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Marketing, Underwriting, and Administration - Part 2
Underwriting is the process of classifying the potential insureds into the appropriate risk classification in order to charge the appropriate rate.
An underwriter decides whether or not to insure exposures on which applications for insurance are submitted. There are separate procedures for group underwriting and individual underwriting.
For individual underwriting, the insured has to provide evidence of insurability in areas of life and health insurance or specific details about the property and automobiles for property/casualty lines of business.
An individual applicant for life insurance must be approved by the life insurance company underwriter, a process that is sometimes very lengthy. It is not uncommon for the application to include a questionnaire about lifestyle, smoking habits, medical status, and the medical status of close family members. For large amounts of life insurance, the applicant is usually required to undergo a medical examination.
For group underwriting, the group characteristics, demographics, and past
losses are judged. Because individual insurability is not examined, even very sick people such as AIDS patients can obtain life insurance through a group policy.
Once the underwriter determines that insurance can be issued, the next decision is to apply the proper premium rate.
Some people believe that any characteristic over which we have no control, such as gender, race, and age, should be excluded from insurance underwriting and rating practices.
Others argue that some of these factors are the best predictors of losses and expenses, and without them, insurance can function only extremely inefficiently. Additionally, some argument could be made that almost no factor is truly voluntary or controllable.
Is a poor resident of Chicago, for instance, able to move out of the inner city? A National Underwriter article provided an interesting suggestion for
mitigating negative characteristics: enclosing a personalized letter with an application to explain special circumstances.
For example, according to the article, “If your client is overweight, and his family is overweight, but living a long and healthy life, note both details on the record. This will give the underwriters more to go on.” The article continues, “Sending letters with applications is long overdue. They will often shorten the underwriting cycle and get special risks-many of whom have been given a clean bill of health by their doctor or are well on their way to recovery-the coverage they need and deserve.”
Premium rates are determined for classes of insureds by the actuarial department. An underwriter’s role is to decide which class is appropriate for each insured. The business of insurance inherently involves discrimination; otherwise, adverse selection would make insurance unavailable.
Over the years, insurers have used a variety of factors in their underwriting decisions. A number of these have become taboo from a public policy standpoint. Their use may be considered unfair discrimination.
Redlining occurs when an insurer designates a geographical area in which it chooses not to provide insurance, or to provide it only at substantially higher prices.
These decisions are made without considering individual insurance applicants. Most often, the redlining is in poor urban areas, placing low- income inner-city dwellers at great disadvantage.
A new controversy in the underwriting field is the use of genetic testing. In Great Britain, insurers use genetic testing to screen for Huntington’s disease,  but U.S. companies are not yet using such tests.
In automobile insurance, for instance, factors such as marital status and living arrangements have played a significant underwriting role, with divorced applicants considered less stable than never-married applicants.
In property insurance, concern over redlining receives public attention
Case Study 07- Keeping Score-Is It Fair to Use Credit Rating in Underwriting?
Please download the PDF containing the case studies for this module. This is available from the module resources section for this module.
The next case study we will examine is “Case Study 07- Keeping Score-Is It Fair to Use Credit Rating in Underwriting?”
The case study describes the moral debate behind the use of credit rating in underwriting.
After insurance is sold and approved by the underwriter, records must be established, premiums collected, customer inquiries answered, and many other administrative jobs performed.
Administration is defined broadly here to include the following:
Accounting information systems
Service is the ultimate indicator on which the quality of the product provided by insurance depends. An agent’s or broker’s advice and an insurer’s claim practices are the primary services that the typical individual or business needs.
In addition, prompt, courteous responses to inquiries concerning changes in the policy, the availability of other types of insurance, changes of address, and other routine matters are necessary.
Another service of major significance that some insurers offer, primarily to commercial clients, is engineering and loss control.
Engineering and Loss Control
Engineering and loss control is concerned with methods of prevention and reduction of loss whenever the efforts required are economically feasible.
Much of the engineering and loss-control activity may be carried on by the insurer or under its direction.
The facilities the insurer has to devote to such efforts and the degree to which such efforts are successful is an important element to consider in selecting an insurer. Part of the risk manager’s success depends on this element.
Engineering and loss-control services are particularly applicable to workers’ compensation and boiler and machinery exposures. With respect to the health insurance part of an employee benefits program, loss control is called cost containment and may be achieved primarily through managed care and wellness techniques.
In this section you studied the following:
The marketing function of insurance companies differs for life/health and property/casualty segments.
Agents represent insurers and may work under a general agency or managerial arrangement and as independent agents or direct writers.
Brokers represent insureds and place policies with appropriate insurers.
Internet marketing, mass merchandising campaigns, and financial planning are other methods of acquiring customers.
Underwriting classifies insureds into risk categories to determine the appropriate rate.
1. Would you rather shop for insurance on the Internet or call an agent?
2. Advertising by the Independent Insurance Agents & Brokers of America extols the unique features of the American agency system and the independent agent. Its logo is the Big I. Does this advertising influence your choice of an agent? Do you prefer one type of agent to others? If so, why?
3. What does an underwriter do? Why is the underwriting function in an insurance company so important?
4. Why are insurers using credit scoring in their underwriting? In what areas is it possible to misjudge a potential insured when using credit scoring? What other underwriting criteria would you suggest to replace the credit scoring criterion?
 Etti G. Baranoff, Dalit Baranoff, and Tom Sager, “Nonuniform Regulatory Treatment of Broker Distribution Systems: An Impact Analysis for Life Insurers,” Journal of Insurance Regulations, Regulations 19, no. 1 (Fall 2000): 94.
 “2006: The Year When Changes Take Hold,” Insurance Journal, January 2, 2006, accessed March 6, 2009,; Steve Tuckey, “NAIC Broker Disclosure Amendment Changes Unlikely,” National Underwriter Online News Service, April 15, 2005, accessed March 6, 2009,
=4_15_05_15_17035.xml; “NAIC Adopts Model Legislation Calling For Broker Disclosures Defers One Section for Further Consideration” at; Mark E. Ruquet, “MMC Says Contingent Fees No Longer A Plus” National Underwriter Online News Service, February 15, 2006.
 Sally Roberts, “Big I Changes Name to Reflect Membership Changes,”Business Insurance, May 6, 2002.
 The term direct writer is frequently used to refer to all property insurers that do not use the Independent Agency System of distribution, but some observers think there are differences among such companies.
 Paul P. Aniskovich, “Letters With Apps Can Make The Difference,”National Underwriter, Life
& Health/Financial Services Edition, November 12, 2001.
 Catherine Arnold, “Britain Backs Insurers Use of Genetic Testing,”National Underwriter, Life
& Health/Financial Services Edition, November 27, 2000.
END of UNIT
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