2.4 Individual Underwriting By the Insurer

Underwriting is the process of evaluating, selecting, classifying, and rating an applicant to determine whether the individual qualifies for coverage and, if so, at what premium. It involves assessing insurability, assigning an appropriate risk classification, and establishing the rate to be charged.

Sources of underwriting information include the insurance application, medical examinations, an Attending Physician's Statement (APS), reports from the Medical Information Bureau (MIB), inspection (consumer investigative) reports, and the producer's report.

Information Sources and Regulation

The life insurance application is a primary underwriting document and consists of two distinct sections:

• Part I – General Information
  • Part I gathers personal and background information about the applicant, including age, date of birth, gender, marital status, residence, occupation, and existing life insurance coverage.
• Part II – Medical Information
  • Part II focuses on the applicant's medical history. It includes questions regarding current and past health conditions, recent medical visits, hospitalizations, surgeries, and the medical history of immediate family members, including their ages and causes of death.

Together, these two sections provide the insurer with essential information needed to evaluate the applicant's insurability.

Medical examinations are performed by licensed physicians or nurses to assess the applicant's current health condition. The insurer typically requires a medical exam based on factors such as the amount of coverage requested, the applicant's age, or disclosed health history.

Medical exams are more commonly required for higher face amounts and in cases involving potential cardiovascular risks, elevated cholesterol or enzyme levels, or concerns related to communicable diseases such as HIV. The cost of the medical examination is paid by the insurer.

The medical examination report is the only underwriting document that may be copied and attached to the policy as part of the contract.

An Attending Physician Statement (APS) is requested when the application or medical examination reveals conditions that require additional clarification. The report is completed by the applicant's treating physician and provides detailed information regarding the applicant's medical history, diagnosis, treatment, and prognosis.

Before the APS can be obtained, the applicant must sign a written authorization permitting the release of medical information. The cost of obtaining the APS is paid by the insurer.

The Medical Information Bureau (MIB) serves as an information exchange for member life and health insurance companies. Its primary purpose is to collect and share coded information related to adverse medical conditions and other factors that may affect an applicant's insurability. MIB is a member-owned, not-for-profit organization operating in the United States and Canada.

MIB's underwriting services are used exclusively by member insurers when evaluating applications for life, health, disability income, critical illness, and long-term care insurance. The system helps alert underwriters to potential fraud, errors, omissions, or misrepresentations in insurance applications. By identifying inconsistencies early, the MIB helps promote accurate underwriting and may contribute to cost control within the insurance industry.

MIB reports contain coded, general information regarding medical conditions and certain nonmedical factors, such as hazardous activities or adverse driving history. If the information in an MIB report conflicts with the applicant's disclosures, the underwriter must conduct further investigation before making a decision. Because MIB data is limited and coded in nature, it cannot be used as the sole basis for declining coverage.

An Inspection Report, also known as a Consumer Investigative Report, provides an overview of the applicant's financial condition, personal character, employment history, lifestyle, hobbies, and general habits. The report may be prepared by the insurer or obtained through a third-party investigative agency.

Under the Fair Credit Reporting Act (FCRA), the applicant must be notified that such information may be gathered and is entitled to certain rights regarding disclosure and access to the report.

An Agent's Report is a confidential statement provided by the producer to the insurer that includes observations about the applicant's financial condition, character, and any other relevant personal knowledge obtained during the application process.

This report is used solely to assist the insurer in evaluating insurability and underwriting the risk. It remains confidential between the producer and the insurer and does not become part of the insurance contract.

Individual Selection Criteria

Insurers evaluate insurability using information gathered by the field underwriter along with additional underwriting sources. Although the producer collects and submits initial information, the final decision regarding acceptance, classification, and premium is made by the home office underwriter in accordance with the insurer's underwriting guidelines.

Example

Suppose an insurer receives an application submitted with the initial premium. After reviewing the Medical Information Bureau (MIB) report, the underwriter discovers references to prior medical conditions. The underwriter may then request additional documentation, such as an Attending Physician Statement (APS) or a medical examination, to obtain more detailed information.

Based on the additional findings, the underwriter may approve the application at a standard rate, assign a rating (surcharge), or decline coverage. Because MIB information is general and coded, it cannot be used as the sole basis for rating or denying an application; further investigation is required before a final underwriting decision is made.

Nonmedical Application

A nonmedical application is used when the policy applied for does not require a medical examination as part of the underwriting process. In these cases, the producer asks health-related questions directly on the application, and the applicant's responses serve as the primary source of medical information for underwriting purposes.

Classification of Risks

Rating Applicants

After reviewing all underwriting information—such as the application, medical examination results, and laboratory tests (including blood and urine analysis)—the underwriter evaluates whether the applicant qualifies for coverage.

If the applicant is deemed insurable, the underwriter assigns an appropriate risk classification. This classification determines the premium rate to be charged for the coverage.

Classifications

• Standard Risks – Individuals whose health, lifestyle habits, gender, and occupational characteristics align with those assumed in the insurer's mortality tables. These applicants present an average level of risk and are expected to have a normal life expectancy.
• Preferred Risks – Individuals who meet enhanced underwriting standards due to superior health, favorable height-to-weight ratios, and positive lifestyle factors. Because they present a lower-than-average mortality risk, they qualify for reduced premium rates and are expected to have a longer-than-average life expectancy.
• Substandard Risks (Higher Risk Exposure) – Individuals who do not qualify for coverage at standard premium rates due to factors such as impaired health, hazardous occupations, or risky lifestyle habits. These applicants are typically issued policies with a surcharge, commonly referred to as a “rated policy.”
  • Common substandard rating methods include:
    • Graded (Lien) Plan – Provides limited benefits during the initial policy years, often returning only the premium paid if death occurs early in the policy period. The death benefit gradually increases until the full face amount becomes payable. This structure is frequently used in senior or simplified-issue life insurance policies.
    • Rated-up Age – The insured is assigned a premium rate based on an age older than the applicant's actual age, resulting in a higher premium.
    • Flat Extra Rate – A fixed additional charge added to the standard premium per $1,000 of coverage. For example, if the standard premium is $25 per $1,000 and a $5 flat extra is applied, the total premium becomes $30 per $1,000. This method is commonly used for hazardous occupations or hobbies, such as aviation or high-risk sports.
    • Tabular Rating – A surcharge determined by actuarial tables that reflect increased mortality risk for individuals with similar impairments or medical conditions.
• Declined – This is not a risk classification, but rather a determination that the applicant does not meet the insurer's underwriting standards. In such cases, the insurer refuses to issue coverage, and the applicant is considered uninsurable under that company's guidelines.

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1. Which of the following underwriting sources may be attached to and become part of the insurance policy?

A. Agent's Report

B. Inspection Report

C. Medical Examination Report

D. MIB Report

Correct Answer: C

Rationale: The medical examination report is the only underwriting document that may be copied and attached to the policy as part of the contract. Other reports, such as the Agent's Report, Inspection Report, and MIB report, are used strictly for underwriting purposes and do not become part of the policy.

2. Which statement best describes the role of the Medical Information Bureau (MIB)?

A. It determines whether an applicant will be approved or declined.

B. It provides detailed medical records for underwriting decisions.

C. It serves as an information exchange that alerts insurers to potential misrepresentations.

D. It replaces the need for medical examinations.

Correct Answer: C

Rationale: The MIB is a member-owned, not-for-profit organization that shares coded information among member insurers. Its purpose is to alert underwriters to possible fraud, omissions, or inconsistencies. It cannot be used as the sole basis for declining or rating an application and does not replace medical exams or detailed physician reports.

3. When an applicant is approved but charged an additional fixed amount per $1,000 of coverage due to a hazardous hobby, this rating method is known as:

A. Tabular rating

B. Flat extra rate

C. Rated-up age

D. Graded plan

Correct Answer: B

Rationale: A flat extra rate is a constant additional charge added to the standard premium per $1,000 of coverage. It is commonly used for identifiable risks such as hazardous occupations or hobbies. Unlike a rated-up age or tabular rating, the flat extra is expressed as a specific dollar amount added to the base premium.

4. If information in an MIB report conflicts with the applicant's disclosures, the underwriter must:

A. Automatically decline the application

B. Issue the policy at a substandard rate

C. Conduct further investigation before making a decision

D. Ignore the MIB information

Correct Answer: C

Rationale: MIB reports contain coded and general information. If inconsistencies arise, the underwriter is required to request additional documentation—such as an Attending Physician Statement (APS) or medical examination—before making a final underwriting decision. MIB data alone cannot justify a decline.

5. Which risk classification applies to an individual whose health and lifestyle characteristics align with those assumed in the insurer's mortality tables?

A. Preferred

B. Substandard

C. Standard

D. Declined

Correct Answer: C

Rationale: Standard risks represent individuals whose health, occupation, and lifestyle characteristics reflect average mortality expectations as outlined in actuarial tables. Preferred risks qualify for better-than-average rates due to superior characteristics, while substandard risks are issued rated policies. A declined applicant is not issued coverage at all.