Underwriting and Risk Analysis Flashcards

What is the primary purpose of insurance underwriting?

Answer: To classify and price risk fairly to maintain the financial stability of the insurance pool

Underwriting classifies and prices risk to ensure premiums are fair and adequate, protecting the financial stability of the insurance pool for all policyholders.

What are the standard risk classifications used in life insurance underwriting?

Answer: Preferred, standard, substandard (rated), and declined

The standard risk classifications are preferred (better than average risk), standard (average risk), substandard/rated (higher than average risk), and declined.

What is 'financial underwriting' in the context of life insurance?

Answer: Verifying that the coverage amount is justified by the applicant's financial circumstances and insurable needs

Financial underwriting ensures that the death benefit amount is reasonable and justified by the applicant's income, net worth, and financial obligations.

How does tobacco use affect life insurance underwriting in Canada?

Answer: Tobacco users typically pay significantly higher premiums than non-tobacco users due to increased mortality risk

Tobacco use significantly increases premiums because it is one of the strongest predictors of increased mortality, with smoker rates typically being double or more the non-smoker rates.

What is an 'attending physician statement' (APS) and when is it typically requested during underwriting?

Answer: A report from the applicant's doctor providing their medical history, typically requested for larger coverage amounts or disclosed health conditions

An APS is a report from the applicant's personal physician providing detailed medical history, ordered when the underwriter needs more information about disclosed conditions or for large coverage amounts.

What is 'adverse selection' and how does underwriting help prevent it?

Answer: The tendency of higher-risk individuals to seek insurance more aggressively than lower-risk individuals

Adverse selection is the tendency of higher-risk individuals to seek more insurance, which underwriting counteracts by identifying and appropriately pricing these higher risks.