Underwriting of Insurance

“STRONGER REGULATION AND SUPERVISION AIMED AT PROBLEMS WITH UNDERWRITING PRACTICES AND LENDERS’ RISK MANAGEMENT WOULD HAVE BEEN A MORE EFFECTIVE AND SURGICAL APPROACH TO CONSTRAINING THE HOUSING BUBBLE THAN A GENERAL INCREASE IN INTEREST RATES”

 -BEN BERNANKE

Introduction:

Underwriting is a process which means that the lender verifies our income or assets or debts in order to issue final approval for the loan. The underwriting services are provided to some financial institutions like a bank, insurance companies, etc. all these financial institutions promise to return the payment if in case of any damage or loss incurred. An underwriter helps the company to identify the risks involved in terms of finance of the company and they also help in calculating the price for the coverage which is beneficial to both the insurer and the company.  

Guidelines of Underwriting

• In some insurance plans, for only the age of 1^st month, 1st day to the age of 70 years is being considered.
• An insurer can select only one life insurance plan with or without a rider, example: accidental death rider, hospital and surgical rider, hospital benefit rider, dread disease rider, etc.
• Underwriting would come into force based on the risks involved, e.g. lifestyle, financial risk factor and the health status.

 Documents Needed for Underwriting

These conditions apply for the insured aged between 1 month 1day and 15 years:

• Insurance application for the juvenile, i.e. children below the age of 16 years.
• A copy of the birth certificate or any valid ID card.
• A copy of health check-up documents that have been insured at the age of 1 year old.
• An authorization by the juvenile’s parent when a copy of medical treatment history is required.
• A temporary binding receipt. (A binding receipt is that which is given to an applicant for confirming the insurance and that the application has been authorized.)
• Agent’s report.

The below conditions applies only to people aged 16 years and above:

• An insurance application.
• A copy of a valid ID card.
• A self-authorization of the insured.
• Agent’s report
• A temporary binding receipt.

Factors Necessary in Underwriting Insurance Lives

• Health history of insured: this is the most important aspect to be considered while underwriting. The application form will consist of a list of questions relating to the body of the insured, if he has undergone any surgery or is aware of a temporary/permanent disorder, etc. due care should be taken while filling this particular form.
• Family history: family history plays a crucial role when a person has incurred any disease. It has been proven that genes not only carry characteristic features, but it might also transfer the ailments to the next generation. Every minute information like the death of parents, siblings and the medical history should be mentioned by the insured.
• Occupational history: majority time of any particular individual is spent in his/her workplace. Workplace pressure not only causes mental illness but there are high possibilities of physical damage too. For example, people who work in coal mines, car racing, boxing, etc. are exposed to higher risks.
• Ability to pay: this is also known as financial underwriting. This particular underwriting is concerned with the ability of the inured to repay the premiums.
• Residential location’s risk: a person’s house location also acts as a threat. Countries or places which are prone to frequent wars, natural calamities, etc. attract a higher premium. For example, the people in Jammu and Kashmir are prone to frequent war attacks at odd times.

Underwriting Process

 Underwriting process involves identifying, analyzing and solving the risks that are incurred to the insured. There is a certain order of procedure that is being followed during the process of underwriting, such as:

• The application form should be filled in and authorized by the insured.
• Age proof of the insured has to be submitted.
• KYC (know your customer) documents like the identity proof (aadhar card, passport copy, voter ID, PAN card or driving license) has to be self-attested. Residence proof and a photograph have to be submitted.
• PAN card is compulsory only if the annualized premium payable on the application exceeds Rs. 50,000.
• It is a rule that collection above Rs 2, 00,000 can be made only by the account payee cheque or through an account payee demand draft or any other online banking system. According to section 269ST of Income-tax Act, 1961, if any cash collection exceeds Rs. 2,00,000 per person per day, it is considered void. Hence it is prohibited.
• Income proof can be stated in the form of salary slip. The primary reason for the income proof is to check the degree of protection cover which is connected to procuring limit and to look at the capacity to pay the premium over the term of the approach.
• Once the company receives all the documents, it will issue a standard premium rate policy to the insured. With the start of a new era where everything is done with the help of technology, insurers have the freedom to fill the proposal forms online using tablets and mobile phones.
• Automated underwriting: this is also known as the ‘jet underwriting’.  This is a technology-based underwriting. The decision of loans is taken by the computer. This is considered as an efficient and time-consuming process.
• Non-medical underwriting: this is an underwriting process which excludes the process who medical examination of the insured. One can get a term life insurance policy without examining themselves.
• Medical underwriting: medical underwriting is the process of evaluating the health insurance application and examining the medical history of the insured. A medical examination is conducted through medical practitioners empanelled with insurance companies. Once the medical examination has been ordered, the life assured is contacted within 2 to 3 business days in order to schedule the medical examination.

Types of Underwriting

1. Insurance underwriting: under this type of underwriting, the insured’s life, health, rental or other types of insurance would be analyzed and evaluated. In this process of life insurance, the underwriting process involves assessing the risks of the insures by evaluating his/her particular age, family medical history, occupations, residence address, lifestyle, personal health and hobbies. The insurers classify and analyze the risks clearly and specifically related to coverage, being practical to the administer, etc.
2. Securities underwriting: securities underwriting involves the process to the bank wanting to know how profitable the investments would get. Corporate, municipal bonds and governments require security underwriting process. This process helps to identify the profitable securities supplied by the company. The next step of the investor is to sell those securities for a profit.
3. Forensic underwriting: after a borrower fails to pay back a loan, forensic underwriting comes into force. A typical forensic underwriter helps to assess the failure risk and to investigate the frauds.
4. Securities underwriting: in this process, the investment bank is keen on knowing how profitable the investments are likely to be. The investment banks also increase the investment capital on behalf of the government and the corporations. It’s foreseen that this is a way to issue stocks, bonds to the investors.
5. Loan underwriting: this type involves the method of calculating the risk. The factors affecting loan underwriting is as follows-
   • Income- the loan lenders fix an income limit below which they won’t lend money. It is also kept in notice that loan repayment is an essential part, hence they ensure that the customers have a decent income that will help to serve the EMI’s with ease.
   • Collateral’s value– in loans such as home loan, car loan, etc., an asset owned by the insured should be kept as collateral. It would have been of little importance if the collateral doesn’t have an equal or higher value than the loan amount.
   • Credit score- this is one of the most crucial factors influencing the loan underwriting. A credit score reflects how wise or sensible the insured is, in managing and repaying past loans. By this score, one may be offered to avail loans at competitive interest’s rates. A score of 750 and above helps getting entitled as a “responsible borrower”.
6. Continuous underwriting: it is the process in which the risks involved in insuring the customers are evaluated and examined on a continuous basis. It is evolved from the traditional form of underwriting.

Conclusion

An underwriter ensures that the company’s IPO (initial public offering) increases. The process of underwriting gives a certain relief to both the insurer and the insured. The underwriter evaluates and analyzes the risks of insuring a particular customer and eases their job. An insurance company cannot randomly give the proposal forms to all the individuals willing to pay the premiums. Not everyone has the same mortality risk. Hence underwriters help keep the insurance company in profit and carefully complete their tasks.

References:

• “lenders scrutiny borrowers,” – Herald Tribune
• Insurance law and practice- pg., 115
• https://www.canarahsbclife.com/knowledge-centre/blog/what-is-life-insurance-underwriting-process.html
• https://www.glgamerica.com/types-of-underwriting/
• https://www.google.com/amp/s/www.forbes.com/advisor/mortgages/how-mortgage-underwriting-process-works/%3famp