Post - Claim Underwriting: A Life and Health Insurer's Boon or Bane[dagger]

FDCC Quarterly, Fall 2004 by Schuman, Gary

I.

INTRODUCTION

Life and health insurance companies find themselves in an extremely competitive environment.1 Industry consolidation, greater sophistication of the consuming public and easy access to information have forced insurers to carefully review the manner in which they conduct business. They must constantly respond to new products introduced by the competition and look for ways to become more accessible in order to maintain existing customers and obtain additional business.

Insurers compete for business in many ways. One method is to simplify the process of buying and selling insurance by looking for ways to streamline the application and underwriting processes.2 Not all individual insurance products require the same degree of underwriting. Some insurance applicants who seek large amounts of life, medical or disability coverage can be approved only after extensive medical, personal and financial information has been gathered and carefully evaluated.3 Other applicants - such as those applying for low amounts of coverage - may be approved with only the information contained in the application.4

An insurer's duty to investigate an applicant's health and background before issuing coverage must be balanced with the time and money involved in doing so. It is physically and economically impossible for an insurer to fully and completely investigate every potential insured to try and discover the less obvious health defects.5 In order to make thorough medical and background examinations of every applicant for insurance, similar to those most insurers now make when the amount applied for is large, the insurer's costs would not only significantly increase the price of insurance but also seriously inconvenience the individual applying for the coverage.6

II.

THE INSURANCE APPLICATION AND UNDERWRITING PROCESSES

Regardless of the size or type of insurance sought, the first formal step in the making of a life or health insurance contract is the completion and signing of a written application by the person who seeks to obtain the insurance.7 The applicant's health status is critical to a life or health insurer's ability to evaluate the risk it is being asked to insure8 and the application for insurance is one of the most important risk assessment tools provided to the insurer and its underwriters.9

The application contains a general identification of the applicant and a description of the type of insurance coverage desired. In addition, depending on the type of insurance applied for, it may be very detailed requesting information about the applicant's employment, health and insurance history and other information, or it may be as simple as listing the insured's name, address and beneficiary.10

Insurers usually design applications for lower face value coverage such as industrial," supplemental12 and credit insurance13 to obtain all the necessary underwriting information, so that the underwriter will have to gather little or no additional information. These applications typically contain fewer and simpler health questions designed to ensure that the applicant fits the profile established by the insurer for the coverage. Completed applications are then submitted to the insurer's underwriting department for review and evaluation.14

Underwriting is intended to ensure that each proposed insured receives an equitable, consistent evaluation and is charged an appropriate premium for the coverage offered.15 One of the basic principles of insurance is that each individual insured should pay a premium that is proportionate to the amount of risk the company assumes for that person.16

The home office underwriter's primary responsibility is to evaluate an individual's anticipated mortality17 or morbidity,18 depending on the coverage applied for, in order to determine whether to approve that person for insurance coverage according to the insurer's underwriting manual.19 An underwriting manual is a detailed listing of various health and social conditions with information on impairments. It provides a guide to suggested underwriting action when impairments are present.20 An insurance company is entitled to determine what risks it chooses to accept for insurance,21 but it also has a responsibility to follow consistent risk selection practices and following the manual helps ensure that the insurer is acting in a fair manner.22

The agent plays an extremely important role in the application and underwriting process. This is especially true for the lower face value policies.23 Underwriters have traditionally relied on the agent to gather initial information that can indicate whether a proposed insured is eligible for the coverage requested.24 Agents see applicants in person, make an initial assessment of a proposed insured, and determine whether that person is likely to be approved for a specific type of coverage by performing field underwriting.25 Field underwriting is the process of gathering initial information about the proposed insured and screening applicants who have requested coverage.26 The agent is expected to obtain answers to every question on the application and to record the information obtained directly from the proposed insured's response.27 Home office underwriting, if any, is performed at the clerical level because the rate structure for this type of coverage makes little allowance for detailed assessment by an underwriter.28