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8.5 Individual Health Insurance Underwriting

The policyowner is the individual who applies for and owns the insurance policy. This person is responsible for completing the insurance application and maintaining the policy. The policyowner may or may not be the insured, who is the person whose health or life is covered under the policy.

In most health insurance policies, benefits are typically payable directly to the insured when a covered loss occurs. However, the policyowner may designate a beneficiary to receive benefits under certain circumstances. For example, if the policy includes a death benefit and the insured dies before benefits are paid, the proceeds will be paid to the named beneficiary.

The primary beneficiary is the first person designated to receive the policy benefits. A contingent (secondary) beneficiary may also be named to receive the benefits if the primary beneficiary dies before the insured.

When applying for insurance coverage, both the policyowner (applicant) and the insured must generally be present and sign the application to confirm the accuracy of the information provided and acknowledge the terms of the policy.

Field Underwriting Nature and Purpose​

Field underwriting is a critical part of the insurance underwriting process because it helps identify potential risks, including the possibility of moral hazard. It represents the first step in evaluating a health insurance risk and begins during the producer’s initial contact with the applicant.

During field underwriting, the producer meets with the applicant, gathers relevant information, and assists in accurately completing the insurance application. The producer also makes preliminary observations about the applicant’s eligibility for coverage and helps ensure that all required information is properly recorded.

The primary purpose of field underwriting is to help determine whether the prospective insured individual or group presents a level of risk consistent with the premium rates established by the insurer. In other words, the process helps ensure that the applicant’s probability of loss is reasonably aligned with the assumptions used when setting the policy’s premium.

Completing the Application and Field Underwriting​

An insurance application is a written, formal request submitted by an applicant asking an insurer to issue an insurance policy based on the information provided in the application. This document collects essential details about the applicant that the insurer uses to evaluate the risk and determine whether coverage should be issued.

During the application process, the producer has the responsibility to ask follow-up questions and clarify information beyond the basic questions listed on the form. This process, known as field underwriting, helps ensure that the information provided is complete and accurate.

The application serves as the primary source of information used by the insurer when underwriting a potential risk. If a copy of the application is attached to the policy when it is issued, it becomes part of the entire contract between the insurer and the policyowner.

##Required Signatures The insurance application must be signed by both the producer and the applicant. By signing the application, the applicant confirms that the statements and information provided are accurate and truthful to the best of their knowledge.

If the policyowner is different from the insured, both individuals are generally required to sign the application to acknowledge the information submitted and the request for coverage.

When the applicant is a minor, a parent or legal guardian must sign the application on the minor’s behalf. This signature confirms legal consent for the insurance coverage and the accuracy of the information provided in the application.

Changes in the Application​

If a response on the insurance application needs to be corrected, the producer or the applicant may make the necessary change. However, the applicant must initial the correction to verify that the revised information is accurate and approved.

Alternatively, if the correction is significant or multiple changes are required, the producer may complete a new application to ensure that all information is clear, accurate, and properly documented.

Consequences of Incomplete Applications​

It is the producer’s responsibility to ensure that the insurance application is completed fully, accurately, and based on the best knowledge of the applicant. Careful completion of the application helps the insurer properly evaluate the risk and determine whether coverage should be issued.

If an application is incomplete, the insurer’s underwriter will typically return it to the producer so the missing information can be obtained from the applicant. Ensuring that all required information is included helps prevent delays in the underwriting process.

If a policy is issued based on an incomplete application, it may be assumed that the missing information was not material to the underwriting decision. In such cases, the insurer may be considered to have waived the right to later deny or challenge a claim based on the incomplete information in the application.

Collecting the Initial Premium and Issuing the Receipt​

When the initial premium is paid at the time of application, the producer provides the applicant or policyowner with a conditional receipt. This receipt indicates that coverage may become effective as of the date of the application, provided the applicant qualifies for coverage as applied for, at a standard risk classification or better.

If a loss occurs before the policy is formally issued, the insurer must determine whether the applicant would have qualified for the coverage as requested. If the insurer cannot demonstrate that the policy would have been declined or issued on different terms, the loss will generally be covered according to the terms of the conditional receipt.

If the producer does not collect the initial premium and submits only the application to the insurer, coverage will not become effective immediately. In this situation, the policy will take effect only after the application has been approved, the policy has been issued, and the required premium has been paid.

Notice of Information Practices and Disclosure – Fair Credit Reporting Act (FCRA)​

When an insurance company collects information from third-party sources during the underwriting process, it must comply with the requirements of the Fair Credit Reporting Act (FCRA). These rules are intended to protect consumer privacy and ensure that applicants are informed about how their personal information may be obtained and used.

Applicants must be notified that third-party information may be collected and must provide consent for the insurer to obtain such information. This disclosure is typically included as part of the insurance application.

By signing the application, the applicant acknowledges the Notice of Information Practices and authorizes the insurer to obtain necessary reports. These may include investigative reports, medical records, and financial or consumer reports, which are used by the insurer to evaluate the applicant and complete the underwriting process.

The Health Insurance Portability and Accountability Act (HIPAA), enacted in 1996, establishes federal standards for protecting the privacy and security of individuals’ health information. Under HIPAA, health care providers and insurers must safeguard sensitive medical information and ensure that it is not disclosed without the individual’s knowledge or authorization.

During the underwriting process, any medical information obtained about an applicant must be kept confidential, and the applicant’s privacy must be protected. Before an insurer can share or disclose medical information, the applicant must be informed about how the information will be used, their rights to maintain privacy, and their ability to limit or refuse the release of certain information.

Insurers must also follow strict procedures when conducting HIV testing as part of the underwriting process. Written consent from the applicant is required before an HIV test can be performed. The HIV Consent Form explains the purpose of the test, outlines confidentiality protections, and describes how the applicant can obtain the test results.

Based on underwriting guidelines, insurers may decline to issue a policy if an applicant receives a positive HIV test result.

Underwriting Factors​

Underwriting is the process of evaluating an applicant to determine whether they are an acceptable risk for the insurance coverage being requested. During this process, the insurer analyzes various characteristics of the applicant to assess the likelihood of a loss. The goal of underwriting is to ensure that the risk presented by the applicant aligns with the assumptions used to establish the insurer’s premium rates and to avoid insuring risks that may result in more frequent or severe claims than anticipated.

Several factors may be considered during the underwriting evaluation of an individual applicant, including:

  • Age
  • Gender
  • Tobacco use
  • Occupation and hobbies, particularly those that involve a higher degree of risk. If an applicant has more than one occupation, the most hazardous occupation is typically considered.
  • Physical condition and overall health status
  • Moral or financial hazards, which may indicate a higher likelihood of claims
  • Personal and family health history
  • Geographic location
  • Foreign travel or residence
  • Existing insurance coverage
  • The type of insurance plan being applied for

These factors help insurers assess the applicant’s risk profile and determine whether coverage should be issued, as well as the appropriate premium and policy terms.

Part I Quiz​

1. Who is the policyowner in an individual health insurance policy?

A. The insurance company issuing the policy

B. The individual who applies for and owns the insurance policy

C. The beneficiary receiving policy proceeds

D. The underwriter evaluating the application

Correct Answer: B

Rationale: The policyowner is the individual who applies for and owns the insurance policy and is responsible for completing the application and maintaining the policy. The policyowner may or may not be the insured.

2. What is the primary purpose of field underwriting?

A. To determine claim payments

B. To establish policy dividends

C. To evaluate whether the applicant’s risk aligns with the insurer’s premium assumptions

D. To set interest rates for policies

Correct Answer: C

Rationale: Field underwriting is the initial step in evaluating a health insurance risk. It helps determine whether the applicant’s probability of loss is consistent with the insurer’s premium rates and assists the insurer in deciding whether to issue coverage.

3. Which document serves as the primary source of information for the insurer during the underwriting process?

A. The conditional receipt

B. The insurance application

C. The outline of coverage

D. The policy schedule

Correct Answer: B

Rationale: The insurance application contains the applicant’s personal, medical, and financial information and serves as the primary source used by the insurer when underwriting a potential risk. If attached to the policy, it becomes part of the entire contract.

4. What must occur before an insurer can perform an HIV test during the underwriting process?

A. Approval from the Department of Insurance

B. Notification of the beneficiary

C. Written consent from the applicant

D. Payment of the initial premium

Correct Answer: C

Rationale: Under privacy and medical testing regulations, insurers must obtain written consent from the applicant before performing an HIV test. The consent form explains the purpose of the test, confidentiality protections, and how the applicant may obtain the results.

5. If the initial premium is paid with the application, what does the producer provide to the applicant?

A. A policy endorsement

B. A binder agreement

C. A conditional receipt

D. A waiver of premium

Correct Answer: C

Rationale: When the initial premium is collected at the time of application, the producer provides a conditional receipt. This receipt may make coverage effective as of the application date, provided the applicant qualifies for coverage as applied for, typically at a standard risk classification or better.

Information Sources and Regulation of Underwriting​

Application​

The insurance application is a primary source of information used by insurers during the underwriting process. It provides detailed information about the applicant and helps the insurer evaluate the level of risk associated with issuing a policy. The application is typically divided into two main sections: Part I – General Information and Part II – Medical Information.

  • Part I – General Information
    • This section contains general, nonmedical information about the applicant. Typical questions address topics such as the applicant’s gender, marital status, residence, date of birth, occupation, and any existing or previously held life insurance coverage.
  • Part II – Medical Information
    • This section focuses on the applicant’s health and medical history. It includes questions regarding the applicant’s past and current health conditions, recent medical visits, hospitalizations, or surgeries, and the medical history of immediate family members. Information about family members may include their ages, health status, and, if deceased, the cause of death. This information assists the insurer in assessing potential health risks associated with the applicant.

Medical Examination​

A medical examination consists of health records and observations obtained by a qualified medical professional regarding the applicant’s current physical condition. Insurers may require a medical examination when factors such as the amount of coverage requested, the applicant’s age, or the individual’s health history indicate that additional medical information is necessary for underwriting. When a medical examination is required, it is arranged and paid for by the insurer.

Attending Physician Statement (APS)​

An Attending Physician Statement (APS) is requested when information provided in the insurance application or medical reports indicates a condition that requires further clarification. The APS is completed by the applicant’s personal physician, who provides detailed information about the applicant’s diagnosis, treatment, and medical history related to the condition. Before the insurer can obtain this report, the applicant must provide written authorization allowing the physician to release the medical information.

Medical Information Bureau (MIB)​

The Medical Information Bureau (MIB) is an information-sharing organization supported by member insurance companies. Its primary purpose is to collect and maintain adverse medical and risk-related information about insurance applicants and provide this information to member insurers during the underwriting process. The MIB operates as a member-owned, nonprofit corporation.

MIB underwriting services are used exclusively by member life and health insurance companies to evaluate an individual’s risk and eligibility when applying for life, health, disability income, critical illness, or long-term care insurance. The system helps underwriters identify possible fraud, errors, omissions, or misrepresentations in insurance applications. By assisting insurers in detecting inaccurate or incomplete information, the MIB may also help reduce overall insurance costs for consumers.

Information reported by the MIB is provided in coded form, summarizing general medical conditions and other factors that may affect insurability. These codes may also indicate nonmedical risks such as hazardous hobbies or adverse driving records.

If information contained in an MIB report conflicts with the information provided by the applicant, the insurer’s underwriter must conduct further investigation to verify the applicant’s medical history or other risk factors before making an underwriting decision. Because MIB reports contain generalized coded information, they cannot be used as the sole basis for declining an insurance application.

Inspection Report​

An inspection report is a general investigation of an insurance applicant that provides information about the applicant’s financial condition, character, lifestyle, occupation, hobbies, and personal habits. This type of report is sometimes referred to as a Consumer Investigative Report.

Inspection reports may be prepared by the insurance company or by an independent third-party reporting agency. Because the report involves the collection of personal information, the applicant must be notified that information may be gathered and is protected by the rights provided under the Fair Credit Reporting Act (FCRA). The FCRA ensures that applicants are informed about the investigation and have certain rights regarding the information collected and how it is used.

Agent’s Report​

An agent’s report is a statement submitted by the producer to the insurer that includes any personal observations or relevant information about the applicant obtained during the application process. This report may include details about the applicant’s apparent health, lifestyle, or other factors that could affect the underwriting decision.

The agent’s report is confidential communication between the producer and the insurer and is used solely for underwriting purposes. It is not shared with the applicant and does not become part of the insurance contract.

Individual Selection Criteria​

Insurers evaluate an applicant’s eligibility for coverage by reviewing information gathered through the field underwriting process and other available sources. These sources may include the insurance application, medical reports, inspection reports, and data obtained from organizations such as the Medical Information Bureau (MIB). After reviewing this information, the insurer determines whether the applicant meets the underwriting standards required for the policy.

The home office underwriter is ultimately responsible for evaluating the risk and determining whether the applicant satisfies the insurer’s underwriting guidelines. Based on this evaluation, the underwriter may approve the application as submitted, approve it with modifications, or decline coverage.

Example: An insurer receives an application with the initial premium already paid. After reviewing the applicant’s MIB report, the underwriter discovers indications of prior health concerns. Because additional clarification is required, the underwriter may request further documentation, such as an Attending Physician Statement (APS) or a medical examination. After reviewing the additional information, the underwriter may decide to approve the application, apply a rating or modification to the policy, or deny coverage. However, because MIB reports contain only general coded information, they cannot be used as the sole basis for rating or denying an application.

Nonmedical Application​

A nonmedical application is used when the insurer determines that a medical examination is not required based on factors such as the applicant’s age, health history, or the amount of coverage requested.

In these cases, the applicant’s medical information is obtained solely through health-related questions included in the insurance application. The producer asks these questions and records the applicant’s responses, which serve as the primary medical information used by the insurer during the underwriting process.

Classification of Risks​

Premium Determination and Rating​

Health insurance underwriting follows a process similar to life insurance underwriting; however, the type of risk being evaluated is different. In health insurance, underwriters focus on the likelihood that the applicant may experience illness or injury, rather than the risk of death.

After all required information has been received, the home office underwriter reviews and analyzes the applicant’s data to determine whether the individual represents an acceptable risk for coverage. During this evaluation, underwriters consider factors such as the applicant’s medical history, prior accidents or illnesses, exposure to environmental hazards, and occupational working conditions.

If the applicant is considered acceptable, the underwriter assigns the individual to a risk classification, which is then used to determine the appropriate premium for the policy.

Assumptions and Calculations of Premiums​

Insurance premiums are paid in advance and are invested by the insurer to generate interest. The income earned from these investments helps insurers meet future claim obligations and manage overall policy costs. Several key factors are considered when determining the premium for a health insurance policy.

Factors in Premium Determination​

Morbidity: Morbidity refers to the expected frequency of illness, injury, or disability within a specific group of insured individuals during a given period of time. Insurers rely on morbidity tables, which contain statistical data used to estimate the number and cost of medical or disability claims that may occur within a year. These tables help insurers project the amount of funds required to pay future claims.

Interest: Interest earnings represent the income insurers expect to generate by investing collected premiums. Insurance companies commonly invest premiums in financial instruments such as bonds, stocks, mortgages, and real estate. Because insurers anticipate earning investment income, the expected interest rate is considered when calculating the premium.

Expenses: Insurers must also account for the operational costs associated with issuing and maintaining policies. These costs include employee salaries, agent commissions, administrative expenses, marketing, and other business-related costs. The portion of the premium used to cover these operational costs is known as expense loading. Expense loading may vary between insurers depending on their operational efficiency and cost structure.

The relationship between these factors can be summarized as follows: Morbidity − Interest = Net Premium Net Premium + Expenses = Gross Premium

The gross premium is the total premium charged to the policyowner.

Modes of Premium Payment: The mode of premium payment refers to how frequently premiums are paid. Common payment modes include monthly, quarterly, semiannual, and annual payments. Policies that require more frequent payments generally result in higher total premium costs, as insurers must account for increased administrative expenses and reduced investment income from receiving smaller payments over time.

Underwriting Actions and Classification​

After completing the underwriting review, the insurer’s home office underwriter will make a final determination regarding the applicant’s eligibility for coverage. The decision is based on the applicant’s overall risk profile compared to the insurer’s underwriting guidelines. The underwriter may take one of the following actions:

Issued as a Preferred Risk: Coverage is issued at a lower-than-standard premium rate because the applicant meets the insurer’s qualifications for a preferred risk classification. Preferred risks represent individuals who are considered lower than average risk based on factors such as health, lifestyle, and medical history.

Issued as a Standard Risk: The policy is issued as applied for and at the standard premium rate originally quoted. Standard risks represent applicants whose risk level is considered average. Some health insurance policies may only be issued at standard rates, although premium adjustments may still apply for certain factors, such as tobacco use.

Issued as a Substandard Risk: If the applicant presents a higher-than-average risk, coverage may still be issued but with certain adjustments. Substandard policies may be issued in several ways:

Rated-Up Policy: The insurer issues the coverage requested but charges a higher premium to compensate for the increased likelihood of claims. This additional premium is sometimes referred to as a surcharge.

Policy Issued with Exclusions or Limitations: Coverage may be issued with specific exclusions or limitations that restrict the insurer’s obligation to pay for certain conditions or risks. These limitations may be temporary or permanent. A rider that excludes coverage for a specific medical condition is often called an Impairment Rider.

Application Rejection (Declined Risk): If the applicant presents a risk that exceeds the insurer’s acceptable underwriting standards, the application will be declined, and the policy will not be issued.

Delivering the Policy​

When an applicant submits an insurance application with the initial premium, the premium payment generally represents the offer, and the insurer’s issuance of the policy represents the acceptance. Once the insurer determines that the applicant is an acceptable risk, the policy is issued and typically sent to the producer for delivery to the insured. In this situation, coverage may become effective as of the date of the application, provided the premium was submitted with the application and all underwriting requirements are satisfied. If a medical examination is required, coverage may instead become effective on the date the completed medical exam is received, assuming the applicant qualifies as applied.

After the policy is issued, it is standard practice for the insurer to send the policy to the producer, who is responsible for delivering the policy to the insured. During delivery, the producer should review the policy with the insured and explain important elements such as policy benefits, provisions, riders, exclusions, and any rating endorsements to ensure the insured clearly understands the coverage.

If the applicant does not submit the initial premium with the application, the application is considered a trial application. In this situation, the policy itself represents the offer, and the payment of the premium upon delivery represents the acceptance. The insurer will send the policy to the producer for formal delivery, but coverage does not begin until the premium is collected at the time of delivery.

At delivery, the applicant may also be required to complete a Statement of Good Health. This statement confirms that the applicant’s health condition has not changed since the original application was submitted. If the applicant’s health status has changed, the policy may be returned to the insurer for further underwriting review before coverage can take effect.

Part II Quiz​

1. Which section of the insurance application contains information about the applicant’s health history, hospital visits, and medical background?

A. Part I – General Information

B. Part II – Medical Information

C. Agent’s Report

D. Inspection Report

Correct Answer: B

Rationale: Part II of the application focuses on the applicant’s medical history and current health condition, including doctor visits, hospitalizations, surgeries, and family medical history. This information helps underwriters evaluate the applicant’s potential health risks.

2. Who is responsible for paying for a required medical examination during the underwriting process?

A. The applicant

B. The producer

C. The insurer

D. The attending physician

Correct Answer: C

Rationale: When an insurer requires a medical examination to obtain additional health information, the insurance company arranges and pays for the exam. The examination helps the underwriter assess the applicant’s physical condition and risk level.

3. What is the primary purpose of the Medical Information Bureau (MIB)?

A. To determine the premium rate for all policies

B. To share coded information about adverse medical or risk-related conditions among member insurers

C. To provide medical examinations for insurance applicants

D. To approve or deny insurance applications

Correct Answer: B

Rationale: The MIB operates as a nonprofit information exchange used by member life and health insurers. It provides coded reports indicating possible medical conditions or risk factors, helping underwriters detect fraud, omissions, or inconsistencies in insurance applications.

4. Which underwriting information source provides details about an applicant’s finances, character, lifestyle, and habits?

A. Attending Physician Statement (APS)

B. Inspection Report

C. Medical Examination

D. Application Part II

Correct Answer: B

Rationale: An inspection report (also called a Consumer Investigative Report) provides general information about the applicant’s financial status, character, lifestyle, occupation, and habits. It may be prepared by the insurer or a third-party reporting agency and is regulated under the Fair Credit Reporting Act (FCRA).

5. Which underwriting decision occurs when an insurer issues the requested coverage but charges a higher premium due to increased risk?

A. Preferred Risk

B. Standard Risk

C. Rated-Up Policy

D. Application Rejection

Correct Answer: C

Rationale: A rated-up policy is issued when the applicant presents a higher-than-average risk. The insurer still provides coverage but charges a higher premium (surcharge) to compensate for the increased likelihood of claims.