Life & Health Insurance Underwriting and Risk Classification Questions and Answers — Questions and Answers
Question 1: An applicant for life insurance discloses a hazardous hobby of recreational scuba diving. How would an underwriter most likely address the increased risk?
- Issue the policy at preferred rates because the applicant is likely physically fit.
- Decline the application immediately as scuba diving is a prohibited activity.
- Ignore the hobby as personal activities are not considered in underwriting.
- Issue the policy with a higher premium or an exclusion rider for scuba diving. (Correct answer)
Correct answer: Issue the policy with a higher premium or an exclusion rider for scuba diving.
Hazardous hobbies or occupations increase the risk of premature death, so the insurer must account for this. The most common methods are to charge a higher premium (often called a 'flat extra') to compensate for the increased risk, or to add an exclusion rider which states the death benefit will not be paid if the insured dies as a result of the specified hazardous activity.
Question 2: An underwriter reviewing a life insurance application finds that information in the applicant's MIB (Medical Information Bureau) report conflicts with the medical history provided on the application. What is the underwriter's most appropriate next step?
- Immediately decline the application based on the MIB report.
- Request an Attending Physician's Statement (APS) for more detailed information. (Correct answer)
- Issue the policy but increase the premium to a substandard rate.
- Report the applicant to the state's Department of Insurance for attempted fraud.
Correct answer: Request an Attending Physician's Statement (APS) for more detailed information.
An MIB report serves as an alert for underwriters, but an adverse decision (like declining an application) cannot be based solely on MIB information. The proper procedure when a discrepancy is found is to conduct further investigation, which typically involves ordering an Attending Physician's Statement (APS) to get complete medical details directly from the applicant's doctor.
Question 3: An applicant is 35 years old, in excellent health with no chronic conditions, has a desk job, and does not use tobacco products. Into which risk classification would this individual most likely be placed?
- Substandard
- Standard
- Preferred (Correct answer)
- Declined
Correct answer: Preferred
The Preferred risk classification is for applicants who present a lower-than-average risk of loss. This applicant's excellent health, safe occupation, and healthy lifestyle choices qualify them for the best rates, which are associated with the Preferred or Preferred Plus categories. Standard is for average risk, and Substandard is for higher-than-average risk.
Question 4: Which of the following best defines the principle of 'adverse selection' from an insurer's perspective?
- The process of selecting only the healthiest, lowest-risk applicants for insurance.
- The illegal practice of discriminating against applicants based on prohibited factors.
- The tendency for individuals with a higher-than-average risk of loss to seek insurance coverage. (Correct answer)
- The selection of a diverse portfolio of investments to fund policy reserves.
Correct answer: The tendency for individuals with a higher-than-average risk of loss to seek insurance coverage.
Adverse selection describes a situation where individuals who know they are at a high risk of loss (e.g., those with health problems) are more likely to apply for insurance than those at average or low risk. The underwriting process is the primary tool insurers use to mitigate the effects of adverse selection by properly identifying and pricing risk.
Question 5: All of the following are primary factors used in life insurance underwriting to classify risk EXCEPT:
- Race (Correct answer)
- Tobacco Use
- Occupation
- Health History
Correct answer: Race
It is illegal for insurers to use race as a factor in underwriting or setting premiums for life insurance. Factors such as tobacco use, occupation, and personal health history are all permissible because they have a direct and statistically valid correlation to an individual's mortality risk.
Question 6: What is the primary source of information an underwriter uses to determine an applicant's eligibility and risk classification for a life insurance policy?
- The agent's report
- The Medical Information Bureau (MIB) report
- The completed insurance application (Correct answer)
- The Attending Physician's Statement (APS)
Correct answer: The completed insurance application
The insurance application is the applicant's formal request for coverage and is the primary source of information for the underwriter. It contains the applicant's own statements regarding their health, occupation, lifestyle, and financial situation. Other sources like the MIB, APS, and agent's report are used to supplement and verify the information provided on the application.
Life & Health Insurance Underwriting and Risk Classification Questions and Answers
An applicant for life insurance discloses a hazardous hobby of recreational scuba diving.
How would an underwriter most likely address the increased risk?