Life Insurance Underwriting, Rating and Risk Selection
Underwriting questions test the decision, not just the definition: given a profile, would the insurer accept standard, rate it, postpone it, impose a lien, or decline?
What is being assessed
- Medical hazard: age, sex, build (BMI), blood pressure, lipids, HbA1c, ECG, family history of heart disease, diabetes or cancer, personal history of illness, tobacco and alcohol use.
- Occupational and avocational hazard: mining, aviation, hazardous chemicals, adventure sports.
- Financial and moral hazard: sum assured versus income and needs, existing cover with other insurers, over-insurance, unusual urgency, third-party payment of premium.
- Sources: proposal form, agent's confidential report, medical examiner's report, paramedical tests, attending physician's report, employer certificates, Insurance Information Bureau data.
- Decisions: standard, substandard (extra premium/rating), exclusion clause, lien (part of the sum assured withheld for a stated period), reduced sum assured, postponement, declinature.
- Numerical rating method: adverse factors score debit points, favourable ones credit points, and the total is expressed as a percentage of standard mortality - +75% means a rated policy.
Worked example
A 45-year-old smoker, BMI 32, HbA1c 7.2%, applying for ₹1 crore. Reasoning: three measurable debits (build, tobacco, borderline diabetes) push the case outside standard; the sum assured triggers full medicals and a special report; because the condition is stable and quantifiable, the answer is a rated acceptance with extra premium. If HbA1c were 10% with complications, postponement until controlled would be correct.
Traps
Assuming every non-standard case is declined - lien, exclusion, rating and postponement are distinct outcomes. Lien is not surrender; the withheld portion is released if the life survives the lien period. Moral hazard concerns intent; medical hazard concerns health.