, the trend probably will continue. However, if the claims were due to unusual circumstances that aren't likely to be repeated, that's another matter. As an example, suppose two highly compensated executives who were members of the group were badly injured when they were traveling together in a commercial airplane that crashed. Both suffered long-term disabilities that resulted in high monthly benefit payments for extended periods. The

 

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likelihood of such an event recurring is slight. 

 

High employee turnover can also be a concern because the insurance company incurs administrative costs when employees are hired and added to the plan and when they are terminated from the plan. Some turnover, of course, is desirable to avoid an ever-aging group that is more likely to become disabled as the years pass.

 

The group's history with other insurers is also important. Under­writers need to discover whether the group has been canceled and, if so, why. If the group sponsor frequently cancels one plan and initiates a new plan with a different insurer, the underwriter also must wonder why. A group that is constantly price shopping, for example, can cost the insurer significant administrative expense. In addition, insurers must be aware of the significance of pre-existing condition provisions that have been fulfilled in previous DI insurance plans in order to weigh its risk in underwriting a group where that provision cannot be enforced.

 

Establishing the Plan

 

Underwriters are also concerned with and must be consulted about the details of establishing a new group DI plan, including:

 

*Approving the plan's provisions: What are the basic provisions? What optional

  provisions are Included-presumptive benefits? Rehabilitation benefits? Survivor   benefits? Other provisions?

 

*Terms under which the plan will be installed: What is the minimum number of

  participants? What are the group sponsor's responsibilities? The insurer's

  responsibilities?

 

*Determining individual eligibility: What employees will be covered? How long   must they be employed?

 

*Establishing the benefit amounts and benefit periods: Is there a formula for

  differentiating between income levels? Does a flat percentage apply across all

  income levels? Are all income levels eligible for the same benefit period? Do

  all   provisions comply with federal nondiscrimination requirements?

 

*Deciding who will pay the premiums: Does the employee pay all or part of the   premium? Do the employees and the sponsor understand the tax consequences?

 

*Establishing a method to collect premiums when participants contribute: Will   the existing payroll deduction system be used? If not, what system will be

 

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  established? Does the sponsor understand its responsibilities to collect and remit   premiums?

 

*Developing administrative guidelines: Who will explain the plan to employees?   Who will enroll participants and how? Who will assist with claims filing and

  answer participant questions? Who will maintain plan records and perform other   administrative responsibilities?

 

All of these are issues with which the underwriter must be involved since covering a group obligates the insurance company to a number of services not associated with individual plans. The underwriter must be convinced that all of the details can be handled by both the group sponsor and the insurance company before the group plan will be profitable and, therefore, an acceptable risk for the insurer.

 

Whether installing a group plan or proposing an individual disability income policy, the agent is always the front-line person in the initial underwriting process. Now that you've read in some depth about the underwriting concerns and responsibilities associated with disability income insurance, you're in a better position to do an outstanding job of pre-qualifying all of the applicants you ask your insurers to consider.

 

 

 

 

 

Chapter 8 Review Questions

 

1.         The text suggests that you begin your pre-qualifying efforts by prospecting among (professionals/high -income earners/businesses/all of the preceding).

 

 

 

 

2.         For DI insurance, the key piece of information for deciding whether a policy will be issued and at what cost is the applicant's (medical history/financial status/occupation).

 

 

 

 

 

 

 

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3.         From the job descriptions below, select the one that best illustrates the type of information you should provide on an application for DI insurance.

 

a.      President and sole proprietor of A&M Construction Company

b.      President and sole proprietor of A&M Construction Company; master carpenter skilled in all aspects of carpentry for residential renovations and additions; work performed by applicant and one employee; no electrical, mechanical or plumbing work.

 

 

 

4.         An applicant is age 35 and apparently healthy. What type of medical data is probably required? (medical history on the application/medical examination/both the medical history and the medical exam)

 

 

 

 

5.         When the underwriter wants information from an applicant's doctor about a specific medical condition for which the doctor treated the applicant, the underwriter requests which of these? (Attending Physician Statement/medical examination by a physician of the insurer's choice/MIB report)

 

 

 

 

6.         What is the name of the specific service that provides insurers with records of applications for disability income insurance during the past five years? (MIB/DIRS/APS)

 

 

 

7.         Based on information in the text concerning occupational classifications, which of the following is likely to be classified as a better risk, eligible for more liberal benefits? (electrician/school teacher/physical therapist)

 

 

 

8.         Typically considered among the best occupational risks are people whose source of income is (personal professional services/educational professions/retail occupations).

 

 

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9.         According to the text, declined or rated applications are more likely to occur in what field? (disability income insurance/life insurance/neither; they're about equally likely to be declined or rated)

 

 

10.       Most DI policies are issued as (standard/substandard) risks.

 

 

 

11.       Which of the following methods might an underwriter use to write a DI policy that would otherwise be declined?

 

a.      Retain all provisions as requested, but increase the premium.

b.      Reduce the benefit period, but retain other provisions as requested.

c.      Exclude a particular condition from coverage, retaining other provisions as requested.

1. All of the above

 

 

 

12.       Group underwriting requires the underwriter to look at the history of (the group sponsor/the particular group/both the sponsor and the particular group)

 

 

 

Answers

• all of the preceding
• occupation
• b is correct
• both the medical history and the medical exam
• attending Physician Statement
• DIRS – Disability Income Record System, white is maintained by the Medical Information Bureau (MIB)
• school teacher
• personal professional services
• disability income insurance
• standard
• d is correct
• both the sponsor and the particular group