Short notes on Life Insurance Underwriting
Underwriting is a process of accepting a risk, analysing the risks, framing terms and conditions and deciding the chargeable premium rate. It needs to know the risk features and factors of every risk offered for acceptance.
Risk analysis determines the physical hazards and inherent moral hazards attacked to the cover of the products. Steps of risk management are adopted for underwriting purposes.
Safety audit, staff drills, investigations and remedial steps are taken to prevent recurrence of risk. Moral hazard is minimised by staff-relations, compliance with legal enactments and effectiveness of corporate governance.
The acceptance of risks and pricing them has been the basic statutory function of the Tariff Advisory Committee (TAC) till detariffed market is governed by IRDA since January 1, 2007. The TAC has prescribed cover wordings and the minimum prices to be charged by insurers who breach them.
The disciplinary standards are imposed by the TAC to safeguard the consumers’ interest. The TAC has been working in India for more than 50 years. With liberalisation of market and entry of foreign players, the detariffication has started.
It has observed by the experience of 2005-2006 that only 6% claim has been reported in India as against 20 per cent losses in international markets. Only 1.2 lacks out of 32 lakhs insured persons reported for mediclaim.
The claims paid as said by insurers are 120 per cent. Thus, the underwriting redesigning is needed for the purpose. The underwriting process is studied under life insurance, non- life insurance and detariffed era underwriting.
Life Insurance Underwriting :
Life insurance underwriting is not merely selling of life insurance products. It is sold to those who qualify to the suitable person to buy insurance. It assesses proposers’ needs, paying capacity and determining the price rate. Life insurance is embedded with an element of social responsibility with cooperative spirit.
The risk qualifications and determination of price (premium-rate) for each class is essential function of underwriting. The insurer underwrites a policy to an insured by assessing his own experience of claims payment, expenses incurred and return on investment besides his ability to retain the risk and products.
In life insurance, underwriting is done by insurance agents or advisors. Based on the disclosures of the proposal forms, medical reports; the insurer may exercise his own investigation to insure the insurable risk. The underwriting takes two phases i.e., financial underwriting and medical underwriting.
The former deals with determining the eligible total amount of life assurance coverage. The latter deals with medical and diagnostic reports. There is need of close monitoring early death and should check the reasons of early death. The life insurance underwriting is based on mortality, expenses and interest.
The cost of insurance depends on mortality insurers have to monitor whether the present tables of mortality and morbidity are in tune with the present rate of premium. Life Insurance Council and Actuarial Society of India are working in this area.
They will decide the extra premiums to be charged from the sub-standard lives and ensure fair premium rate to standard lives. Certified Life Underwriter is preparing professionals of underwriting life insurance.
The life insurers incur certain expenses which are loaded on the net premium based on mortality and interest. Since there are different insurers having different expense rate, The premium rate may differ but under Tariff Advisors committee, the rates cannot vary significantly.
The interest or return on investment made of life fund. The post liberalisation has facilitated several insurers to earn varied rate of interest depending on the investment methodology.
The life insurance agents known as intermediates are playing significant role in underwriting of life insurance business. Medical development has reduced mortality and premium rate is expected to decline accordingly.
On the other hand, pollution and crowd have created unexpected deaths. Occupation is considered as one of the key elements affecting the longevity of the insured. Stress and occupational hazards have added more risk.