The general population doesn’t know what life underwriting is or what a life underwriter does. Introducing yourself as a life insurance underwriter typically gets you blank stares. Based on personal experience, it would go something like this:
"So, what do you do?"
"Oh! I'm a life insurance underwriter!"
"…Uhh…Sorry, insurance what?"
"Basically, I review life insurance applications."
For some people this explanation piques their interest. Some of the common questions asked include
- What does the underwriting process involve?
- Why do insurance companies need underwriting?
- How do you decide whether a policy gets approved or declined?
- Why do some people pay more for their insurance coverage than others?
What does the underwriting process involve? Why do insurance companies need underwriting?
Before we get into the process involved in underwriting, let's talk about the importance of underwriting to a life insurance company.
An insurance company simply cannot offer coverage to every applicant willing to pay premiums. Not every applicant has the same mortality risk; i.e., not all applicants have the same life expectancy. It would be difficult for an insurance company to remain profitable if it accepts every application it receives, regardless of any risks the applicant may have medically or non-medically.
Underwriters help keep insurance companies profitable by carefully assessing the risks applicants carry and selecting those who have acceptable risks within the company guidelines.
Next, let's review the life underwriting process.
A company's non-medical limits are one if the elements that impact underwriting. Non-medical limits refer to the amount of insurance coverage applied for that can be accepted on the basis of an application form only. Once this non-medical limit is exceeded, medical requirements are required as part of the underwriting assessment. Some common medical requirements are
- Blood tests
- Urine tests
- Paramedical or Medical examinations
- Attending Physician's Statement (APS)
These medical requirements are commonly referred to as "Age and Amount Requirements" since the requirements are dependent on the applicant’s age and the amount of coverage they’re applying for. Not only can Age and Amount Requirements differ between companies, but trends in the life insurance industry are changing the emphasis placed on traditional medical testing.
Depending on the product type and the insurance company's own Age and Amount guidelines, a policy could be issued without medical testing. If medical testing is required, an underwriter has to assess those results (blood and urine tests; paramedical or medical examinations; or doctor’s report) in conjunction with the information provided on the application.
At the end of the day, the underwriter will make use of the available non-medical and medical information on the applicant; assess the risks involved; and then decide whether the client is eligible for coverage.
So what contributes to a policy getting approved or declined? And why do some people pay more for their insurance coverage than others?
Underwriters don't arbitrarily decide to approve or decline a policy. Resources available to underwriters to help assess a client’s risk include
- Underwriting manuals
- Company underwriting guidelines
- Company medical directors, consultants, and actuaries
- Reinsurance and underwriting colleagues
- Insurance and medical journals as well as reference books
Not everyone has the same mortality risk. Why does this matter? Well, barring certain circumstances, the insurance company pays out the policy proceeds after an insured individual passes away. If the insured individual is assessed to have a higher mortality risk, he or she is viewed to have a higher probability of dying earlier than the average life expectancy. In theory, the company could then expect to pay out policy proceeds earlier than it would for an average-risked individual.
As a simplified example, let’s examine two thirty-year old adults applying for insurance coverage of $100,000. After the underwriting process, individual A is assessed to have a higher mortality risk due to a serious medical condition. Individual B, on the other hand, has no serious medical problems and is therefore assessed to be of average or standard mortality risk. The insurance company may have to pay out the $100,000 sooner for Individual A than it would for Individual B. To help ensure adequate funds are available for the possible earlier payout, an insurance company could charge higher or substandard rates for Individual A, whereas it would charge Individual B standard rates.
It should be noted that different life insurance companies use different underwriting manuals and have different underwriting guidelines. Company X could assess Individual A as a slightly lower mortality risk class compared to Company Y; Company X could then offer Individual A better rates than Company Y. Companies rely on research and data analysis to create their manuals and underwriting guidelines, and that is why life underwriters should use these resources and assess insurance applicants consistently and logically.
So there you have it: life insurance underwriting 101! So the next time you’re introduced to a life insurance underwriter, instead of replying, "…Uhh…Sorry, insurance what?" you now have an idea what a life insurance underwriter does.