Preferred Vs Simplified Issue Underwriting By: Aakash Mishra, GM Island Life Assurance Co Ltd Mauritius at OESAI LIFE INSURANCE TECHNICAL TRAINING, TANZANIA,11 th Nov 2015

Objectives Underwriting : Key Principles 1 Main distinguishing features 2 Advantages and Disadvantages 3 Challenges Ahead 4 5 Current Trends 5

What is underwriting?  Underwriting is the process of  examining, accepting or rejecting insurance risks, and  classifying those selected, in order to charge the appropriate premium for each.  The purpose of underwriting is to spread the risk among a pool of insured in a manner that is equitable for the insureds and profitable for the insurer. Risk The possibility of any adverse deviation from a desired outcome that is expected or hoped from any occurrence

What does an Underwriter do?  The underwriter is an employee of the insurer who- Underwriter B C D A Evaluates risk Accepts Applications Declines Applications Determines appropriate premium The decision to provide insurance coverage or not is commonly referred to as an underwriting decision These decisions greatly affect the success or failure of an insurance company

Why is sound underwriting important? Sound underwriting is beneficial to the insurance company, the insured and the insurance sales persons:  Helps insurance companies remain competitive and financially strong.  An insurer’s profit is primarily determined by controlling expenses, accurately pricing products and exercising sound judgment in underwriting SoundUnderwriting Underwriting is considered to be sound if each risk is evaluated accurately, classified properly, approved for an appropriate premium amount, or denied accurately

 An insurer must charge premium amounts that correspond to the risk that each proposed insured represents.  Sound underwriting benefits sales agent because they can use an insurer’s sound underwriting practices as a selling point to demonstrate the company’s focus on fairness to policy owners and its commitment to financial strength. Why is sound underwriting important? -Contd SoundUnderwriting Underwriting is considered to be sound if each risk is evaluated accurately, classified properly, approved for an appropriate premium amount, or denied accurately

What are the objectives of Underwriting? Just like insured should be charged premium amounts that are appropriate for the level of risk they present, insurance companies should also be compensated for the level of risk they accept on each policy. All insurance companies, require sound underwriting to help assure favorable financial results. Although underwriters are only indirectly involved in establishing a company’s premium structure, underwriters’ decisions are crucial in producing actual morality results that correspond to the actuaries’ morality projections, and, thus, produce profitable business. Profitable to the insurance company.

 Simplified issue underwriting is the minimum underwriting by which a risk could be assessed approximately  Preferred underwriting is the detailed underwriting by which a risk could be assessed appropriately

From Simplified issue to Preferred underwriting Preferred Simplified issue Guaranteed issuance Basic definitions: When an underwriting is done on minimal number of questions, upto a certain sum assured, without any medical tests, such underwriting is called Simplified issue underwriting. In Preferred underwriting, the Full underwriting is carried out based on build, family history, medical test report, hobbies, occupation, Lifestyle, smoking/non smoking etc. Preferred: Traditionally, life insurers have looked at risk assessment and product pricing on the basis of your age, gender, smoker/non-smoker status, and overall “standard” health. Preferred Underwriting takes into account your lifestyle and physical build, along with your personal and family health history. Guaranteed Issuance: The product is priced in such a manner that risk element is minimal.

Factors affecting Preferred Underwriting 7Factors F1 F6 F2 F3 F7 Age Gender Build LifestyleHabits F5 F4 Family Medical History Personal Medical History

Other factors in Preferred underwriting B C A Insurable interest for the cover Life Income Multiple calculation. Premium Paying Capacity. to ensure that there is Insurable interest First step of establishing financial eligibility is to ensure that there is Insurable interest in offering the cover  A person has an "insurable interest" in something when loss or damage to it would cause that person to suffer a financial loss or certain other kinds of losses.  A basic requirement for all types of insurance is the person who buys a policy must have an insurable interest in the subject of the insurance. Financial eligibility Subsequent step would be establishing Financial eligibility The final step is establishing Premium paying capacity. Financial eligibility and Paying Capacity can be assessed by the current annual income of the proposed.

Other factors (contd)  There are 5 different classes of occupations depending on the varying degrees of risk associated with that particular occupation: Occupation Class Class 5Class 4Class 3Class 1 Class 2 Mostly ‘White Collar’ workers working inside an office and are not subject to other factors, which would increase their risk Some ‘White Collar’ workers whose occupations are subject to some hazardous factors and whose duties are outdoor or traveling. Skilled or semi- skilled industrial workers involving either manual labour or the use of light machinery Industrial workers whose occupations require the use of heavy machinery or other unskilled labourer. The risk is higher than Class 4 and therefore has to be individually considered

Basic approaches of the two types of underwriting Risk- Reward balance Lower &’Specific” premium is charged due to various debits and credits. Most of the risks can be underwritten and can be adequately priced. For Eg loading on diabetes, HIV etc. Preferred Risk- Reward balance Insurer takes higher risk and charges higher &’generic’ premium Various restrictions on product, Age, SA, Riders etc Simplified

Advantages and Disadvantages of each type Preferred Simplified Costly to underwrite and administer Medical cost Time taken for issuance Low premium for proposer High SA possible More Qns asked during selling, less during claims All Products relatively cheaper to underwrite, simple to administer Quick issuance High premium for proposer Fixed SA Less Qns asked during selling, more during claims Limited products Can be used for increasing scale of operations rapidly Mass appeal products, easy to sell

Challenges ahead Traditional u/w methods are on the wane. In the digital world, everything is quick. Willing to pay slightly more for quick service. Insurers also cant afford to spend heavy cost on underwriting, based on medicals, other questionnaires etc. Can have higher Risk appetite Simplified- Mass products but costly for customer. Insurer need to do rigorous data analysis, lower admin costs, build process efficiencies to gain market share Reputational risk due to claim repudiation in simplified- Non disclosure Sales would always ask for quick issuance. Simplified helps in this regard

Current trends and digital age- New Markets, New Products, New Distribution models Trend towards mass customization of products and services. increase in variety and customization without a corresponding increase in costs. Increased and upward revision in medical u/w grid Better Health care and longevity. Insurers can afford to launch Simplified products Digital nature of things to come- Website, mobile insurance, Outbound call Centre Bancassurance channel Worksite Marketing Micro insurance

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