CH 15

Chapter 15
Underwriting
Learning Outcomes
Underwriting – Basic concepts

Types of Claims
Non- medical underwriting
Medical underwriting
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Strictly for internal circulation only. Should not be further circulated/ used for presentation to a prospect/ general public
Learning Outcomes
Underwriting – Basic concepts

Types of Claims
ver. 1 – w.e.f. Aug. 16

Underwriting Basic Concepts
The underwriter is an employee of the

insurer. He determines the premium to be
charged.
His assessment would include:

• Is there a genuine need for insurance
• Are the intentions of the proposer fine
Font: Zurich Cn BT, Size: 20
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‘Selection’ or ‘Underwriting’
Process of verifying the level of risk in each new

entrant and determining the terms of admission
is called…
‘SELECTION’ OR
‘UNDERWRITING’
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Learning Outcomes
Types of Claims
Non- medical underwriting
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Risk Classification
To usher equity, the underwriter engages in a process known as risk classification

i.e. individual lives are categorized and assigned to different risk classes
depending on the degree of risks they pose. There are four such risk classes.
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Risk Classification
i.Standard lives - These consist of those whose anticipated mortality corresponds to

the standard lives represented by the mortality table.
ii. Preferred risks - These are the ones whose anticipated mortality is significantly
lower than standard lives and hence could be charged a lower premium.
iii. Substandard lives - These are the ones whose anticipated mortality is higher
than the average or standard lives, but are still considered to be insurable. They may
be accepted for insurance with higher (or extra) premiums or subjected to certain
restrictions.
iv. Declined lives - These are the ones whose impairments8 and anticipated extra
mortality are so great that they could not be provided insurance coverage at an
affordable cost. Sometimes an individual’s proposal may also be temporarily
declined if he or she has been exposed to a recent medical event, like an operation.
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Underwriting or the selection process
Field Underwriting - It includes information gathering by an agent or company

representative to decide whether an applicant is suitable for granting insurance
coverage.
The agent plays a critical role as primary underwriter. 9
Underwriting Departmental Level - It involves specialists and persons who are

proficient in such work and who consider all the relevant data on the case to decide
whether to accept a proposal for life insurance and on what terms. .
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Hazards
Factors affecting risk on the life of an individual are

called Hazards. They may be…
Occupational
Physical Moral
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Strictly for internal circulation only. Should not be further circulated/ used for presentation to a prospect/ general public 10
Let us understand the physical hazards that
affect the premium
11
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Physical
Age impairments
Sex
Physical
Physical hazards condition
s
Build
Personal history
Family history
Note
Body measurements may indicate physical hazards
Physical hazard affects the probability of death
An underwriter charges extra premium for physical

hazards
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Let us understand the Moral hazards that
affect the premium
14
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Moral Hazard
Moral Hazard refers to intentions of the

proposer to take undue advantage.
The intention could be to:
• Pay lesser premiums or
• Gain quick monetary gains
Moral Hazard is a matter of opinion and hence not

measurable. A proposal with moral hazard is declined
Note: Possibility of Moral Hazard is evaluated by

Financial Underwriting
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Some Moral hazard situations…
The proposal is for a much larger amount than
what the income would justify
Proposer is old and has not been insured so far and

the proposal is for a large amount
Large amount of insurance is proposed on the life

of a family member while main earning family
members are insured for a relatively small amount
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16
Underwriting Methods
Underwriters may use two types of methods:
Judgment Method - Under this method subjective judgment is used, especially when
deciding on a case that is complex.
Numerical Method. Under this method underwriters assign17positive rating points for all
negative or adverse factors (negative points for any positive or favourable factors). It ensure
uniformity in decisions and avoid ad hoc or whimsical decisions, insurers have developed
guidelines to identify and interpret data.
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Underwriter makes his decision based on…
Proposer’s Medical Agent / Other

statements made examination Official’s report
in proposal form report*
* The medical referee usually sees only cases for large insured.
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18
Underwriting Decisions could be
19
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On the basis of risk assessed, the underwriter
decides on the proposal as one of the following:
Standard Risk As proposed
Higher Risk With Extra
Risk expected to wear off With Lien

With modification on
Higher Risk to be reduced
plan or term or SA
Specific Risk Exclude Risk
Temporary Risk Postpone
Unacceptable Risk Decline

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20
In this case a person has no adverse features
affecting mortality and other factors
relating to insurability
For a Standard risk, underwriter charges

ordinary premium
For slightly higher risks, proposal may be
accepted with extra premium
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21
•If life not standard but risk expected
to wear off in course of time
•A ‘lien’ operates for a specific
period
•The amount payable on death will
vary from year to year
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Proposed sum assured is modified
to a level where underwriter is more
comfortable
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23
At times underwriting decisions
are made with certain
restrictions, these restrictions are
called as “Clauses”
It restricts the benefits under

the policy and excludes
specific risks e.g. First
pregnancy
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This means proposal will be considered
after specified period with fresh
medical report
This is done when some adverse factors

are noticed which, it is judged:
(i) Temporary and may wear off after some
time or
(ii) Could become more serious after some time
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If risk is too heavy to be insured,
underwriter declines the proposal
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26
Learning Outcomes
Types of Claims
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Sometimes, it is essential to consider the
medical conditions of the proposer to
evaluate the risk
28
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Non medical
• Medical examiners underwriting is
are not available in usually done for
all places younger age groups,
• After medical lower sum assureds
examination, more
than 90% proposals
are accepted at
ordinary rates
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Under the system of non-medical underwriting there
are restrictions
On Age On Sum
Assured
HIGHER HIGHER
RISK RISK
LOW HIGH
LOW HIGH SUM ASSURED
AGE
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A large sum assured requires additional checks
• Underwriters may avail assistance of

doctors associated with life insurance
companies
•Insurers, have such doctors, called medical
referees, on their panels
•These doctors have specialized knowledge
about the effect of medical conditions on
mortality
• These medical referees are not employees
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Do you know that as an Agent you
are the primary underwriter?
32
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Underwriting by the agents
Agents must inform insurer about

factors affecting the risk of subject
matter of insurance
Agent must make sure of this by

submitting an unambiguous report
and by ensuring that no information is
concealed in proposal papers
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Importance of underwriting by agents
It helps the insurer by It helps insured give

removing chances of Agent helps the correct relevant
fraud Insurer and insured information and avoid
by writing a truthful denial of claim by
report
insurer
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Female Underwriting
Working women/ educated

women are treated on par with
men
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Underwriters are more
cautious while
considering cases on
female lives
36
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Reasons for extra caution for
Female lives
High pregnancy related deaths,

particularly in remote areas
Deaths due to domestic violence
History of frauds
In the last 50 years practices have changed. Educational

qualifications, sources of income, husband’s insurance,
life style etc. are all considered now.
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Key Learning
• Classification of Risk
• Financial Underwriting
• Risk Assessment
• Special Underwriting for Females
• Agents role in Underwriting
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Summary
•To usher equity, the underwriter engages in risk classification where individual lives are
categorised and assigned to different risk classes depending on the degree of risks they pose.
• Underwriting or the selection process may be said to take place at two levels:
• At field level and
• At underwriting department level
•Judgment method or numerical method of underwriting is widely used for underwriting

insurance proposals.
•Underwriting decisions made by underwriters include acceptance of standard risk at

standard rates or charging extra for sub-standard risks. Sometimes there is acceptance with
lien on sum assured or acceptance is based on restrictive clauses. Where the risk is large the
proposal is declined or postponed.
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Summary
• A large number of life insurance proposals may typically get selected for insurance
without conducting a medical examination to check the insurability of an insurant.
Such cases are termed as non-medical proposals.
• Some of the rating factors for non-medical underwriting include
• Age
• Large sum assured
• Moral hazard etc.
• Some of the factors considered in medical underwriting include
• Family history,
• Heredity and personal history etc.
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Test
Which of the following is not an underwriting decision?
I. Risk acceptance at standard rates

II. Declinature of risk
III. Postponement of risk
IV. Claim rejection
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Test
Which of the following is not an underwriting decision?
I. Risk acceptance at standard rates

II. Declinature of risk
III. Postponement of risk
IV. Claim rejection
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Test
Which of the following condition will affect a person’s

insurability negatively?
I. Daily jogs
II. Banned substance abuse
III. Lazy nature
IV. Procrastination
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Test
Which of the following condition will affect a person’s

insurability negatively?
I. Daily jogs
II. Banned substance abuse
III. Lazy nature
IV. Procrastination
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Test
Which of the following denotes the underwriter’s role

in an insurance company?
I. Process claims
II. Decide acceptability of risks
III. Product design architect
IV. Customer relations manager
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Test
Which of the following denotes the underwriter’s role

in an insurance company?
I. Process claims
II. Decide acceptability of risks
III. Product design architect
IV. Customer relations manager
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Test
Under risk classification, ___________ consist of those

whose anticipated mortality corresponds to the
standard lives represented by the mortality table.
I. Standard lives
II. Preferred risks
III. Sub-standard lives
IV. Declined lives
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Test
Under risk classification, ___________ consist of those

whose anticipated mortality corresponds to the
standard lives represented by the mortality table.
I. Standard lives
II. Preferred risks
III. Sub-standard lives
IV. Declined lives
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Test
Sheena is suffering from acute diabetes. She has

applied for an insurance plan. In this case the
underwriter is most likely to use ____________ for
underwriting. Choose the most appropriate option.
I. Judgment method
II. Numerical method
III. Any of the above method since an illness like
diabetes does not play a major role in the underwriting
process
IV. Neither of the above method as diabetes cases are
rejected outright
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Test
Sheena is suffering from acute diabetes. She has

applied for an insurance plan. In this case the
underwriter is most likely to use ____________ for
underwriting. Choose the most appropriate option.
I. Judgment method
II. Numerical method
III. Any of the above method since an illness like
diabetes does not play a major role in the underwriting
process
IV. Neither of the above method as diabetes cases are
rejected outright
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Test
Amruta is pregnant. She has applied for a term

insurance cover. Which of the below option will be the
best option to choose for an underwriter to offer
insurance to Amruta? Choose the most likely option.
I. Acceptance at ordinary rates

II. Acceptance with extra premium
III. Decline the proposal
IV. Acceptance with a restrictive clause
ver. 1 – w.e.f. Aug. 16

Test
Amruta is pregnant. She has applied for a term

insurance cover. Which of the below option will be the
best option to choose for an underwriter to offer
insurance to Amruta? Choose the most likely option.
I. Acceptance at ordinary rates

II. Acceptance with extra premium
III. Decline the proposal
IV. Acceptance with a restrictive clause
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Test
Santosh has applied for a term insurance policy. His

anticipated mortality is significantly lower than
standard lives and hence could be charged a lower
premium. Under risk classification, Santosh will be
classified under ___________.
I. Standard lives
II. Preferred risks
III. Substandard lives
IV. Declined lives
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Test
Santosh has applied for a term insurance policy. His

anticipated mortality is significantly lower than
standard lives and hence could be charged a lower
premium. Under risk classification, Santosh will be
classified under ___________.
I. Standard lives
II. Preferred risks
III. Substandard lives
IV. Declined lives
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Test
Which of the below insurance proposal is not likely to

qualify under non-medical underwriting?
I. Savita, aged 26 years, working in an IT company as a

software engineer
II. Mahesh, aged 50 years, working in a coal mine
III. Satish, aged 28 years, working in a bank and has
applied for an insurance cover of Rs. 1 crore
IV. Pravin, aged 30 years, working in a departmental
store and has applied for an endowment insurance plan
for a tenure of 10 years
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Test
Which of the below insurance proposal is not likely to

qualify under non-medical underwriting?
I. Savita, aged 26 years, working in an IT company as a

software engineer
II. Mahesh, aged 50 years, working in a coal mine
III. Satish, aged 28 years, working in a bank and has
applied for an insurance cover of Rs. 1 crore
IV. Pravin, aged 30 years, working in a departmental
store and has applied for an endowment insurance plan
for a tenure of 10 years
ver. 1 – w.e.f. Aug. 16

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Chapter 15

Underwriting – Basic concepts

Non- medical underwriting

ver. 1 – w.e.f. Aug. 16

Underwriting – Basic concepts

ver. 1 – w.e.f. Aug. 16

The underwriter is an employee of the

His assessment would include:

ver. 1 – w.e.f. Aug. 16

Process of verifying the level of risk in each new

ver. 1 – w.e.f. Aug. 16

Non- medical underwriting

ver. 1 – w.e.f. Aug. 16

To usher equity, the underwriter engages in a process known as risk classification

ver. 1 – w.e.f. Aug. 16

i.Standard lives - These consist of those whose anticipated mortality corresponds to

Field Underwriting - It includes information gathering by an agent or company

Underwriting Departmental Level - It involves specialists and persons who are

ver. 1 – w.e.f. Aug. 16

Factors affecting risk on the life of an individual are

ver. 1 – w.e.f. Aug. 16

ver. 1 – w.e.f. Aug. 16

Body measurements may indicate physical hazards

Physical hazard affects the probability of death

An underwriter charges extra premium for physical

ver. 1 – w.e.f. Aug. 16

ver. 1 – w.e.f. Aug. 16

Moral Hazard refers to intentions of the

Moral Hazard is a matter of opinion and hence not

Note: Possibility of Moral Hazard is evaluated by

ver. 1 – w.e.f. Aug. 16 15

Proposer is old and has not been insured so far and

Large amount of insurance is proposed on the life

ver. 1 – w.e.f. Aug. 16

ver. 1 – w.e.f. Aug. 16

Proposer’s Medical Agent / Other

ver. 1 – w.e.f. Aug. 16

Standard Risk As proposed

Higher Risk With Extra

Risk expected to wear off With Lien

Temporary Risk Postpone

Unacceptable Risk Decline

For a Standard risk, underwriter charges

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It restricts the benefits under

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This is done when some adverse factors

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• Underwriters may avail assistance of

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