PURPOSE OF UNDERWRITING
o CLASSIFICATION OF INSRUANCE APPLICANTS
o WHAT FACTORS GO INTO THE UNDERWRITING PROCESS?



What is the purpose of the underwriting process?
• In a nutshell, the purpose of term insurance underwriting is to spread risk among
a pool of insureds in a manner that is both fair to the insured and profitable for the
insurer.
• Like other businesses, insurance companies need to make a profit. Therefore, it
doesn't make sense for them to sell term insurance to everyone who applies for it.
Although they don't want to make the insured pay an excessively high rate, it's not
wise for them to charge all their policy owners the same premium.
• Underwriting enables the company to weed out certain applicants and to charge
the remaining applicants premiums that are commensurate with their level of risk.
How do insurance companies classify term insurance applicants?
When the applicant applies for term insurance, he/she will be classified into one of
the following four risk groups: Standard, Preferred, Substandard, or Uninsurable.
Standard Risks: These are individuals who, according to the insurance
company's underwriting standards, are entitled to term insurance without
having to pay a rating surcharge or be subjected to policy restrictions.
Preferred Risks: This group includes individuals whose mortality experience
(i.e., life expectancy) as a group is expected to be above average and to
whom the company offers a lower than standard rate. The most common
preferred class today is nonsmokers, for whom many insurers now offer a
favorable rate.
Substandard Risks: These are individuals who, because of their health
and/or other factors, cannot be expected (on average) to live as long as
people who are not subject to these risk factors. Substandard applicants are
insurable, but only at higher than standard rates that reflect the added risk.
Policies issued to substandard applicants are referred to as rated or extra risk
policies.
Uninsurable Risks: These are applicants to whom the company refuses to
sell term insurance because they're unwilling to shoulder the risks. They've
decided that the risk factors associated with the applicant are too great or too
numerous. In other cases, the applicant's circumstances may be so rare or
unique that the company has no basis to arrive at a suitable premium.
What factors go into the underwriting process?
An insurance company typically looks at a number of factors during the underwriting
process in order to evaluate applicants in terms of risk. These factors enable the
insurer to decide whether or not applicants are insurable and, if they are, to place
them into the appropriate risk group. Some of the things considered are the potential
insured's:
􀂃 Age
􀂃 Sex
􀂃 Current health/physical condition
􀂃 Personal health history
􀂃 Family health history
􀂃 Financial condition
􀂃 Personal habits/character
􀂃 Occupation
􀂃 Hobbies
An insurance company will gather information about the applicant from several
sources, like:
􀂃 The applicant’s application
􀂃 From the applicant’s agent/broker
􀂃 From information bureaus
􀂃 From physical examination with regard to health assessment