Insurance Underwriting

How Risk Affects an Insurance Application

When an insurance company ‘underwrites’ a health or life insurance application, it assesses the risks associated with the applicant.  As a licensed insurance agent, it is important to understand that the goal of an insurance company is to maintain a profit while providing financial protection to its customers.  In order to measure the amount of risk that is associated with the applicant, the insurer’s underwriting department reviews the application according to its ‘underwriting guidelines.’

Simply stated, an insurance company determines an applicant’s eligibility and premium amount based on the total overall risk, and how it is classified according to the company’s risk limits and standards.

Underwriters are individuals who are employed by the insurance company to review and determine whether an applicant is acceptable or declinable, based on the medical history of the applicant.  The ‘underwriting guidelines’ used to determine the class of risk associated with an applicant can vary from each insurer, according to the amount of risk the insurer can assume.

Each applicant is ‘rated’ according to sex, age, height, weight, medical conditions, medical history, smoking status, occupation, and even hobbies (riding motorcycles, rock climbing, etc).  The policy’s risk classification and associated premium rate (monthly cost) are determined using this rating system.

4 Classifications of Risk:

1.  Preferred Risk – This class of risk is reserved for people with good health and good habits.  Based on age, height, weight, and smoking status, individuals that fit within this classification are considered a low or ‘preferred’ risk, and will often pay less premium than a standard risk policy.

2.  Standard Risk – Simply means an applicant has been approved for the policy as applied.  This classification is the average, or normal classification for the majority of applicants.  Insurance companies commonly promote ‘anticipated rates’ based on a standard risk classification.

3.  Sub-standard Risk – This class of risk includes applicants with pre-existing conditions that are within the risk acceptance levels of the insurer, and can include a higher premium payment to offset the increased risk.  This risk class can also exclude certain benefits of the policy, or types of medical conditions from receiving coverage in order to prevent abnormal loss to the insurance company.  An applicant rated as ‘substandard risk’ is commonly in poor health, has already manifested a preexisting condition that is beyond the standard risk classification (based on the underwriting review), or might engage in a dangerous hobby or occupation.

4.  Declined Risk – Unfortunately, some risks are uninsurable and are not accepted by the majority of the insurance industry.  These risks can include specific life-threatening conditions, a combination of multiple conditions, or even an applicant’s extreme weight limit.  An insurer will try to increase premium or exclude a risk in order to accept an applicant (remember profit); however, some risks are beyond the risk acceptance levels of the insurer and are declined.  Keep in mind that every insurer is different and each follows its own underwriting guidelines, so just because an applicant is declined or rated as ‘substandard’ by one insurance company does not mean that the next insurer will result in the same outcome.

Remember, an insurance agent’s responsibility is to provide the best available options to an applicant (often times from several insurance companies), weigh the pros and cons of each option, and help the individual accurately apply for the insurance.  When the insurer knows the correct and complete background of an applicant, it can provide the best result for both parties.