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IAI SP2: Life Insurance Underwriting and Risk Assessment

IAI SP2 · Work through your exam, one topic at a time.

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Life Insurance Underwriting and Risk Assessment

Life Insurance Underwriting and Risk Assessment

The Life Insurance Underwriting and Risk Assessment domain tests how insurers classify lives, collect evidence and decide terms. You must distinguish medical, non-medical and financial underwriting.

Core rules and concepts

  • Evidence: proposal form, medical examination, attending physician's statement, laboratory tests, ECG, and financial documents. Non-medical evidence includes occupation, avocation, smoking, alcohol, driving record and residence.
  • Financial underwriting: checks that the sum assured is reasonable against income, existing cover and liabilities, to control moral hazard.
  • Decisions: standard, substandard (extra premium, lien, exclusion, modified terms), postpone, or decline. Ratings may be numerical (e.g., +50% mortality) or table ratings.
  • Disclosure: the proposer must disclose material facts. Non-disclosure can lead to avoidance, subject to the policy's incontestability and revival terms.

Worked example

An applicant has controlled hypertension, BMI 31 and smokes. Base mortality is 100%. The underwriter applies +50% for smoking, +25% for BMI and +25% for blood pressure. Ratings are additive on the base: 100% + 50% + 25% + 25% = 200% of standard mortality. The policy is offered at double mortality, typically expressed as a table rating or extra premium. If the standard annual premium is 20,000, a simple proportional extra premium is 20,000 × (200% − 100%) = 20,000, giving 40,000, before any expense or reserve adjustment. The reasoning: ratings are cumulative because each factor adds independent risk.

Traps

  • Applying ratings multiplicatively when the manual specifies additive ratings.
  • Treating a controlled condition as automatically standard.
  • Doing medical underwriting but ignoring financial underwriting.
  • Confusing occupation with avocation risk.
  • Assuming non-disclosure always avoids the policy; incontestability and revival rules may limit this.

Key points

  • Underwriting classifies risk; it does not simply accept or reject.
  • Medical, non-medical and financial evidence serve different purposes.
  • Ratings are applied as specified in the manual, usually additively.
  • Financial underwriting controls moral hazard and over-insurance.
  • Disclosure duties interact with incontestability and revival.