What is Selection of Risk or Underwriting the risk?
Every life insurance company is liable to assess the risk it wishes to accept and on that basis fix a fair and equitable premium payable by the applicant. This is possible only if the company carefully selects and classified the risks it assumes. The process through which a life insurer decides whether an application (or proposal) received by it can be accepted at standard rates of premium or on different terms or be rejected is called underwriting.
Underwriting is otherwise called “selection and classification of Risks“. While selection represents the first part viz., decision to accept a proposal, the second part viz the terms on which the proposal can be accepted is called classification.
Definition of Selection of Risk or Underwriting
Mehr and Cammack
Underwriting is the process of accepting or rejecting risk.
Mowbray and Blenchard
Underwriting is the selection of risk for the insurer and determination in what amount and what terms acceptable risk will be insured.
Frank Joseph Angel
Underwriting involves a determination of whether a given application will be accepted or declined.
Purpose of selection of Risk or Underwriting
From the above definitions, it is quite clear that the selection of risk is aimed at finding out those lives:
- Who can be offered life assurance, and
- Who are un-insurable and are to be declined. The method applied by the insurer in this process is very scientific which aims to assess the longevity of the proposer.
Philosophy behind selection of Risk or Underwriting
Every insurer is aware of the efforts that go into procurement of new business. Therefore rejection or declination of a proposal is done in extreme cases where it goes against the interest of the insurer.
Sources of Risk Information
Before evolution of risk, it is necessary to collect the information about risk in a proper manner. Risk information is collected from various sources as given below:
1. Application form or proposal
Each company has its own format. But the information called for includes
- Name, residence, occupation, income and identification of the proponent;
- Nature of insurance sought;
- Duration of insurance;
- Purpose of insurance;
- Previous insurance history;
- Family history;
- Personal history of illnesses, accidents, hospitalization or treatment taken;
- Habits, especially intake of alcohol, etc.
2. Agent’s Report
The agent who has canvassed the case gives information about the proponent’s condition of health, habits, details of previous life insurance policies held by the proponent, financial condition, agent’s recommendation, etc.
3. Medical Examiner’s Report
The medical examiner who conducts examination of the proponent basically mentions the build, BP reading, condition of various systems in the body, any illnesses suffered or operations (surgeries) underwent, any hospitalizations, etc., and his own opinion about the proponent.
Many times, the company accepts risks without the necessity of medical examination. Such practice is called Non-Medical business. In such cases the application contains additional questions, especially with regard to build (height and weight).
4. Physician’s Report
This is a report obtained, in some cases of high risks, from the doctor who is the usual medical attendant of the applicant.
5. Special Medical Reports
In certain cases of high risk coverage sought by the applicant or proposals from persons at advanced ages or substandard lives, the company can call for special medical reports like ECG, reports about the central nervous system, records of survey, etc.
6. Inspection Report
This is generally obtained whenever moral hazard is suspected, mostly from the officials of the company about the health, financial position, habits, insurable interest, etc. of the applicant.
7. Inter-Company Data Bank
All the companies maintain a record of lives which were accepted with certain modified terms or declined. To avoid foul play, a company at times accesses information from the above data bank.
- What is Selection of Risk or Underwriting the risk?
- Definition of Selection of Risk or Underwriting
- Purpose of selection of Risk or Underwriting
- Philosophy behind selection of Risk or Underwriting
- Sources of Risk Information