Underwriting, Premiums and Policy Servicing
What this domain tests
This domain covers risk selection, how premiums are built and the servicing events that follow issue. Expect calculations, rating decisions and questions on what an insurer may change after the policy is in force.
Underwriting
Insurers classify risks to avoid anti-selection. Medical underwriting uses questionnaires, medical exams, blood tests and attending physician statements; financial underwriting checks income and sum assured; moral hazard checks lifestyle and claims history. Rating outcomes include standard terms, extra premium, exclusion, lien, postponement or decline. Occupation, aviation, residence and hazardous sports are rated separately. Consent is required for HIV testing and genetic testing is restricted.
Premium construction
Gross premium includes mortality or morbidity cost, expense loading, contingency and profit margin, offset by assumed investment return. Net premium is the mortality element before expenses. Premiums vary by age, sex, health, sum assured, policy type and premium mode. Monthly or quarterly modes cost more than annual because of lost investment income and administration, so mode loadings apply. Premiums may be guaranteed or reviewable.
Servicing
Common transactions include beneficiary changes, assignment, address updates, policy loans, surrender, premium redirection, fund switching, reinstatement and claims. A policy loan is secured by cash value and accrues interest; if unpaid, it reduces the death benefit. Surrender value is not a refund of premiums. Reinstatement after lapse usually requires evidence of insurability and payment of overdue premiums with interest.
Worked example
Annual premium is HKD 12,000. Monthly mode is quoted at HKD 1,050. Annualised monthly cost = 1,050 × 12 = HKD 12,600, which is 600/12,000 = 5% more than annual. The extra 5% reflects lost interest and twelve collection cycles. If the client cannot afford HKD 12,000 at once, monthly may still be suitable, but the illustration must show the higher total.
Traps
- Dividing the annual premium by 12 and assuming that is the monthly premium.
- Treating a policy loan as tax-free income; it is debt.
- Assuming surrender value equals premiums paid.
- Forgetting reinstatement requires insurability.
- Ignoring that a lien reduces the death benefit for a stated period.