Insurance is a contract between two parties where the insurance company agrees to compensate for the loss incurred to the individual based on the term and condition of the insurance contract in exchange of premiums paid by the individual.
These contracts usually involved the risks of higher value where insurance companies had to pay a sum which is in the higher multiples of the actual premium paid by the individual whose life is being insured.
A term life insurance policy could cost Rs. 12,000 per annum to a 25-year-old person for a sum assured of Rs. 1,00,00,000. The risk here is huge for insurance companies as they will have to pay a huge amount if the life assured is dead during the policy term.
So the real question is, how does the insurance company take such huge risks and still make profits each year?
In this post, we are going to talk about the most important process followed by insurance companies i.e., underwriting.
Underwriting is the process of classifying the risks & charging enough premium to insure that risk. Simply put, it refers to the process of evaluating risk attached to each proposal of insurance then deciding whether to grant insurance or not & at what cost.
First & foremost process is classification of risk
Standard risks: These consist of people who are anticipated to have a normal life expectancy as per mortality data.
Preferred risks: These consist of people who are anticipated to have a better than normal life expectancy due to various good health conditions. In this case, insurance companies may even charge a lower premium.
Substandard risks: These consist of people who are anticipated to have worse than normal life expectancy due to bad personal habits or health conditions. In this case, insurance companies may charge a higher premium to undertake risk.
Declined risks: These consist of people whose impairments & pre-existing health conditions are not good to provide insurance at a reasonable cost. These cases are usually declined by insurance companies.
Second process is non-medical underwriting, following parameter are included in non-medical underwriting process:
Financial underwriting: Insurance cover is based on the financial eligibility of the insured person. A person earning Rs. 5 lakhs per month cannot get a term insurance of Rs. 3 crores as it raises a cause of concern for insurance companies. This process involves checking of income proofs and liability assessment to arrive at a coverage amount that can be given to the insured.
Alcohol & tobacco consumption: Alcohol & tobacco consumption can lead to health deterioration. Insurance companies apply additional premiums on cases where tobacco consumption in any form is declared. This is to cover the risk of early death that may be caused due to tobacco consumption.
Third process is medical underwriting, there are sub-processes involved in medical underwriting:
Verbal/Tele-medical underwriting: Once the policy is logged in to the insurance company & premium is paid, the case is referred to tele-medical team to check all the details filled in proposal form with life insured over a video call. There is a doctor assigned on the call & they read out the proposal form to the insured person to check if all the details are correct.
They also check the physical appearance of the insured to confirm if there are any disabilities involved and reported in the proposal form. After tele-medical underwriting is completed, the case is referred to the physical medical underwriting team.
Physical medical underwriting: This is a known process where insurance companies conduct medical tests of life insured to check for any additional risks that may arise from unknown medical conditions of insured persons. These tests are conducted by insurance companies at their own cost. Medical reports are shared with the life insured after the policy is issued.
In case the policy is declined due to any undisclosed medical condition which was later discovered in medical tests, the cost of the medical test is recovered from the premium paid by the insured and the remaining amount is refunded back. There are a few cases where even if there is a minor adverse medical condition the policy is issued either with certain conditions or with a higher premium.
Example: In case of hypertension or diabetes, the policy is not rejected unless the medical condition is very adverse but premium is increased by 10-40% depending upon the readings on the medical reports.
It is very important to get your life insurance at an early age to ensure you get a decent cover with a reasonable premium. The chances of contracting critical illnesses in later stages of life are higher and this could lead to higher premiums or even rejection of policy.
An insurance company cannot reject your policy at a later stage even if you encounter any serious ailment. It is only at the time of taking a new policy where your health condition is checked.
Rohit Gyanchandani is Managing Director at Nandi Nivesh Private Limited
