Underwriting Life and Health Insurance and MIB
Individually underwritten life and health insurance is purchased to protect people's future economic security against financial hardship relating to premature death, illness, disability and long term-care costs and other such unexpected events. Insurers and their agents are highly motivated and financially incented to sell insurance. Insurance companies make every reasonable effort to offer coverage to as many people as possible, while also ensuring that they appropriately classify individuals according to the degree of risk they present. Charging appropriate premiums for insured risks allows insurers to remain financially strong so they can meet their long and short-term policy obligations to each and every policyholder. MIB plays a critical role in the underwriting and risk classification process, but the decision to insure and set premium rates is borne solely by the insurer.
What is Risk Classification and Underwriting?
Insurers "underwrite" each application of individual insurance to determine the risk classification to which an applicant should be assigned and to make a final underwriting decision (often described as "risk selection"). A "risk class" is a group of applicants who present to the company an equivalent mortality risk for life insurance or morbidity risk for health insurance. To do so, the company reviews various "risk factors."
The process of risk selection also protects insurers by allowing them to offer insurance at premiums that are commensurate with the levels of risk. By doing so, insurers can be more confident that they will be able to fulfill their future financial obligations to policyholders under their policies. Risk selection also helps applicants by ensuring fairness in underwriting. In the absence of risk selection, healthier applicants would have to unfairly subsidize individuals who are less healthy in order to compensate for the premature claims of these unhealthy individuals.
Another fundamental purpose of insurance underwriting and risk classification is to protect insurers and policyholders from adverse selection (also known as antiselection). Adverse selection occurs when an individual learns that he or she has a serious illness, may die prematurely or become disabled and, as a result, becomes motivated to purchase life or health insurance, often in amounts that are larger than he or she would have otherwise. An individual in this situation also has a strong incentive to withhold unfavorable health information from the insurer to which he or she is applying in order to obtain coverage or pay those lower premiums offered to healthier individuals. MIB operates to protect life and health insurance companies (and ultimately the purchasers of life and health insurance) from adverse selection, including those instances when individuals either deliberately or inadvertently conceal or omit medical impairments and hazardous avocations that might affect their proper risk classification and insurability.
How do Insurance Companies Underwrite Individuals?
Before an individual can purchase certain types of life and health insurance, he or she must meet the insurer's specific underwriting requirements and standards. The underwriting process helps the insurer to classify risks and to decide ultimately whether an application should be accepted or declined, and, if accepted, whether the applicant should be offered insurance at a preferred, standard or substandard premium (an extra premium).
If insurance is offered substandard, the insurer's offer may not include some policy benefits or it may contain a rider excluding coverage for a certain condition. The underwriting process also helps the insurer to determine the amount of the premium to charge based on the individual's risk class.
In order to underwrite an application for insurance under the company's underwriting standards and guidelines, the company typically examines a number of risk factors, including:
current health, physical condition, and build (height and weight);
personal health history;
personal habits (including habits regarding tobacco, alcohol or drug use);
age [A 50-year-old applicant will pay a higher rate than a 30-year-old.];
sex [Except in states requiring unisex rates; rates for women are lower than those for men since women have longer life expectancies.]; and,
other factors, such as aviation activities, military status, avocations, sports, driving record, total amount of insurance in force, and financial status.
What is an Insurer's Most Important Underwriting Tool?
An individual's application for insurance is the most important source of underwriting information. When a person applies for an individually underwritten insurance policy, he or she is asked a number of questions that help the insurance company place the individual in the appropriate risk classification. Most of these questions relate to health, but there are also questions on hobbies, finances, and other insurance policies.
MIB's "Checking Service" provides an alert to a member company when an individual applies for an insurance policy and fails to answer a question correctly because of confusion or forgetfulness, or knowingly and intentionally omits information that may be relevant to the risk classification process. If an underwriter at a member company receives information from MIB about an applicant, the underwriter is required to further investigate the individual's medical history before making any adverse underwriting decision. In this way, MIB information simply acts as an "alert" to the underwriter that an additional investigation is necessary to obtain more information about a condition that was undisclosed on the application.
An underwriter will review all the information obtained during the underwriting process and will then develop a risk profile of the applicant. For life insurance, this risk profile relates to the life expectancy of the individual (mortality). For health insurance, this risk profile relates to morbidity—the relative incidence of sickness or illness of the individual or the individual's anticipated health claims experience. Each insurer sets its own underwriting standards for what it considers to be acceptable, insurable risks. Each application for insurance is reviewed and then compared against those standards. MIB has no role in setting or applying these underwriting standards.
How Does MIB Fit in the Underwriting Process?
MIB's Checking Service alerts its member companies to medical conditions and avocations that could be significant to an individual's health or life expectancy.When a member company searches the MIB database, the results, if any, are compared to the information provided by the applicant as answers to the questions on his or her application, any supplemental questionnaires, and responses made by him or her during any telephone underwriting interviews or examinations. If all of these questions were answered fully and frankly, then any MIB report should have little or no bearing on the underwriting of the application because the underwriter would already be aware of the conditions reported by MIB.
However, if MIB provided information that was not disclosed on the application or was not otherwise provided by the applicant, then the underwriter would obtain further information to substantiate the MIB information (e.g., by conducting a phone interview with the applicant, obtaining medical records, lab tests, etc.). The underwriter would then assess the risk and make an underwriting decision based on the additional information obtained in that investigation. In other words, an adverse underwriting decision would not be based solely on the MIB report.
Why Should MIB's Role be of Interest to Me?
If you were to purchase insurance from a company that suffered a disproportionate amount of claims against it, the excess claims experience could have an adverse effect on the performance of your individual policy and the financial performance of the insurer. Poor claims experience, as a result of persons withholding or omitting information or by making misrepresentations that would have either caused the company to decline to issue or charge an extra premium for the extra risk, may affect all the policyholders of that company. The company may need to raise rates, reduce dividends or interest credited to policies, or make other adjustments to compensate for poorer than expected claims experience. By alerting its member companies to possible errors, omissions, misrepresentations, or even fraud, MIB is helping to reduce the incidence of these cases and, therefore, MIB may help lower the cost of life and health insurance for consumers.
In the absence of risk
applicants would unfairly
subsidize those who are