underwriting risk in insurance – And Definition of Underwriting Risk 


underwriting risk in insurance: Medical examinations are not required with all life insurance applications. The applications which do not require medical examinations are categorized as nonmedical insurance. 

underwriting risk in insurance

underwriting risk in insurance


Medical examinations are not required with all life insurance applications. The applications which do not require medical examinations are categorized as nonmedical insurance.


The concept of nonmedical insurance originated in the UK in the early twentieth century. In the beginning, only young applicants applying for small sums of insurance were allowed nonmedical insurance. Over the years claims experience was seen to be favorable (the number of deaths in the insurance pool was not more than what was assumed) and this practice became the norm in all life insurance companies for wider ranges of age and sum assured. In nonmedical cases, even though medical tests are not required, a limited amount of medical information related to the applicant’s medical history, family medical history and tobacco or alcohol use, must be furnished. 1 There is a potential risk of likely non-disclosure of health problems in nonmedical cases. Surveys conducted by some life insurance companies have shown nondisclosure of serious medical conditions of around 15%. 2 The underwriter has to rely on statements made by the applicant as there is

no other source to verify the applicant’s statement about his health. In the absence of medical examination and laboratory tests, many health conditions go undetected. Diseases that can occur without overt symptoms such as diabetes or hypertension remain undisclosed as the applicant may not know that he suffers from them. Sometimes, applicants may also intentionally hide health-related facts. To minimize the increased risk of nondisclosure of health conditions, the life insurance companies have put in place certain safeguards for the nonmedical cases.

5.1.1 Limiting the Sum Assured and the Age for Nonmedical Applicants (Nonmedical Limits)

Insurance companies reduce the risk of nonmedical businesses by limiting the sum assured in the nonmedical category. Some newly formed private life insurance companies offered a sum assured of Rs. 8 lakh for clients less than 35 years of age as

nonmedical insurance, initially. Today, most companies provide up to Rs. 15 to 20 for this age group in the nonmedical category. 3 The nonmedical limits were relaxed as the claims experience of the companies was lower than what was expected. Sum assured allowed for nonmedical cases decrease with the increase in the age of the clients. Previous policies that have been taken by the client are added to the sum assured applied to calculate whether the sum assured falls in the nonmedical limit. Nonmedical limits are regularly assessed by the evaluation of claims data. Claims arising from nonmedical applicants due to diseases that were unknown or concealed at the time of application are weighed against the cost of medical expenses for those applicants. Figure 5.1 uses a simple example to illustrate the principle behind the devising of nonmedical limits in insurance companies.


underwriting risk in insurance

underwriting risk in insurance

FIGURE 5.1 Determining nonmedical limits An illustration.

5.1.2 Converting a Nonmedical Application into Medical in Case of Substandard Risk

Nonmedical life insurance is allowed only when the client states he is healthy and, therefore, falls in the standard risk category. This is another safeguard to reduce the risk of nondisclosure in nonmedical cases. If the client mentions any illness or symptoms in the application form, the underwriter requests for relevant medical tests. Applicants in risk-prone

risk-prone occupations like those working in mines or chemical industries may be sent for medical tests as exposure to harmful and noxious substances for substantial periods can cause respiratory problems. Medical tests that are required by underwriters for certain medical conditions are listed in

 TABLE 5.1 Conditions (in Nonmedical Cases) Requiring Medical Tests

underwriting risk in insurance

underwriting risk in insurance

5.1.3 Identification (ID) Proofs

Life insurance companies have a list of acceptable identification proofs as mandatory requirements for all insurance applications. The name and the age of the client on the ID proof submitted must match what is stated in the application form. Regulatory guidelines for Anti Money Laundering (AML) and Know Your Customer (KYC) require proper identification documentation before any financial transaction. To prevent fraud, the underwriters examine the ID proof for any signs of tampering or forgery.

5.1.4 Strict Parameters for Nonmedical Automatic/ Computerized Underwriting

Many companies have an automated system for evaluating and issuing nonmedical cases. Nonmedical cases form the bulk of new insurance applications and automation helps in expediting the process. Details of the application are entered into a computer program which automatically issues the policy

if the details given in the application form match predefined parameters. In case the applicant is found to have any risk element, the computer automatically sends the case to an underwriter for review. In companies where nonmedical underwriting is automated, the parameters set for issuing a policy are very stringent.

5.1.5 Limiting Insurance on Juvenile (Children) Lives

Juvenile cases are profitable due to the relatively lesser mortality risk. Life insurance companies are eager to sell policies to children. However, children do not need to be insured as they do not generate any income or any financial value for the family that would need to be protected through insurance. Life insurance policies sold to children are purely for investment reasons. Life insurance companies put limits on the amount of life insurance for children and certain insurance products such as term insurance are not sold

to children. To avoid any misuse of life insurance cover on children, the applications for life insurance on children are very carefully underwritten. Insurance companies limit the coverage to amounts much smaller than those available to adults, particularly for very young children. They also verify life insurance on siblings. An equal amount of life insurance on the breadwinner of the family is a prerequisite for juvenile cases. Insurance is not allowed till the child is three months old (some companies do not allow insurance till six months) because the death rate is high immediately after the birth due to hazards of the natal environment, congenital defects and the delicate physical resistance of a newborn. The social strata and the financial ability of the family also influence the mortality of a child. This makes it important to inquire about the family’s income. Life insurance policies are issued only to healthy infants and children. Health problems reflected in the.

the application form is investigated thoroughly before the issue of the policy. Most insurance companies do not issue policies to children with poor or substandard health conditions.

5.1.6 Advantages and Disadvantages of Nonmedical Insurance for the Life Insurance Companies

Nonmedical cases can be processed faster. The time required for organizing medical examinations is saved. Facing a doctor for the purchase of life insurance policies is known to be one of the greatest psychological barriers for a customer. By removing this barrier life insurance companies can reach out to more customers. Claims data for young age groups show only a little difference in medical and nonmedical policies. The differences increase as the age of clients increases. Therefore, under the age of 30, there is very little probability of finding any disorder based on medical examination. Nonmedical insurance does have a slightly

higher rate of mortality than medically examined applications. This extra mortality can come from two reasons: one, impairments known to the applicant but deliberately concealed, two impairments not known to the applicant that could have been discovered by a medical examination. Nonmedical business is profitable only till the cost of claims for the insured pool is less than the cost of medical examinations and tests as illustrated in

underwriting risk in insurance

underwriting risk in insurance

FIGURE 5.2 Profitability equation for nonmedical insurance.


Life insurance companies seek detailed information in the application forms to evaluate the nonmedical cases and categorize them methodically in proper risk categories.

These significant nonmedical factors for risk assessment are as follows:

(i) Age
(ii) Gender
(iii) Previous insurance
(iv) Adverse medical history
(v) Family medical history
(vi) Occupational hazards
(vii) Residence and travel
(viii) Nonresident Indians
(ix) Habits
(x) Morals

5.2.1 Age

An individual’s resistance to disease and injury decreases as age advances and the body grows older. Mortality tables clearly show that the age of the client is the single most important factor for increased mortality. Insurance companies charge higher premiums with the increasing age of applicants. Companies do not issue insurance policies beyond a certain age as the risk becomes very high. The maximum age limit for

buying an insurance policy in most companies is 60 years. Some may have lower or higher ages depending on the design of the product. Age is the basic factor that determines the premium a client pays for insurance. The client has to submit a proof of age with the application. Sometimes an incorrect statement of age is discovered after the policy has been issued; in such cases, the sum of the proceeds is reduced by the misstatement of age clause. 5 The documents required for the proof of the birth are as follows: Acceptable date of birth proofs (identification documents)
(i) Passport
(ii) Driving license
(iii) PAN card
(iv) Ration card
(v) Voters identity card
(vi) High school or equivalent certificate
(vii) Employers certificate (government and public sector employees)

underwriting risk in insurance

The documents which cannot be accepted as the date of birth proofs are:

(i) Affidavits
(ii) Self-declaration
(iii) School leaving certificate

Some companies treat the non-acceptable date of birth proofs as a risk factor and add an extra amount to the standard premium (Rs. 2 per Rs. 1000 of sum assured is added to the premium) for clients who do not have acceptable proof of date of birth. Such applicants are, thus, classified as substandard.

5.2.2 Gender

The mortality rate for women is lower than men and women have longer lifespans. The standard premiums for women are, therefore, lower than men. In spite of that, there is an increased risk associated with women. This is due to their unfavorable socioeconomic status in India where sporadic cases of the culpable homicide of newly wedded women (dowry deaths) are reported. Underwriting of life insurance policies is stringent for women

applicants who are uneducated and unemployed. Professional, salaried, wage-earning and income-generating women are treated at par with men for life insurance purposes. The amount of life insurance allowed for such women depends on their income. By and large, housewives, unemployed and unmarried dependent women are generally only allowed small amounts of life insurance. Women who have passive income through rentals or investments are also allowed only a small amount of life insurance coverage. Women are not allowed to buy term insurance if they are dependent housewives.

5.2.3 Previous Insurance

The applicant’s previous life insurance is taken into account to calculate the total insurance sum assured allowed to him. The total amount of insurance should bear a reasonable relationship with the applicant’s needs and financial resources. This is discussed in detail

under the Financial Underwriting section. Applicants have to disclose details of any previous rejected or rated (substandard risk) application. A previously rated applicant is investigated for the specific medical condition which might have become worse over some time.

5.2.4 Adverse Medical History

The application form contains questions about the applicant’s previous illnesses, injuries, and surgical operations. Past adverse medical history would prompt the underwriters to request special/ additional medical tests or examinations. In such cases, even the personal doctor of the applicant may need to be contacted for medical information.

5.2.5 Family Medical History

The life insurance application form contains a section on family history. Questions are asked on ages and state of health of parents and siblings. Ages at death, and the causes of death, need to be stated if the parents/ siblings have

died. Family history is considered significant because some health and medical conditions such as coronary heart disease, diabetes, high blood pressure are known to be hereditary. Some other hereditary diseases are— stroke, ovarian, breast and colon cancer, and thalassemia and hemophilia (blood disorders).

5.2.6 Occupational Hazards

The International Labour Organization (ILO) has estimated the annual figure for work-related deaths as 1.1 million people, globally. Accidents represent 30% of the total work-related mortality while diseases account for the rest. 6 Accidents are common in many occupations. People working with machines and other heavy equipment are exposed to various hazards. Construction workers may suffer serious injuries during construction activities. Miners face the risk of explosions, rockfalls, and fire. Most electrical workers are exposed to the risk of electrocution and some

underwriting risk in insurance

are prone to the risk of falling from high poles, transformers, and pylons. Laborers handling heavy material run the risk of getting crushed under them. Fishermen face the risk of tidal waves and other perils of the sea. Police, military and paramilitary personnel have the risk of getting injured and even losing their life in various operations. People working in industrial plants are exposed to dust and poisonous gases produced by the operations processes such as grinding, drilling, etc. Contaminants such as silica, metal, textile or wool fibers can cause respiratory problems that adversely affect the lifespan of individuals.

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   The lasting effects of exposure to dust during and after employment in such trade is an important factor for underwriting. Exposure to asbestos is a proven serious health hazard. Different forms of poison are used in many industries as the raw material for making various products. Exposure to lead in workers associated with the mining and smelting of lead; or those in jobs involving printing, and painting is known to have adverse effects on health. Insurance companies, therefore, charge extra premiums from applicants engaged in certain occupations which entail higher than the average risks. All life insurance companies have occupational hazard manuals in which they list the occupations that are deemed to have adverse effects on lifespans and health.

underwriting risk in insurance

    The client employed in one of the listed occupations is required to pay an additional premium, even if all medical parameters and other factors are favorable. Applicants working in any of the listed occupations must complete questionnaires according to the underwriting guidelines. Unskilled and semiskilled jobs employing labor at low wages are associated with extra mortality risks due to unsatisfactory living and working conditions and the non-availability of adequate medical care. Other occupations have socio-economic hazards because of the environment in which the employees work. vendors, and drivers, are prone to health hazards purely as their working environment exposes them to various forms of addiction and substance abuse. Bartenders, liquor Workplace safety regulations in India are less stringent than developed countries. Inadequate compliance with workplace safety the underwriters tend to view workplace hazards of these occupations seriously and rate these occupations conservatively.

underwriting risk in insurance

The risk depends on the hierarchical designation, type of industry and the applicant’s job profile. For some occupations, the underwriters may offer the life insurance cover as standard but charge the also rampant. Therefore, norms are accident rider at substandard rates. Indicative decisions such as standard, substandard or declined for a few occupations as per the current industry, practices are given in the succeeding paragraphs. If a particular Occupation on Service is substandard, the ratings (extra premium) are expressed as a flat extra increase per Rs. 1000 of sum assured such as Rs. 2 per mille or Rs. 3 per mille, The rating for accident riders are typically expressed as multiples known as the multiplier for example 2x or 4x.7


There is no occupational rating (extra premium) or restriction on pilots or crew members flying on regularly scheduled commercial aircraft. The rating on pilots of private planes, which fly on unscheduled routes depends on the pilot’s age, experience, training, and frequency of flying. Applicants are required to complete an aviation questionnaire. This contains full details of the aircraft and the company which owns it. Rating for pilots of military aircraft is dependent on the type of aircraft flown. Pilot’s age and type of flying missions are also taken into accounts.

Military and police personnel

Service in the armed forces is regarded as a high-risk job. Some branches in the armed forces such as anti-terrorist squads, special action commandos, bomb disposal squads, and paratroopers are at higher risks than other armies, navy or airforce personnel. Such applicants may be declined life insurance or charged a very high extra premium. Naval personnel is considered standard risks except for submarine personnel and naval divers. Air force engineers and administrative personnel are put in the standard category while a rating of pilots depends on whether they fly fighter planes or transport planes. Police personnel have lower risks and are usually given standard rates if they are not a part of counterterrorist, commando or bomb disposal operations. Armed forces or Border Security Force (BSP) personnel may be given life cover with an extra premium of Rs. 2 per mille while the accident rider may be declined.

Mining and refineries

People working in mines and oil refineries face risks due to accidents or hazardous inhalants that affect health and cause long-term chronic health problems. The degree of risk substantially depends on the position and type of work performed by the person. Usually, geologists and managers have lesser risks than skilled or semiskilled workers at the site. Applicants in white-collar jobs are, therefore, given standard rates if their work is mainly onshore. Engineers on oil rigs or in other such offshore installations are rated at 1 per mille while skilled and semiskilled workers such as welders and foremen are rated at 2 per mille. Accident rider may be rated at 2x for the low-risk white-collar applicants and rated at 2x for the other higher risk applicants

Drivers fall in either the intermediate or low-risk category based on the type of vehicle they drive. For example, truck drivers may be put in substandard categories, but taxi drivers can be taken as standard risks.

Construction workers
The risk category of construction workerS varies according to the nature of the job and their work deployment. Generally, they fall in high to intermediate grades of risk.

5.2.7 Avocation

People participating in high-risk sporting activities are charged with extra premiums. Racing (car, motorbike, speedboat, etc) sky diving; scuba diving and mountaineering are considered risky for insurance purposes Depending on the extent of the associated risk, risk-prone avocations have a flat extra rating of Rs. 2.00 to Rs. 10.00 per Rs.1000 of the sum assured.

5.2.8 Travels and Residence

Geographical factors play a major role in determining the life expectancy of people in any region. Poor medical facilities, extreme climate, and difficult topography increase health-related risks

Politica and economic

conditions of a country are equally important issues both from mortality rate and the cost associated with investigating a death claim in a foreign country. Insurance companies decide on the premium depending on the risk category that has been assigned to the country. This depends on the level of crime, social law, and order, war, and diseases prevalent in that country. The underwriter may also take into account the occupation, profile, exact city or location of residence in their respective country and income of the applicant. Flat extra premiums due to residence risk range from 1 per mille to 4 per mille. Applicants residing in strife-torn countries like Afghanistan or Somalia may be declined insurance.

5.2.9 Insurance for NRIs and Foreign Nationals

A Non-Resident Indian (NR) has to sign an application in India and has to pay the premium in Indian rupees (INR) Only if an Indian life insurance company has an office in a foreign country, it can issue policies to people of Indian origin in that country, and the premium can be paid in foreign currency. People from foreign countries residing in India permanently for extended periods can be insured by Indian life insurance companies.

5.2.10 Habits

The term habit, for the purpose of underwriting, refers to the use of alcohol tobacco, drug abuse or addiction to any other intoxicating material. The use of drugs impairs judgment and weakens reflexes. This increases the risk of accidents and affects the individual’s general health. Drug addicts have usually declined insurance. Prolonged use of the excessive quantity of alcohol is harmful to health. Nevertheless, insurance companies are not averse to giving life insurance policy to an applicant who uses alcoholic beverages in moderate entities medical test is called for if the applicant discloses his addiction to alcohol, which is higher than what is considered to be occasional social drinking. Similarly, heavy Smokers are susceptible to many diseases and the insurance companies are cautious of smokers who claim to have left smoking

5.2.11 Morals

Insurance companies are interested in the moral conduct of the client. Behavior patterns which are considered immoral (such as unfaithfulness to spouse)are viewed seriously because they are frequently found in combination with other types of risky behavior such as overindülgence in alcoholic
beverages, gambling and the use of drugs Unethical business identified also taken into consideration while deciding the life insurance application conduct wherever


Financial underwriting attempts to ensure that the amount of life insurance is by the applicant’s status, assets, and income. Assessment of financial risks is equally important as evaluating medical or occupational risks. When large monetary benefits are available from life insurance they
may have an undesirable effect. It is not unheard of beneficiaries to kill the insured person to obtain the proceeds of his life insurance policy. It may even tempt an insured person when facing a financial crisis to commit suicide to secure his family’s future. To ensure that there is no over-
insurance, speculation, and fraud arising out of the underwriting guidelines have been put in place by the life insurance companies.

policy, sophisticated financial

The factors used to determine the adequacy of the insurance amount are a combination of income, material net worth and insurable application for life insurance that must be denied (declined). There is no mechanism available with the underwriters to neutralize these factors and issue insurance at substandard rates by charging extra premiums as done in the case of medical or occupational substandard risks and therefore Such applications are rejected outright. The fundamental underwriting is to ensure that a person should not be worth more when dead than alive. objective of financial

underwriting risk in insurance

Financial underwriting is defined as “the investigation and evaluation of financial data on a risk under consideration to determine the acceptability of that risk for insurance coverage.”2 Financial indicators such as income, profitability, and liquidity provide the insurer with information to analyze is insurance and eliminate moral hazard.

Individual (e.g. family protection, home or personal loan protection, investment or savings) and business (e.g. business loan protection partnership protection or key person cover) insurance cases are subjected to financial underwriting. Some questions that are asked for underwriting the financial risk in insurance applications are as follows:


Is the application based on a valid insurable interest?
i) Consistency: Are the type of policy applied for and, in particular, the sum to be insured ii) 4fordability Are sufficient resources available with the applicant to enable payment of future premiums?

5.3.1 Fallouts of Over-insurance
Over-insurance is the insurance over the proportionate loss of income to the policy holder’s family in case of his demise. Over insurance can have extreme effects such as murder or Suicide of the insured. Another negative effect of insurance is the lapse of the policy. Legal and regulatory measures are
put in place by life insurance companies to prevent such incidents as discussed further:


Legal systems in some countries put the onus of preventing misuse of the insurance policy on insurance companies. In several courts have emphasized insurable interest and an insurer’s duty to investigate the financial worth of the applicant before granting life insurance. Negligent issuance of a policy or change of beneficiary could result in murder or injury to the insured by the beneficiary or someone acting on his behalf in an attempt to obtain the proceeds of the life insurance policy. In such situations, the insuring company may incur legal liability and can be sued for adjudication by the relevant court of law as illustrated in the following court case of Life
Insurance Company of Georgia VS. Lopez in U S A

underwriting risk in insurance



In this case, the insured claimed that the
insurer’s negligence had endangered his life
and caused him injury. The total annual
family income was about$9,000, but between
1974 and 1977 the insured’s wife obtained
policies on his life totaling $130,000, plus
double indemnity for accidental death; the
annual premiums were $7,464.38. The
insured did not know of the life insurance
policy purchases. He was tricked into signing
the forms, believing his wife was buying
health insurance. In 1977, he heard his wife
and her brother plotting to kill him. He called
the insurance agent and told him, but no
the inquiry was made by the insurer. A few
months later, his wife and her brother tried to
drown him, but he was rescued by a passing
sheriff. The insured alleged that the insurer
should have discovered the disproportionate
life insurance coverage on him about
the family finances and the company should
have investigated the murder conspiracy after
getting the actual notice from the insured. The
the court held that when the insurer has actual
notice of the beneficiaries murderous intent
the court held that when the insurer has an actual1
notice of the beneficiary’s murderous intent
the insurer would be liable if the beneficiary
tries to murder the insured to collect the policy
proceeds. Notice of the beneficiaries intentions
“should have triggered an investigation which
would have quickly discovered the disparity
between the insured’s economic worth and the
beneficiary’s relative interest in the insured
dead or alive, the insured’s lack of consent
and the financial incongruity of paying such
high premiums regularly for very long




























underwriting risk in insurance

Most courts assume that if the beneficiary has no insurable interest in the insured’s life, the murder of the insured is a foreseeable event. The Indian insurance law requires that the applicant/owner of a life insurance policy should have an interest in the continuation of the insured’s life insurable interest). Certain close family relationships Such as Spouse, parent, child or pecuniary interest relationships such as business-key-person or debtor-creditor is presumed to create an insurable interest as discussed in Chapter 1 Even if a blood/family relationship exists, insurable interest is limited to the amount of financial loss expected on the death of the insured.

   underwriting risk in insurance

According to J.D. Ingram, “Policies in violation of the insurable interest rule is not dangerous because they are illegal; they are illegal because they are dangerous. Practically, all courts recognize that an insured is placed in a position of extreme danger where a policy of insurance is issued on his life in favor of a benefīciary who has no insurable interest”.12 Poor financial underwriting adversely impacts mortality experience of life insurance companies. Many claims studies have shown the correlation between little or poor financial underwriting and increased claims ratios. This has been especially true in the high sum assured category.

In times of grave financial crisis, some insured life insurance may be tempted to commit suicide to pay off their debts or secure their family with the proceeds of the insurance. exclusion clauses in the policy which state that insurance money will not be paid to the beneficiary in case of suicide within a given period of taking the policy. In India, most companies have a suicide clause of one year. In some countries the one-year suicide clause the period has been found insufficient and has been extended to two years. Japanese insurance companies have increased their exclusion clause of suicide to three years due to the rise in the suicide cases of people with large insurance covers.14 Insurance companies have

Regular premium payment on the due date is essential to keep an insurance policy in force. Clients may lapse the policy for many reasons, the unaffordable premium amount being a common one. The risk of lapse is a major risk from the life insurance company’s perspective. Early discontinuation of policy means that the expenses involved in sourcing the application, the agent’s commission, the medical testing, and the processing and underwriting costs which account for most of the premium in the first few years of the policy cannot be recouped.


5.4.1 Individuals

Financial1 an appropriate amount of insurance is given to applicants. Applicants are required to submit documents which are evaluated to assess the financial and social standing of the applicant before granting life insurance Underwriters use multiples of income principle to decide the amount of insurance that underwriting ensures cover allowed. If an individual applies for higher than allowed insurance, the insurance companies send a counteroffer to the clients stating the allowable reduced amount. These criteria differ for individuals with earned income and unearned income.

Individuals with earned income

Earned income means compensation from participation in a business, including wages income from salary, tips, commissions, and bonuses. The allowed amount of insurance for different age groups are given in Table5.2

TABLE 5.2 Sum Assured Guidelines for Individual Applicants

Individuals with unearned income
An individual’s income derived from sources other than employment such as interest and dividends from investments or income from a rental property is referred to as unearned income. The amount generally allowed for applicants in all age groups with unearned income is 5 to 10 times of their gross annual income. Limiting the sum assured is not sufficient for managing financial risks. To ensure affordability of premium and protect the company against an early lapse of policies the premium for the policy cannot be more than a  defined percentage of the applicant’s income


TABLE 5.3 Premium Guidelines for Minimizing Financial Risks

Documents required for determining income

Income is the key factor used to evaluate the appropriateness of the sum assured. Questions about income are a part of the application form but for large amounts of insurance financial documents are required to verify the income mentioned in the application form. The documents generally required are listed in Table 5.4

TABLE 5.4 Financial Documents Required for Life Insurance


Undisclosed income
Some businesspersons have undisclosed income. This is the income that is not declared through the income tax returns or balance sheets. To estimate the income of such people unconventional income proofs are needed to be used. Car ownership, credit card limit, property ownership, etc., can provide a reasonable estimate of such an applicant. Life insurance companies restrict the amount of insurance that can be given based on these documents to Rs. 20-25 lakh. Some of this substitute (nonstandard surrogate) income proofs are specified in Table 5.5.1

TABLE 5.5 Nonstandard Income Proof for Life Insurance


5.4.2 Businesses

Business organizations have always used insurance as a tool for risk management. However, this has been restricted to the risk of loss from damage to machinery, equipment, and tangible assets. Insurance of human capital (the value that human beings bring to the business) is now emerging as an equally
important need. Employees, business owners or partners play a key role in creating and Sustaining profitability. Loss of these key persons and the associated financial risk in case of their death can have serious consequences for the company. It may even threaten the very existence of the company,
particularly enterprises and family-run businesses. and small medium-sized

underwriting risk in insurance

The key employee or the partner contributes to the business results, credit availability and goodwill. Death of a key person may result in a decline in sales and profits. Organizations can face difficulty in finding a replacement for such as key employees. In case of a partnership the firm, the deceased partner’s share in the business is inherited by his legal heirs. A legal heir who has not been involved in the business earlier may face resistance from surviving partners leading to conflicts and disruption. In such cases, a partnership insurance policy can be used
compensatory payments, and buy the share of the deceased from his heirs. by

Surviving partners to make

Key person insurance A key-person is one who significantly contributes to the profits of the company. A key-person insurance policy is meant to compensate for the loss from the death of a key person. The purpose of key person insurance underwriting is to financially evaluate the appropriate sum of insurance cover for a key person. First of all the underwriter has to establish whether the key person is really the key. The worth of the key person for
business has to be established to avoid potential fraud. Information such as education and work experience of the key person, his role in the company, etc., is gathered by his curriculum vitae (CV Or through a questionnaire.

   underwriting risk in insurance

The insurance amount allowed is calculated by taking into account the annual salary of the key person or the profits of the company. It is recommended that the maximum sum insured should not exceed five times the annual gross profit averaged out over the last 3 years. As a rule, the underwriter makes an average of 3 years net profit of the concerned company and multiplies it by 5 to arrive at the sum assured that can be given under a key person life insurance policy This amount 1s distributed among the total number of key persons who have applied for the insurance An alternative to this method is to multiply the annual salary of the key person by 10 to arrive at the maximum insurance that can be given Loss-making enterprises are not allowed to take key person policies.

Partnership insurance
Partnership insurance allows surviving business partners to use the insurance proceeds to purchase the deceased partner’s share from his heirs. This type of insurance is also called buy-sell insurance. The buy-sell a clause is added to the original partnership deed (agreement). The clause specifies that all the monetary death benefits from the insurance policy be used only for buying partners’ shares. This buy-sell provision is made through a supplementary deed or a deed of variation and is the legal arrangement designed to provide for an orderly transfer of ownership.

underwriting risk in insurance

Partnership insurance is useful for both surviving partners and the deceased partner’s heirs. It provides funds to purchase the business interest held by the heirs and assures that the control of the company remains with the surviving partners. It also guarantees that the heirs of the deceased partner sell the shares to the firm, and not to outsiders. By eliminating the possibility that the heirs would assume management positions for which they may not be qualified. Any potential emotional conflicts between the heirs and the surviving business owners, if the heirs were to participate in the business, are avoided. Such an insurance cover also removes pressures from the surviving owners to contribute some parts of the profits to the family of the deceased.

underwriting risk in insurance

Partnership insurance is beneficial to the family of the deceased partner as it assures that they get a predefined lump sum payment to the extent of the deceased partner’s share in the company. To determine the amount of insurance that the partners should be given, the underwriter must know the value of each partner’s interest in the business and the firm’s gross and net profits. The amount of partnership insurance allowed to a partnership firm is five times of the average of the last three years’ net profit of the firm. If a firm decides to obtain partnership insurance, all partners of the firm have to

underwriting risk in insurance

apply for insurance simultaneously. The allowed amount of partnership insurance is divided among all the partners based on their share percentage. Life insurance companies are exposed to significant financial risks. Large policies on individuals or key persons and partners need to be carefully underwritten to minimize risk exposure. Statistics show that if applicants are given life insurance policies in excess of
what they can afford, the company’s mortality experience is likely to be adversely affected.

underwriting risk in insurance

The public at large, sometimes, does not understand the importance of financial underwriting and question the purpose of furnishing financial documents and income details to the underwriters for obtaining a policy. Information about concepts of anti-selection and speculation can help in creating awareness and increase the acceptability of underwriting norms and increase the reach of
insurance products.


Medical underwriting is the process of selection and classification of the mortality risk of the applicant based on health conditions. A medical test and examination are conducted by the medical examiners to obtain a complete assessment of the applicant’s health. The underwriter’s decision is based on
the results of the medical report. If the health of the applicant is normal, the underwriter issues the policy at standard rates. In the case of an abnormal medical report, underwriters refer to an elaborate manual that defines the degree of risk called the Extra Mortality Rate (EMR) carried by each condition. A percentage of the increase is made on the premium for substandard applicants based on the EMR

Life insurance companies have a panel of conduct basic medical examinations and a panel of diagnostic centers for blood tests and other specialized tests. The identification document of the applicant is checked before the medical tests are conducted. The medical examinations can be done by a doctor

underwriting risk in insurance

who a general medical practitioner or a medical specialist. The common medical tests which are required in medical cases are as follows: (G) Medical Examination Report (MER)
i) Urine tests (routine and microscopic)

(ii) Blood chemistry-fasting blood sugar, liver enzymes tests, kidney function tests, cholesterol levels

(iv) Blood tests for HIV and hepatitis

(v) Cardiac tests- Electrocardiograph (ECG) and Treadmill

5.5.1 Medical Examination Report

MER is the key source of information in a medical case. The examining doctor has to complete an MER form and send it to the life insurance company. The MER usually consists of two main sections. Section I deals with the medical history and family history of the client. Section II includes a record of height weight, pulse, blood pressure and other medical parameters.

5.5.2 Urinalysis

The urine sample is examined chemically and microscopically for the presence of albumin, pus, casts or red blood cells. Urinalysis measures the functional capacity of the kidneys, detect infections or other abnormal conditions of the kidneys, and may discover impairments of other vital organs of the body Urinalysis can be a part of the MER or maybe a  separate test. Urinalysis can detect kidney problems urinary infections and the presence of sugar in the urine (possible diabetes)

5.5.3 Blood Chemistry

Fasting Blood Sugar (FBS) Fasting Blood Sugar is a common test for life insurance applicants. This test detects the level of sugar in the blood. The normal range of blood sugar is between 60 to 109 mg/dl a level above this range indicates diabetes Liver enzymes (liver function tests) One of the components of biochemical blood the examination is liver enzymes. The components of this test are AST (also called SGOT), ALT (also called SGPT), GGT and Alkaline

Phosphatase, These liver enzymes play an important role in chemical activities within cells. Injury of the liver cells releases these enzymes into the blood, elevating their level above normal limits.

Kidney function tests

Kidney functions are reflected by measuring the Blood Urea Nitrogen (BUN), creatinine and uric acid levels in the blood


Cholesterol is a fat-like substance in the blood. High level of cholesterol in the blood has been associated with deposits of fat on the walls of the arteries causing heart disease. The various categories of lipids in the blood are High-Density Lipoproteins (HDL), Low-Density Lipoproteins (LDL), Very Low-Density Lipoproteins (VLDL) and triglycerides,

underwriting risk in insurance

underwriting risk in insurance


Human Immunodeficiency Virus (HIV and Hepatitis

Applicants for a large amount of life insurance policies are tested for HIV and Hepatitis.

Cardiac tests: Electrocardiograph (ECG )and treadmill

ECG is a diagnostic procedure used to study the structure and motion of the heart. It involves the recording of the electrical activity of the muscles of the heart and the diagnosis of cardiac abnormalities. Recording of electrical impulses of the heart while pacing on a treadmill is called treadmill ECG or stress ECG. A treadmill is a regulated moving platform with a speed recording device. The medical test which leads to abnormal results can be because of three reasons as follows:
(i) The client was not aware of the medical problem-asymptomatic individuals
(i) There has been an error in the medical test
(in) The client has not disclosed the fact in the

application form

When the client is apparently healthy, and asymptomatic, the adverse medical test results often come as a surprise to the life insurance agents and their clients. It is not uncommon for people with no signs or symptoms of the disease to have abnormal medical test results when undergoing a medical test for life insurance. These people may have been suffering from a disease without any overt signs and symptoms, which is brought to light at the time of the
medical test. Abnormal test results can also occur in the case of laboratory errors. Therefore, to make an accurate assessment of such cases underwriters usually request repeat tests if the applicant has not disclosed any health problems.

5.5.4 Classification of Medical Risks by Numerical Rating Method

Medical underwriting uses a numerical rating system to classify and rate these risks as opposed to that extra and multiplier methods used for occupational risks. The numerical rating system takes into consideration the exponential effect of chronic disease conditions on the body into

The numerical rating system was devised in the USA in the 1960s. Under this system, credits are given for favorable factors like a good family history or a proportionate body height and weight. Debits are given for unfavorable factors such as high blood pressure or diabetes. The total accumulation of
credit and debit represents a client’s percentage of extra mortality usually rounded off to the nearest of 25%. Thus, the imposition of 100% extra mortality rating would mean that the applicant, throughout the policy, 1s likely to experience double the mortality risk then a person accepted on the standard terms.

Underwriting manuals contain indicative Extra Mortality Rates (EMRs) for almost all medical conditions. Numerical ratings are derived from these manuals

underwriting risk in insurance

underwriting risk in insurance


Therefore, the exact Extra Mortality Risk of each individual in a given risk class is not the same, The variation between risks of individuals in the same class is because of this 25% rounding off for all individual risks also known as subsidization. The goal of an insurance company is to reduce subsidization by placing individuals in the risk class closest to their actual extra mortality index. Eliminating the subsidization is not practical as it would mean having a large number of narrowly defined risk classes with very few people in each class. This will not allow the law of large numbers to operate effectively. The principle of the law of large numbers is critical for life insurance companies. It is through the application of this principle that is transference becomes commercially feasible,9

underwriting risk in insurance

Translating extra mortality into actual the premium increase is dependent on the age of the insured and the insurance plan applied for, For term products, 50% extra mortality is equivalent to an extra premium of 50% of the standard because the premium of a term plan is made up mostly of the mortality component.

For products such as whole life or endowment where the premium has a significant investment component, the extra mortality is applied only on the mortality portion of the premium. The mortality portion of the premium also increases with an increase in age. An illustration of the approximate proportions of the three premium components indifferent plans are given in Table 5.8.

TABLE 5.8 Approximate Premium Components in Life Insurance Plans


The ratings of medical conditions in the underwriting manual are prepared over a period of time by reinsurers20 using mortality experience, information on medical and clinical trials and general population studies. One such source of mortality information is a study of

impairment groups that were done by the USA Medical Impairment Study, in 1983. The findings of this study were compared with a similar study in 1951, and changes in mortality experience during this period were analyzed. Based on such studies, relevant revisions are made to the underwriting manuals. ratings of medical conditions in

The extra mortality rates (EMR) for various diseases and conditions vary from life insurance company to company based on the specific underwriting manual which a particular companies do not publish their underwriting guidelines, as intermediaries and agents may misuse them by coaxing their substandard clients to deliberately hide disease conditions which have high EMRs? The underwriting assessment for some of the common health
conditions is given as follows: the company follows. Insurance

Overweight An individual’s built-the relationship

between height, weight, and girth-is one of these basic factors to assess mortality. Being overweight or obese puts a strain on the vital organs and physiological systems. Obesity can lead to raised blood pressure, diabetes and coronary artery disease. During the late 19th, century and early 20th-century comprehensive statistical studies were done based on the relationship between body mass, blood pressure and mortality experience on life
insurance policies issued by the leading insurance companies. The findings of these studies as refined and supplemented by subsequent investigations served as the basis for the build tables used by life insurance companies for several decades. EMRs for obesity are given in terms of Body Mass Index
(BMD. It is a measure of body fat based on height and weight. BMI is calculated as BMI = Mass/ Height? and is almost always expressed in the unit kg/m. EMR for overweight applicants depends on the age of an applicant and is lower for an older applicant than that for a young applicant with the same BMI.

underwriting risk in insurance

This is because actuaries account for some degree of mortality in the standard premium rates for older ages, and so even standard premium rates are higher for older people. Clients who are underweight are generally acceptable at standard rates. But an MER may be requested to ascertain if there is a reason associated with his being underweight such as a history of TB, anorexia nervosa or AIDS. EMR for overweight applicants can range from+25 to +250 depending on the BMI, and other factors such as smoking or diabetes. Individuals with a BMI above 44 are usually declined

Diabetes mellitus (Diabetes)

Diabetes mellitus is the most common health problem, second to obesity, in life insurance applicants. Medical tests are required for diabetic clients to assess the level of blood sugar control, complications such as eye disorders and hypertension. The normal blood sugar level in a and to ascertain another person is recognized by medical science as 60- 109 milligrams per decilitre of blood. If the level of sugar in the blood becomes higher than this threshold it is recognized as a diabetic condition.

The lifespan of a diabetic can greatly increase if his blood sugar is kept near normal. To wrongfully obtain lower premiums, some clients take medications like insulin to lower their blood sugar before an insurance medical test. Therefore, to detect the control of blood sugar level over the past three months another test called HbAlc is used. The importance is given to factors such as age at the time of diagnosis, years since the disease is diagnosed, control of sugar, Smoking habits, protein in the urine indicator of kidney damage) and so on. Diabetic applicants with poor control of blood sugar and related complications are declined a life insurance policy

hypertension (high blood pressure)
Hypertension causes various complications in

Clinical tests show that smoking is associated with lung cancer, increased risk of heart disease, respiratory disease, and hypertension. EMR ranging from +25 to +75 is charged for smokers. The rating depends on the number of cigarettes smoked per day. If any other risk factor is present, then the EMR is increased according to those factors. If a client has diabetes along with such smoking habits he may be denied insurance. The rating can be doubled for Heavy Smokers with high blood pressure and increased cholesterol levels in addition to the rating for the respective conditions.


Certain diseases render applicants ineligible for life insurance policies. Diseases with high Extra Mortality Rates of +350 or more such as cancer, coronary artery disease, AIDS, etc., are rejected permanently (declined) by the insurance companies. People with these diseases are, thus medically uninsurable. Some risks may be postponed temporarily if a medical condition can be brought under control by medication. The term uninsurable suggests insurability is the quality of individuals. In fact, insurability is a set of policy decisions taken by the insurers. The insurance pool works on a concept of membership. Insurability is simply a criterion used by a group to decide whom to include and whom to exclude from its redistributive system. Therefore, the parameters for rejection change from one country to another, from one company to another, and over some time.

underwriting risk in insurance

That conditions which can cause decline or postponement of client’s applications as per current industry norms are discussed in section 5.6.1. The list of these conditions is not exhaustive, and only common conditions have been mentioned here

5.6.1 Postponement of Cases

The following are common causes for
postponement of cases applied on account of
certain medical impairments:


A client with very high blood sugar (above 150mg/d), detected for the first time at the time of insurance medical postponed. The case can be offered a better rate after 3-6 months when the client has taken medication, and his or her blood sugar levels have improved.

examination is

High blood pressure The client whose blood pressure measures more than 170/100 mmHg is postponed The the client is advised to take treatment, and if he comes back with lower blood pressure after 3 to 6 months the case is assessed again.

A person suffering from tuberculosis is not offered any insurance Fulytreated tuberculosis case can be offered standard rates on proof of diagnosis, treatment and medical tests to establish current standard health.

Malignant tumors
Most people with malignant tumors are not insured for 4 years after completion of treatment as statistics show that mortality during this period is very high. After a period of 4 years, the individuals may be insured with a rating depending on the type and extent of the tumor.

Heart Bypass

A person with a heart bypass or angioplasty surgery cannot be insured within 1 year from the date of the surgery.

Very high liver enzymes

Detection of very high levels of liver enzymes in an apparently healthy and asymptomatic person is a common cause of postponement. The liver enzymes can be raised for a variety of reasons. Sometimes harmless physiological reasons can cause high levels of enzymes. of reasons. Sometimes harmless physiological reasons can cause high levels of enzymes. Therefore, most underwriters prefer the wait and watch approach and postpone the case
for 3 months after which a fresh assessment of the case is made.

5.6.2 Decline Cases on Account of
Serious Impairments

The following conditions carry very high- risk. Clients with these conditions are declined insurance.


G) With an abnormal (positive) ECG
ii) Diabetes with albumin in the urine
(ii) Diabetes with complications of other organs


(1) Very high blood pressure associated with proteinuria (protein detected in urine signaling deterioration of kidney function)

Tumors recently diagnosed or in treatment

(1) Leukemia, breast cancer, and other malignant conditions

Other diseases

(1) Systemic Lupus Erythematosus (SLE)
(2) Coronary Artery Disease(CAD) below 40 years of age
ii) Paralysis
(iv) Ulcerative colitis
(v) Polycystic kidney
(vi) Cirrhosis of liver
(vii) Alzheimer’s disease
(vii) Organ transplant recipient (In certain
rare cases kidney transplant recipient is
given policy with a high rating if a current health condition is good)
ix) Chronic pancreatitis
(x) Acquired immune deficiency syndrome (AIDS)
xi) Cystic fibrosis
xi) Muscular dystrophy
(xiii) Renal failure
(xii) Muscular dystrophy
(xiii) Renal failure

underwriting risk in insurance

In the post liberalized market private life insurance companies take a keen interest in gathering data, analyzing claims experience, and keep a track of the competitors underwriting guidelines. As companies increase the size of their insurance pools and experience favorable claim ratios they would gradually relax their underwriting policies, further increase their nonmedical limits and decline of fewer applicants. This will result in the availability of insurance cover for many more people.


5.1 Fill in the blanks with appropriate terms.

(a) ,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,, life insurance policies are underwritten without a medical examination.

(b) In nonmedical policies, diseases which can Occur without overt symptoms such as may remain undisclosed as………….. either the applicant may not know that they suffer from these diseases, or they intentionally hide the fact.

(c) The life insurance policy sold to children is purely for …………….. reasonS.

(d) Regular …………. payment by the due date is essential to keep a life insurance policy in force

(e) Partnership insurance provides funds to purchase the business interest held by the heirs and assures control of the company remain with them …………..

5.2 Give the answers is brief.

(a) What steps are taken to minimize risk for juvenile insurance?

(b) Why are the risks involved in certain occupations evaluated carefully by the insurance companies?

(c)Why does an insurance company need to evaluate the financial condition of the customer before granting him the insurance?

(d) What is the method used to classify medical risks and assign them to an appropriate category?

(e) What are the advantages of nonmedical insurance?


5.1 (a) Nonmedical (b) diabetes or hypertension
(c)children (d) premium (e) surviving partners


Meena is an 18-year-old girl whose father has applied for the life insurance policy for a sum assured of Rs. 5 lakh on her life. The father is the policyholder, hence he is the owner, payer, and beneficiary of the policy. The details of the case are given below:


Name of insured – Meena Age -18 years Sibling- One brother; 16 years of age Policy Endowment for 20 years for a sum assured of Rs. 5 lacs
Insurance on family members – No insurance on sibling or mother; the father has a policy of Rs. 2 lakh policy from LIC Occupation of life to be insured-Student
Father’s occupation – A clerk in the municipal water department
Identification document – Ration Card
Address of family – Government Flat

underwriting risk in insurance

The annual income of the father Rs. 1 lakh per annum Premium Medical Rs. 20,000 per annum

No medical test required as per the medical table Medical history in application form-Fracture in the leg due to falling one year back

Question 1 What are the implications of the gender and age of life to be insured?

Question 2What is the percentage of premium concerning the income of policyholders and is Is the policy affordable?

Question 3
What does the fact that there is no insurance on sibling and parents show?

Question 4 Does medical history raise red flags? If yes, what medical tests, if any, will the underwriter require or will the case remain nonmedical?

Question 5 Based on the above will the policy be issued at standard, substandard rates or declined?

                                                                                                                              CASE II

A 10-year-old boy, Sameer is proposed for insurance of Rs. 1 lakh by his father. The product applied for is a whole life plan. The important
details of the case are given as follows:


Name of insured-Sameer Age-10 years Sibling – 2 brothers; one aged 5 years, another aged 7 years.
Policy Whole life plan for a sum assured of Rs. 1 lakh Insurance on family mnémbersNo insurance on
sibling or mother, the father has an Rs. 1 lakh policy Occupation of life to be insured-Student Father’s occupation Salaried in private company Identification document of the child School record of 2 years back Address of family-Jhuggi Jhopri cluster


Salary of father-Rs. 60,000 per annum Premium is – Rs. 1,000 per annum


Medical history of proposed insured Kidney stone 2 years back removed successfully at a government hospital as per reports attached.
Question 1 Do you think the father can financially afford the premium?

Question 2 What are the key concerns regarding the risk of the case?

Question 3 Apart from the medical history, what will be the other inputs that are required to assess the case?

Question4 If the current health of the child is not completely normal will he be insured?

Question5 If the current health is normal and the child is completely cured of the earlier medical the problem will insurance of Rs. 1 lakh be allowed on him?

underwriting risk in insurance


Seema Desai is the wife of a businessman Deepak Desai, who runs his family handicrafts export business. Deepak Desai has applied for a life insurance policy of Rs. 50 lakh for himself and his wife They have been married for two years now. This case is related to the application of his wife. The significant details are given as follows :


The policy owner and premium payer Deepak Desai (Husband); Age 32 Education of life to be insured (Seema) Qualified dentist; Age – 28 Occupation Contributing full time to serve the Desai charitable trust (in an honorary position)


Income……. Nil as per Income Tax Returns furnished. Husband is the premium payer; Premium – Rs. 1 lakh Assets- Rental from flat in her name Rs, 5 lakh per year


All medical tests as per medical tables are normal

Question 1 Will Seema be regarded as a dependent and her non-earning status put her in the no- income-earning category?

Question 2 Will her education playa role in determining her risk?

Question 3 Should she be given insurance of Rs. 50 lakh even though she does not have a salaried/fixed/business income?



Santosh Shetty is 40 years old, has applied for the Rs. 4 lakh endowment policy. He is a clerk with the ower Corporation in Mangalore. His wife is the
nominee of his policy. The other details of the policy are given below:


Age …. 40 years Nominee Wife Education- B.Sc Sum assured …… Rs. 4 lakh endowment policy Previous insurance- Nil


Income – Rs. 2 lakh per annum Premium RS 4,500 per annum


Details in the Application Form:
Santosh’s parents are diabetic They are above 65 years of age. He 1s also a smoker and Smokes 10 Cigarettes a day

DetaisMER over

It has a blood pressure which is slightly above the normal range. Santosh is slightly overweight on medical examination

Question 1 Is there any financial risk in this proposal?

Question 2 Is the family history coupled with a history of smoking, overweight and blood Are pressure significant?

Question 3 What other medical tests, if any can be required to ascertain risk factors properly?

underwriting risk in insurance


Karthik Krishnamoorthy and Sailesh Sinha, employees of Religare Energy Limited apply for Rs. 5 lakh of unit-linked policies. Both work on-site at the Religare Energy plant. The company deals in oil and natural gas exploration. Karthik is a geologist and works mainly in the office onshore, and Sailesh is an engineer and works on the offshore site.


Name of the insured -Karthik Age-35 years Sum assured – Applied for Rs. 5 lakh Unit

Linked policies

Education- Ph.D. in Geology Has previous insurance for Rs. 6 lakh Name of the insured- Sailesh Age-25 years Sum assured -Applied for Rs. 5 lakh Unit

Linked policies

Education- B. Tech No previous insurance


Income ……. Karthik earns Rs. 18 lakh per annum, Sailesh earns Rs. 8 lakh per annum A premium of Karthik -3,500 Premium of Sailesh-2,500


Parents and siblings healthy in both applications.  All parameters in both application forms are started normally Both are non-smokers No medical test required as per the medical table

Question 1 What are the key risk factors in these cases which need to be assessed for underwriting?

Question 2 Does the difference like the job of both applicants place them in different risk categories?

underwriting risk in insurance

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