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Insurance Administration
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Fifth Edition
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LOMA 301 Course Project Team
Insurance Administration, Fifth Edition is the result of the dedicated efforts of a project team of
LOMA staff members and consultants who were responsible for writing and editing the text’s
content; developing learning aids and study materials to accompany the textbook; and oversee-
ing the production of the text and the Course Portal.
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Copyright © 2018 LL Global, Inc. All rights reserved.
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the prior written permission of the publisher.
While a great deal of care has been taken to provide accurate, current, and
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the ideas, suggestions, general principles, conclusions, and any other informa-
tion presented here are for general educational purposes only. This text is sold
with the understanding that it is neither designed nor intended to provide the
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tance is required, the services of a competent professional should be sought.
This text contains a number of examples and hypothetical scenarios.
The names, characters, organizations, and events in these examples and sce-
narios are fictional. Any resemblance to any actual persons, living or dead, or
actual organizations or events is entirely coincidental.
ISBN 978-1-57974-461-8

Insurance Administration Table of Contents CONT.1
Contents
Preface.................................................................................................PREF.1
Acknowledgments................................................................................ PREF.1
LOMA 301 Text Review Panel.........................................................PREF.1
LOMA Staff/Consultants...................................................................PREF.2
Introduction.................................................................. INTRO.1
Using the Test Preparation Guide................................................... INTRO.2
Module 1: Overview of Life Insurance Administration

(Chapters 1–3)
Chapter 1: Insurance Administration and
the Customer Experience..................................................... 1.1
Insurance Administration Areas................................................................ 1.4
Primary Administration Functions.......................................................... 1.4
Other Insurance Functions...................................................................... 1.6
The Customer Experience.......................................................................... 1.8
Customer Experience Management........................................................ 1.9
The Customer Journey............................................................................ 1.9
Developing a Customer-Centric Culture.............................................. 1.11
Challenges to Implementing Customer
Experience Management Measures..................................................... 1.13
Insurers’ Ethical Duties to Customers..................................................... 1.14
Equity in Risk Acceptance.................................................................... 1.14
Honest, Objective, and Fair Customer Service..................................... 1.14
Protection of Customer Information..................................................... 1.14
Prompt and Equitable Claim Handling................................................. 1.15
Adequate Financial Resources.............................................................. 1.15
Chapter 2: Considerations for Insurance

Administration.......................................................................... 2.1
Regulatory Compliance.............................................................................. 2.2
Privacy.................................................................................................... 2.3
Fraud....................................................................................................... 2.5
Unfair Trade Practices............................................................................ 2.6
Quality Control............................................................................................ 2.6
Metrics.................................................................................................... 2.7
Data Visualization Tools......................................................................... 2.9
Administration Systems and Strategies................................................... 2.10
Process and Technology Management.................................................. 2.12
Paperless Processing............................................................................. 2.13

CONT.2 Table of Contents Insurance Administration
The Power of Data..................................................................................... 2.15

Data Management................................................................................. 2.15
Information Security............................................................................. 2.16
Data Interpretation and Analysis........................................................... 2.18
Chapter 3: The New Business Process and Underwriting

Principles................................................................................ 3.1
The New Business Process.......................................................................... 3.2
Field Underwriting.................................................................................. 3.2
Data Entry and Review......................................................................... 3.10
Making the Underwriting Decision...................................................... 3.11
Policy Issue........................................................................................... 3.12
New Business/Underwriting Quality Control......................................... 3.13
Underwriting Documentation............................................................... 3.14
Audits.................................................................................................... 3.15
Metrics.................................................................................................. 3.15
Underwriting Principles............................................................................ 3.16
Risk Assessment................................................................................... 3.16
Risk Classification................................................................................ 3.20
Underwriting Philosophy and Guidelines............................................. 3.21
Underwriting Organization...................................................................... 3.24
Job Positions......................................................................................... 3.24
Authority Levels................................................................................... 3.25
Workflow Organization......................................................................... 3.27
Efficiencies in Underwriting..................................................................... 3.29
Automated Underwriting...................................................................... 3.29
Simplified Underwriting....................................................................... 3.30
Module 2: Life Insurance Underwriting (Chapters 4 – 7)

Chapter 4: Individual Life Insurance:
Assessing Mortality Risk...................................................... 4.1
Sources of Medical Information................................................................. 4.2
The Application for Insurance................................................................ 4.4
The MIB Group, Inc............................................................................... 4.5
Physician Reports................................................................................... 4.8
Medical Tests........................................................................................ 4.10
Personal History Interviews.................................................................. 4.10
Inspection Reports................................................................................ 4.10
Pharmaceutical Databases..................................................................... 4.12
Assessing Medical Risk Factors............................................................... 4.12
Impairments.......................................................................................... 4.12
Age........................................................................................................ 4.13
Gender................................................................................................... 4.13
Build...................................................................................................... 4.13
Sources of Personal Information.............................................................. 4.15
Assessing Personal Risk Factors.............................................................. 4.16
Occupation............................................................................................ 4.16
Driving History..................................................................................... 4.17

Avocations............................................................................................ 4.17
Tobacco Use.......................................................................................... 4.19
Alcohol Use.......................................................................................... 4.20
Drug Abuse........................................................................................... 4.20
Physical Abuse...................................................................................... 4.20
Criminal History................................................................................... 4.21
Aviation Activity................................................................................... 4.21
Military Status....................................................................................... 4.22
International Residence and Travel....................................................... 4.23
Foreign Citizenship............................................................................... 4.23
Chapter 5: Individual Life Insurance:

Financial Underwriting and Risk Classification................. 5.1
Financial Underwriting............................................................................... 5.2
Risks Deterred by Financial Underwriting............................................. 5.2
Sources of Financial Information........................................................... 5.7
Assessing Life Insurance Needs and Financial Factors........................ 5.12
Tools to Determine the Appropriate Amount of Insurance................... 5.15
Risk Classification..................................................................................... 5.18
Numerical Rating System..................................................................... 5.18
Charging for Substandard Risks........................................................... 5.21
Chapter 6: Underwriting Specialized

Individual Life Insurance Products...................................... 6.1
Underwriting Niche Policies....................................................................... 6.2
Multi-life Policies................................................................................... 6.2
Juvenile Insurance Policies..................................................................... 6.3
Direct-to-Consumer Policies................................................................... 6.4
Underwriting Business Life Insurance...................................................... 6.6
Business Needs Met by Life Insurance................................................... 6.6
Financial Assessment of a Business........................................................ 6.8
Underwriting Considerations for Types of Business Life Insurance.... 6.13
Underwriting Policy Replacements......................................................... 6.18
Section 1035 Exchanges....................................................................... 6.19
Underwriting Supplemental Benefits....................................................... 6.20
Disability Benefits................................................................................. 6.20
Family Benefits..................................................................................... 6.22
Guaranteed Insurability Benefits.......................................................... 6.22
Accidental Death Benefits.................................................................... 6.23
Accelerated Death Benefits................................................................... 6.23
Chapter 7: Underwriting Group Life Insurance................. 7.1

The Group Underwriting Process.............................................................. 7.2
Requesting Coverage.............................................................................. 7.4
Creating a Proposal for Insurance........................................................... 7.7
Completing the Master Application........................................................ 7.8
Delivering the Master Group Insurance Contract................................... 7.9

Risk Factors for Group Underwriting.......................................................... 7.9

The Group Prospect.............................................................................. 7.10
The Proposed Coverage........................................................................ 7.15
Rating Methods for Group Cases................................................................ 7.16
Calculating Premium Rates for Large Groups...................................... 7.17
Calculating Premium Rates for Small Groups...................................... 7.19
Post-issue Underwriting................................................................................ 7.21
Underwriting of Late Enrollees............................................................ 7.21
Renewal Underwriting.......................................................................... 7.21
Module 3: In-Force Policy Administration

(Chapters 8 – 10)
Chapter 8: Reinsurance: Insurance for Insurers................. 8.1
Overview of Reinsurance............................................................................ 8.2
Roles of Insurance Companies in Reinsurance Arrangements............... 8.3
Purposes of Reinsurance......................................................................... 8.4
Benefits of Indemnity Reinsurance for the Direct Writer....................... 8.6
Cession Arrangements............................................................................ 8.8
Risk-Sharing Arrangements.................................................................. 8.11
Reinsurance Administration..................................................................... 8.14
Reinsurance Staffing and Systems........................................................ 8.14
Administering New Business................................................................ 8.20
Administering In-Force Business......................................................... 8.25
Administering Terminations of Reinsurance........................................ 8.29
Chapter 9: Effective Customer Service............................... 9.1

Customer Service for Insurance Companies............................................ 9.2
Customer Service Providers.................................................................... 9.2
Benefits of High-Quality Customer Service........................................... 9.4
Customer Service and the Customer Experience.................................... 9.5
The Customer Service Function................................................................. 9.5
Staffing.................................................................................................... 9.6
Organization............................................................................................ 9.6
Technology for Effective Customer Service Administration................... 9.9
Technology for Sharing Customer Service Information....................... 9.10
Technology for Customer Service Interactions.................................... 9.11
Data Analysis in Customer Service...................................................... 9.17
Legal Issues Affecting Customer Service................................................ 9.18
Complaints............................................................................................ 9.19
Privacy.................................................................................................. 9.21
Chapter 10: Customer Service Practices........................... 10.1

Routine Customer Service Transactions................................................. 10.2
Providing Information........................................................................... 10.3
Changing Names and Addresses........................................................... 10.4
Making Policy Changes........................................................................ 10.6

Administering Premium Payments..................................................... 10.11

Issuing Duplicate Policies................................................................... 10.13
Handling Customer Complaints.......................................................... 10.14
Complex Customer Service Transactions.............................................. 10.15
Beneficiary Changes........................................................................... 10.16
Policy Assignments............................................................................. 10.17
Policy Conversions............................................................................. 10.18
Dividend Payments............................................................................. 10.21
Policy Loans....................................................................................... 10.22
Policy Terminations............................................................................ 10.23
Policy Reinstatements......................................................................... 10.25
Administration of Variable Products................................................... 10.27
Customer Service and Policy Conservation.......................................... 10.28
Policyowner Communications............................................................ 10.28
Financial Professional Engagement.................................................... 10.30
Management of Unassigned Policyowners......................................... 10.31
Claims Processing............................................................................... 10.31
Customer Service Quality Control......................................................... 10.32
Quantitative Performance Measures................................................... 10.32
Qualitative Performance Measures..................................................... 10.33
Module 4: Claim Administration (Chapters 11 – 12)

Chapter 11: Overview of Claim Administration............... 11.1
Claim Philosophy and Claim Practices................................................... 11.2
The Claim Evaluation Process.............................................................. 11.4
Claim Administration Staffing and Organization.................................. 11.4
Staffing.................................................................................................. 11.4
Organizational Systems........................................................................ 11.7
Relationships with Other Insurance Functions..................................... 11.8
Efficiencies in Claim Administration....................................................... 11.9
Automated Workflow Systems............................................................. 11.9
Express Claim Processing................................................................... 11.10
Auto-Adjudication.............................................................................. 11.10
Legal and Compliance Issues Affecting Claim Administration...........11.11
Regulations Governing Claim Administration......................................11.11
Unfair Claim Settlement Practices...................................................... 11.11
Unclaimed Benefits............................................................................. 11.13
Privacy Protection............................................................................... 11.13
Claim Fraud........................................................................................ 11.14
Financing Criminal Activities............................................................. 11.15
Quality Measurement for Claim Administration................................. 11.16
Internal Evaluation of Performance.................................................... 11.16
External Evaluation of Performance................................................... 11.17

Chapter 12: Claim Administration Practices.................... 12.1

Administering Life Insurance Claims..................................................... 12.2
Verifying Coverage Was in Force......................................................... 12.5
Verifying That the Deceased Is Covered.............................................. 12.6
Verifying That Death Occurred............................................................. 12.7
Verifying That the Cause of Death Is Covered..................................... 12.9
Determining Whether the Policy Is Contestable................................. 12.11
Determining the Proper Payee............................................................ 12.11
Calculating Policy Proceeds............................................................... 12.18
Administering Settlement Options...................................................... 12.20
Administering Claims for Supplemental Benefits................................ 12.22
Waiver of Premium for Disability Benefit.......................................... 12.22
Accidental Death Benefit.................................................................... 12.23
Family Benefits................................................................................... 12.23
Accelerated Death Benefits................................................................. 12.23
Administering Claims for Reinsured Policies....................................... 12.24
Establishing the Claim File................................................................. 12.24
Verifying Claim-Related Information................................................. 12.25
Settling Reinsured Claims.................................................................. 12.28
Denying Payment of Benefits.................................................................. 12.28
Glossary......................................................................... GLOSS.1
Index.............................................................................. INDEX.1

Insurance Administration Preface PREF.1
Preface
Insurance Administration, Fifth Edition, provides information about the major
administrative functions performed by insurance companies. It also describes
regulations affecting insurance administration and current challenges and oppor-
tunities that insurance companies face in carrying out effective administrative
systems and programs. The text is divided into four modules:

Module 1: Overview of Life Insurance Administration (Chapters 1–3)

Module 2: Life Insurance Underwriting (Chapters 4–7)

Module 3: In-Force Policy Administration (Chapters 8–10)

Module 4: Claim Administration (Chapters 11–12)
Acknowledgments
Insurance Administration, Fifth Edition, is the result of the combined efforts of
industry experts who served on a text development panel and LOMA staff and
consultants. The LOMA 301 authors wish to express gratitude for the dedication,
knowledge, expertise, and guidance provided by all of these individuals through-
out the writing of this text.
LOMA 301 Text Review Panel

On behalf of LOMA and its membership, we would like to thank all of the LOMA
301 text reviewers and the companies that supported their efforts. Text review-
ers are busy industry professionals who actively support the educational needs of
current and future industry employees and generously volunteer their time and
expertise to review a text’s content. The LOMA 301 text development panel made
many substantive contributions, commented on the developing chapters, provided
suggestions for additional content, submitted relevant research materials, and
answered numerous questions posed by LOMA staff. Text developers are respon-
sible for the accuracy and clarity of the text, and take responsibility for any errors.
The following individuals participated in every aspect of this text development

project, from reviewing the course outline to reviewing all chapters:
Thomas J. Doan
Life Underwriting Manager
Nationwide Insurance Company
Sue Downey
Vice President, Treaty Management/Mortality Solutions
Hanover Life Reassurance Company
Susan Dusbabek
Customer Service Director
Riversource, LIC

PREF.2 Preface Insurance Administration
Michael Frahm
Regional Sales Executive
Royal Neighbors of America
Kevin Glasgow
2nd Vice President/Claims
Munich Re
Jena Kennedy
Director of Business Development
LEXIS-NEXIS
Kevin Mann
Senior Underwriting Analyst
State Farm Insurance Company
Chad Martin
Director, Life Operations
USAA
Jill Silvernail
Underwriting Specialist
Prudential Insurance
William Swarner
Underwriting Auditor
Lincoln Financial Group (retired)
Joanna Teubner
Team Leader—Group Customer Connections Administration
Ameritas Group Division
Scott Tracey
Underwriting Quality Consultant
Berkshire Life
LOMA Staff/Consultants
In addition, we would be remiss if we didn’t thank other LOMA and LIMRA staff
members who graciously provided support and expert advice: Mallory Eldridge,
ALMI, ACS; Sandra C. Fowler, FLMI, ACS; Jim Huffman, ALMI, ACS; Janet
E. Kean, ALMI, ACS; Jennifer E. Keefe, MSLIS, CA; and Heidi Lawless, MLS.
Finally, we extend a very special thank you to Jennifer W. Herrod, FLMI, PCS,
AIAA, PAHM, ARA, AIRC, Director, Learning Content, who served as project
manager and provided guidance and support throughout the project; and to both
Carie W. Crane, FLMI, ACS, AIAA, ARA, 2nd Vice President, Education and
Training Division, and Katherine C. Milligan, FLMI, ACS, ALHC, Senior Vice
President, Education and Training Division, who provided leadership, guidance,
resources, and support for this project.
Brian M. Felt, FLMI, ACS
Patsy Leeuwenburg, Ph.D., FLMI, FLHC, ASRI,
PAHM, ACS, AAPA, AIAA, AIRC, ARA
Melanie E. Luna, M.Ed., FLMI, ACS, AIRC
Atlanta, Georgia 2018

Insurance Administration Introduction INTRO.1
Introduction
The purpose of Insurance Administration, Fifth Edition, is to provide an overview
of the activities involved in administering individual and group life insurance pol-
icies. Enrollment in the course includes access to an online Course Portal, from
which learners access everything they need to study and prepare for the course
examination. The Course Portal organizes the assigned text material into conve-
nient Modules—chapter clusters that help to focus the learning process by break-
ing up the course content into meaningful sections. In addition to the assigned
study materials, the Course Portal provides access to an array of blended learning
resources, including multimedia features designed to enhance the learning experi-
ence. The Course Portal provides access to

PDFs of the assigned text and Test Preparation Guide, which can be printed
or read online

An interactive version of the Test Preparation Guide’s Practice Questions and
Sample Exam

Review tools, including Learning Aids—animations of important concepts—
and a “Top Ten Tough Topics” tutorial

Recommended study plans to help you set goals and manage your learning
experience

Related links which help you apply the course instruction to the real world
While preparing to take the examination for LOMA 301, you will find that the
assigned study materials include many features designed to help you more eas-
ily understand the course content, organize your studying, and prepare for the
examination. As we describe each of these features, we give you suggestions for
studying the material.

Learning Objectives. Each chapter lists the chapter’s learning objectives to
help you focus your studies. Before reading each chapter, review these learn-
ing objectives. Then, as you read the chapter, look for material that will help
you meet the learning objectives. The interactive version of the Test Prepara-
tion Guide’s Practice Questions and Sample Exam questions (accessible from
the Course Portal) are linked to the learning objectives to give you an idea of
how the learning objective might be measured on an examination, as well as to
help you assess your mastery of the learning objectives.

Chapter Outline. Each chapter contains an outline of the chapter. Review this
outline to gain an overview of the major topics that will be covered; then scan
through the chapter to become familiar with how the information is presented.
By looking at the headings, you can gain a preview of how various subjects in
each chapter relate to each other.

Figures. We include figures throughout the text to illustrate and bring a real
world perspective to the text’s discussion of selected topics. Information con-
tained in figures may be tested on the examination for the course.

INTRO.2 Introduction Insurance Administration

Learning Aids. Learning Aids enhance your learning experience by helping
you to visualize concepts described in the text and allowing you to see those
concepts in action. This icon in the margin of the text indicates that there is a
Learning Aid on the Course Portal that relates to the topic in the text. If you
are reading the text in PDF format, click on the Learning Aid icon to go to that
LEARNING AID Module’s Learning Aid collection. If you are reading a printed copy of the text,
use the Learning Aid icon as a visual cue that the Course Portal holds more in-
formation on the topic. Information contained in Learning Aids may be tested
on the examination for the course.

Glossary and Key Terms. This text explains key terms that apply to the text
material and, where appropriate, reviews key terms previously presented in
LOMA courses. Each key term is highlighted with bold italic type when the
term is defined and is included in a list of key terms at the end of each chapter.
All key terms also appear in a comprehensive glossary at the end of the PDF
of the text. As you read each chapter, pay special attention to the key terms.

Top Ten Tough Topics. The Top Ten Tough Topics tutorial, found on the
Course Portal, contains animations and study tips for topics that learners of-
ten find difficult when answering questions on the examination. This tutorial
enhances the learning experience, appeals to a variety of learning styles, and
offers a great way for learners to advance their understanding and retention of
course content.
LOMA may periodically revise the assigned study materials for this course. To ensure
that you are studying from the correct materials, check the current LOMA Education
and Training Catalog available at www.loma.org or on the Course Portal. Also be
sure to visit the Announcements page on the Course Portal to learn about important
updates or corrections to the assigned study materials.
Using the Test Preparation Guide

LOMA’s Test Preparation Guide for LOMA 301 (TPG) is assigned reading for
students preparing for the LOMA 301 examination. It contains Practice Ques-
tions organized by chapter and a full-scale Sample Exam. The TPG is available
in two versions, both accessible from the Course Portal: (1) a printable PDF that
includes answer keys for all questions, and (2) an interactive version that can be
used online or downloaded for offline use. The interactive version has the added
advantage of answer-choice explanations for all Practice Questions and Sample
Exam questions. The TPG is designed to help you learn the course content and
prepare for the examination. Used along with the assigned text, the TPG will help
you master the course material. Studies indicate that students who use LOMA
TPGs consistently perform significantly better on LOMA examinations than
students who do not use TPGs.

Insurance Administration Chapter 1: Insurance Administration and the Customer Experience 1.1
Chapter 1
Insurance Administration and

the Customer Experience
Objectives
After studying this chapter, you should be able to
1A Describe the policy life cycle and identify the primary purposes of the
underwriting, reinsurance, customer service, and claim administration
functions
1B Describe how the following operational areas—marketing, actuarial,
accounting and treasury operations, legal and compliance, human
resources, and information technology—support insurance
administration
1C Explain the significance of the customer experience and how focusing
on customer experience impacts insurance company operations and
employees
1D Define touchpoint and identify four major touchpoints between
customers and insurance companies
1E Describe how insurers study customer journeys to understand their
customers’ experiences
1F Identify and describe some of the challenges to implementing customer
experience management measures
1G Explain how an insurer fulfills its ethical duties pertaining to insurance
administration

1.2 Chapter 1: Insurance Administration and the Customer Experience Insurance Administration
Outline
Insurance Administration Areas Insurers’ Ethical Duties to Customers
 Primary Administration Functions 
Equity in Risk Acceptance
 Other Insurance Functions 
Honest, Objective, and
Fair Customer Service
The Customer Experience
 Customer Experience Management 
Protection of Customer Information
 The Customer Journey 

Prompt and Equitable
Claim Handling
 Developing a

Adequate Financial Resources
Customer-Centric Culture
 Challenges to Implementing
Customer Experience
Management Measures
T
he customer is at the heart of any business, but this is particularly true in life
insurance. Why? Because the life insurance policy that the customer pur-
chases is a contract, a promise to pay a benefit at some future time, under
specific circumstances. Since the customer receives no tangible good—other than
the contract itself—in exchange for paying policy premiums, the company dem-
onstrates its value to the customer by effectively and efficiently administering the
policy throughout its lifetime.
A life insurance policy generally goes through predictable phases, which we
call the policy life cycle. It comes into existence or is “born” during the underwrit-
ing process; “lives” while the contract is in force; and comes to an end or “dies”
when the policy terminates, which occurs when it expires, lapses, or is cancelled,
or when a claim is filed. In addition, many—though not all—life insurance
policies are reinsured throughout their lifetime. Figure 1.1 depicts the policy
life cycle.
Figure 1.1. The Policy Life Cycle

Customer Service
Underwriting Policy In-Force Claims
Reinsurance
Birth Life Death

Insurers provide specialized services during each stage in the life cycle.
Those company activities specifically associated with administering life insur-
ance policies—including underwriting, reinsurance, customer service, and claims
—are known as insurance administration. In this text, you will learn about typ-
ical practices, policies, and procedures for administering individual and group
life insurance. However, remember that individual companies may take different
approaches to administration activities.
Throughout this text, we use specific terminology to describe the parties
who purchase and benefit from life insurance. For definitions of these terms,
see Figure 1.2.
Figure 1.2. Life Insurance Terminology
Applicant The person or entity that submits an application for individual

insurance and seeks to purchase the insurance coverage.
Proposed During the underwriting process, the person whose life, health,
Insured or income is to be covered by an insurance policy.
Insured The person whose life, health, or income is covered by an

insurance policy.
Policyowner The person or entity that owns an individual life insurance policy.
Beneficiary The person or party that the owner of the policy named to
receive the policy benefit.
Group The person or organization that decides what types of group

Policyholder insurance coverage to purchase for a specific group, negotiates
the terms of the group insurance contract, and purchases the
group insurance coverage.
Group A group that has applied for—but has not yet been approved
Prospect for—group coverage from an insurance company.
Group An individual covered by a group insurance policy.

Insured
In an insurance contract, a single individual or entity might assume more than

one of the roles described in Figure 1.2. For example, a person may apply for a
life insurance policy on his own life. In this case, the applicant is also the pro-
posed insured, and he becomes the policyowner and the insured once the insurer LEARNING AID
approves his application. As another example, a person or entity may purchase a
third-party policy, which is an individual insurance policy that is purchased by
one person or business on the life of another person. For instance, a business that
purchases a third-party policy on a vital employee is the policyowner and benefi-
ciary, and the employee is the insured. As you can imagine, life insurance com-
panies often face the unique challenge of serving the needs of multiple customers
that have an interest in a single policy.

Another important role to remember is the financial professional, which—

within the context of insurance sales—generally refers to any individual who is
licensed to sell insurance products. We use “financial professional” as a broad
term that encompasses sales agents, brokers, financial advisors, and bank-
affiliated sales personnel.
In this chapter, you’ll learn about the primary activities in insurance adminis-
tration and the other insurance company operations that support administration.
You’ll also learn about the importance of managing customer experiences and
about the ethical duties insurers have to their customers.
Insurance Administration Areas

Administration includes a wide variety of activities requiring specialized exper-
tise and processes. In this section, you’ll learn about the primary administration
functions and some of the other company functions that support life insurance
administration.
Primary Administration Functions

For life insurance companies, the primary administration functions are new busi-
ness, underwriting, reinsurance, customer service, and claims.
New Business
New business refers to the activities an insurer undertakes in receiving
applications, underwriting applications, and issuing policies. Although the new
business process can involve the efforts of marketing staff, financial profession-
als, underwriters, and support staff, this text focuses on the underwriting area,
where employees make decisions about whether to issue policies and under what
conditions.
Underwriting
An insurance policy’s life begins in underwriting, which is the process of
(1) assessing and classifying the degree of risk represented by a proposed insured
or group with respect to a specific insurance product and (2) making a decision
to accept or decline that risk. An underwriter is an insurance company employee
who performs the risk assessment, classification, and selection process.
Sound underwriting decisions help insurance companies remain financially
strong and competitive. If an insurer accepts too many improperly assessed risks
at premium rates that are not adequate for the actual level of risk, the insurer will
pay more in claims than it can afford. If an insurer fails to accept enough appropri-
ate risks at appropriate rates, the insurer will lose customers to competitors.
Reinsurance
Reinsurance is insurance that one insurance company obtains from another insur-
ance company to protect against the possibility of financial loss associated with
insurance policies issued by the first company. Briefly, reinsurance is insurance
for an insurer. In a reinsurance arrangement, one insurer transfers a portion of a
risk to a second insurer, which agrees to pay part or all of the benefits owed by the

first insurer in exchange for a reinsurance premium. Insurers often have specific
employees or departments that administer reinsurance underwriting, service, and
claim activities—and some insurance companies’ sole business is providing rein-
surance to other insurers.
While reinsurance is an important sector of the insurance industry and an
important aspect of the policy life cycle, it differs from other administration
functions in that policyowners have no involvement in reinsurance activities.
Companies engage in reinsurance arrangements with reinsurers, and customers
are generally not aware that their policies are reinsured.
Customer Service
Maintaining positive relationships with customers is essential for an insurer
to remain competitive. Insurance company customers include policyowners,
insureds, beneficiaries, financial professionals, and other financial institutions.
Customer service is the broad range of activities that a company and its employees
perform to keep customers satisfied so that they will continue doing business with
the company and speak positively about it to others.
Policyowner service is a specific type of customer service that includes all
the service activities performed for people or entities that own individual insur-
ance policies. During a policy’s lifetime, policyowner service personnel handle
any changes or updates made to the policy. The policyowner service area of a
company also works closely with other areas to support customers. For example,
some policies include supplemental benefits that allow policyowners to file claims
during the life of the policy under specific circumstances while the insured is still
alive. In these cases, policyowner service personnel often work closely with claims
personnel to fulfill these requests.
Customer service transactions for group insurance products can differ from the
transactions for individual insurance products. For this reason, many insurance
companies devote a segment of the customer service unit exclusively to mem-
ber service. Member service encompasses customer service activities performed
for group insureds. Member service personnel provide information and answer
questions about a group plan’s eligibility requirements, benefits, and contract
provisions.
Providing exceptional service helps an insurer attract and retain customers
and improve profitability. Well-served policyowners are more likely to keep their
policies in force and buy additional products from the insurer. Customer retention
boosts profits because the cost of keeping existing insurance customers is less than
the cost of acquiring new ones. In addition, satisfied policyowners are more likely
to recommend the insurer to family and friends, who then may buy products from
the insurer based on those recommendations.
Claims
A life insurance policy’s life cycle ends when a claimant, usually the beneficiary,
files a death benefits claim. At this point, claim administration staff review the
claim and determine the insurer’s liability. Claim administration is the process of
evaluating each submitted claim, deciding whether the claim is valid, informing
the person who submitted the claim of the decision, and authorizing the payment
of each valid claim according to the terms of the policy.

An insurer has a legal and ethical obligation to pay all valid claims promptly.
Doing so fulfills its promise to policyowners and builds its reputation as a trust-
worthy and reliable company. Insurers also must deny invalid claims, because
paying invalid or fraudulent claims results in higher insurance costs for all poli-
cyowners and hurts the solvency and profitability of the company.
Other Insurance Functions

Insurance administration staff members typically coordinate many aspects of their
work with staff working in other company areas, such as marketing, actuarial,
accounting and treasury operations, legal and compliance, human resources, and
information technology. Each of these areas supports the administration activities
that take place throughout the policy life cycle.
Marketing
Marketing is the functional area of an insurance company that is responsible for
(1) identifying the insurer’s customers and the products or services that its
customers want, and (2) promoting and distributing those products or services to
customers. The marketing department also assists in product development. Effective
marketing efforts enable a company to learn about and understand its customers,
clients, business partners, and society so that the company can increase the value of
its offerings and better facilitate the exchange process between buyers and sellers.
Marketing messages or images that raise customers’ awareness of company
offerings are often the customer’s first point of contact with the company and can
have a significant impact on the customer’s perceptions about the company and its
products.
Actuarial
An actuary is a technical expert in insurance, annuities, and other financial prod-
ucts who applies mathematical knowledge to industry and company statistics to
calculate various financial values. Among other activities, members of an insurer’s
actuarial staff
Use statistics to predict the rates of death among life insureds
Calculate premium rates for insurance products
Determine legal reserve liabilities
Conduct research on trends in mortality rates, policy lapses, policy loans,

company expenses, and interest rates
Engage in financial reporting activities
An insurer uses actuarial information to develop assumptions used in pricing
new products and in selecting risks. Members of the actuarial staff also help insur-
ers make reinsurance decisions.

Accounting and Treasury Operations

Accounting is the insurance company area responsible for collecting, recording,
summarizing, analyzing, and reporting data about a company’s financial con-
dition. The accounting department develops financial information that is used
throughout the company to make decisions, measure financial performance, and
satisfy internal and regulatory financial reporting requirements.
In treasury operations, employees manage cash as it flows through the com-
pany. Treasury operations staff set up bank accounts and disburse policy proceeds
via checks and electronic funds transfer. In some companies, a separate unit in the
customer service area handles premium billings.
Legal and Compliance

The legal department of an insurance company—also known as the law
department—handles all legal matters for the company. Company lawyers may
be called on to
Advise life insurance claim personnel when claims are disputed
Represent the company or supervise outside attorneys in any litigation involv-

ing the company
Develop or review policy forms, agency contracts, business contracts, and
other legal documents
The compliance department is responsible for ensuring that the insurer adheres
to all applicable laws and regulations in each jurisdiction in which the company
does business. Some companies combine the legal and compliance functions into
one department, while other companies have separate departments.
Human Resources
Human resources is the functional area of an insurance company that typically:
Recruits job candidates and screens applicants
Helps select qualified employees
Plans and presents appropriate onboarding and development for each employee
Administers employee benefit programs
Maintains employee records

In some companies, training and development is a separate area rather than
a part of human resources. Human resources staff members also guide an insur-
er’s management in conducting performance evaluations of employees and in
determining compensation levels for various jobs. Finally, personnel in human
resources assist with employee separations resulting from resignations, layoffs,
retirements, or discharge.

Information Technology
Information technology (IT) is the area of an insurance company that devel-
ops and maintains the company’s information systems and oversees information
management throughout the company. An information system is an interactive
combination of technology, people, and processes that collects, manipulates, and
disseminates information. Information management is the use of information
systems to provide employees with the information they need to carry out their job
responsibilities. These responsibilities include administering products, maintain-
ing records, formulating strategy, and providing information to customers.
The Customer Experience

Increasingly, insurers are focusing on delivering an exceptional customer
experience, which is the impression of a company that a customer forms over time
as a result of a series of encounters with the company. A company can enhance the
customer experience by adapting to evolving customer preferences. For example,
many customers today expect quick and easy purchase processes and high lev-
els of customer service from all of the companies with which they do business,
including insurance companies. Figure 1.3 provides examples of online features
that customers want to help them shop for insurance policies.
Figure 1.3. Customers Want Online Shopping Resources for Insurance
Customers use insurance company websites to conduct online

research on life insurance products. However, many customers desire
additional online capabilities to improve their purchasing experi-
ences. Based on interviews with customer focus groups, LIMRA
reported that customers want an insurance company’s
website to provide
•• Quotes that do not require them to fill in contact information until
they are ready to buy
•• Comparison charts, to help them (1) choose the type of life insur-
ance they need and (2) compare companies
•• A clear glossary of terms
•• Calculators or needs analysis tools that help identify how much coverage and what type of
coverage they need
•• Clearly posted contact options, including phone numbers, email addresses, financial
professional locators, and chat functions
•• Simple-to-use online applications that make it possible for them to complete the entire
purchasing process online
Source: LIMRA, Taking Out the Mystery: Providing Transparency for Life Buyers (Windsor, CT: LL Global, Inc., © 2017).
Used with permission; all rights reserved.

More than ever, insurance companies are listening to customers and making
changes in response to customer needs and wants. For instance, one way that
insurance companies are enriching the customer experience is by improving the
efficiency and effectiveness of their administration functions.
The efforts of employees in every administration area influence customer expe-
rience outcomes. Customers have the best end-to-end experience when all opera-
tional areas of the company share the same goal of meeting or exceeding customer
expectations. For example, the underwriting department can improve a customer’s
experience by simplifying the underwriting process as much as possible. When a
customer emails customer service to ask a question, a prompt and empathetic reply
shows the customer that she is important to the company. In the claims area, cus-
tomers are usually dealing with the death or illness of a loved one and appreciate
swift, clear, and compassionate service. The service that customers receive during
each interaction affects their perception of the company.
Employees who work in non-customer-facing areas have an impact on the cus-
tomer experience as well. For example, the IT department manages and adminis-
ters the systems that enable employees to perform administration processes, ide-
ally delivering a positive customer experience at every point of contact. Human
resources staff support a positive customer experience by aiding managers in hiring
and training employees appropriately. Compliance personnel help ensure the com-
pany is adhering to market conduct regulations and protecting customer privacy,
making underwriting and claims decisions in a fair and consistent manner, and
ensuring proper licensing of financial professionals, among other requirements.
Customer Experience Management

To coordinate customer experience initiatives across business units, insurers
engage in customer experience management (CEM), which is an enterprise-wide
business strategy that allows an organization to manage all aspects of its interac-
tions with current and potential customers.
CEM tracks experiences from the customer’s viewpoint and involves
Monitoring every interaction between a company and its customers
Gathering customer feedback to determine the quality of customer interactions

Identifying and evaluating occasions when customers’ experiences differed
from their expectations
Developing actionable insights based on analysis of customer feedback
Modifying internal processes and procedures with the customer in mind
Continuously searching for opportunities to optimize the customer experience

CEM helps an insurer concentrate on understanding customers and maximiz-
ing customer experiences. Effective CEM builds customer loyalty and differenti-
ates an insurer from its competitors.
The Customer Journey

Insurance companies gauge the customer experience by looking at touchpoints,
or points of contact with customers, which may occur during all of the phases of LEARNING AID

a policy’s life cycle. In general, there are four major touchpoints for customers of
life insurance:
Shopping experience. A potential customer obtains information about insur-
ers and their products and considers buying from them. Significant factors
that contribute to a favorable shopping experience include the ease of (1) con-
ducting research and (2) contacting a customer service employee or financial
professional to discuss a possible purchase in further detail.
Purchase experience. The customer usually gathers information about vari-
ous insurance products and services—either online or by talking with a finan-
cial professional, or both—and then initiates a purchase by submitting an
application for insurance coverage. The insurer then underwrites the appli-
cation, accepts or denies coverage, and sends either a policy contract or a
denial of coverage to the applicant. The accepted coverage may differ from the
requested coverage—for example, the contract could be written with a higher
premium rate or lower coverage amount. When sending the policy contract,
the insurer typically explains the reason for any changes. Significant factors
that enhance the customer’s purchase experience include (1) how efficient and
easy the application process is, (2) how quick and easy the underwriting pro-
cess is, (3) how understandable the contract is for the customer, (4) how clearly
any changes are explained, and (5) how long it takes to receive the contract.
In-force experience. Between the time an insurer accepts an application for
insurance and the time the policy lapses or pays death benefits, customers
may continue to interact with the insurer, the financial professional, or both.
Significant factors that contribute to a positive in-force experience include
(1) frequency of insurer-customer contacts, (2) ease of doing business with the
insurer, (3) the insurer’s accuracy in handling transactions and requests, and
(4) insurer responsiveness to evolving customer needs.
Claims experience. When an insured dies or becomes ill, a policyowner or
beneficiary submits a claim to the insurer. Significant factors that can improve
the claims experience include (1) ease of contacting the insurer, (2) sensitiv-
ity and compassion shown by the insurer’s employees, (3) accuracy of claim
processing, and (4) speed in completing claim administration.
For each touchpoint, an insurance company has an opportunity to create a good
or bad impression in a customer’s mind.
Example:
Yuriko Suzuki recently finalized her divorce and wants to change the
beneficiary on her life insurance policy from her ex-husband to her sister.
Yuriko calls her insurer to walk her through the process. Talia is the employee
who takes Yuriko’s call.
Analysis:
Talia’s response to the request influences Yuriko’s view of the insurer. If Talia
is helpful, knowledgeable, and empathetic, then Yuriko will be happy with the
quality of service that she received. If Talia cannot clearly explain the steps of
a beneficiary change or does not provide the necessary help to process the
change, then Yuriko will have a bad impression of Talia and the insurer.

The customer journey is the path each individual customer travels with a com-
pany, beginning with the first touchpoint and ending with the last. Some customer
journeys may last for a few days, while other journeys can last for years. To under-
stand the customer journey, an insurer considers the customer’s end-to-end experi-
ence with the company from the customer’s perspective. An example of a typical
customer journey is illustrated in Figure 1.4.
Figure 1.4. The Customer Journey
In-Force
Shopping Purchase Claims
Service
Typical •• Recognizing •• Applying for a •• Refining and •• Making a

touchpoints a need for policy reviewing the claim
insurance •• Underwriting policy •• Fulfilling
•• Getting advice •• Making policy promise
•• Comparing payments
options •• Maintaining
relationship/
loyalty
Because touchpoints shape each customer’s perception of a company and

determine a customer’s level of satisfaction, some insurers find it helpful to create
customer journey maps, which provide visual representations of customer inter-
actions with a company. By mapping individual customer journeys, insurers can
determine where pain points occur. A pain point is a real or imagined problem for
a customer that a company plans to solve. By identifying and addressing common
pain points, insurers improve the customer experience. In addition, companies that
analyze customer journeys and act on their findings can gain a competitive edge.
Developing a Customer-Centric Culture

Providing an exceptional customer experience begins with adopting a customer-
centric philosophy, which focuses on the needs of customers and how to fill those
needs. Customer-centric companies strive to understand their customers so that
the companies can (1) provide personalized services, (2) meet and exceed cus-
tomer expectations, and (3) earn customer trust and loyalty. When an insurance
company applies a customer-centric philosophy to its business practices, it devel-
ops a customer-centric culture. Figure 1.5 describes some tactics that insurers can
use to promote a customer-centric culture.

Figure 1.5. Tactics for Promoting a Customer-Centric Culture

Insurers can use a variety of tactics to promote a customer-centric culture. Some of the
actions a company can take include
Customer Service •• Simplifying products and services so they are easier to

understand and use
•• Making the company website as user-friendly as possible
•• Increasing customer self-service options
•• Offering access to forms and account information through mobile
devices
•• Using social media to communicate with customers
Analytics •• Soliciting feedback from customers at multiple touchpoints

•• Developing metrics for analyzing effectiveness of customer
experience initiatives
•• Using insights from data analysis to initiate more customer
interaction
Enterprise •• Restructuring procedures to speed up underwriting, customer

Operations service, and claims processing
•• Encouraging cross-functional collaboration in meeting customer
needs
Technology •• Automating routine or repetitive tasks, enabling staff to spend

more time on complex activities
•• Modifying administration systems and other technology to make
it easier for customers to conduct business with the company
Employees •• Providing employees with continuous education and training

programs, thus supporting more effective resolution of customer
requests
•• Encouraging employees to offer feedback on programs and
processes in the company
•• Rewarding employee innovation, adaptability, and attention to
customer focus
Companies make customer-centricity a top priority by aligning corporate goals

with the needs of customers. In addition, insurers purposefully implement strate-
gies designed to respond to evolving customer preferences. Customer-centric mea-
sures affect virtually all aspects of the insurer’s business. For example,
Streamlining the purchasing process encourages more people to buy their
products and services.

Process improvements and administrative system upgrades lead to faster

underwriting and claim processing, expediting results for customers and
enhancing the insurer’s efficiency.
Better customer engagement and loyalty help retain business and can lead to
new business.
To develop the internal culture necessary to become a customer-centric com-
pany, some insurers are creating new employee roles, such as the chief customer
experience officer. The chief customer experience officer (CCXO), also known as
the chief customer officer or the chief experience officer, is a senior-level e xecutive
who is responsible for managing corporate strategies to improve the customer
experience. Many insurance company CCXOs have a background in sales, mar-
keting, or technology and use their expertise to implement new processes and
technologies in ways that increase customer retention and loyalty. CCXOs also
bring together the efforts of various business units to ensure that the company
presents a unified, coordinated response to customer needs.
Challenges to Implementing Customer Experience

Management Measures
Transforming a company’s approach to managing the customer experience can be
a significant undertaking. The main challenges to implementing effective CEM
measures are
Company culture. For some insurance companies, developing a culture focused
on optimizing the customer experience may require restructuring responsibili-
ties, providing additional employee training, and soliciting employee feedback
on the effectiveness of programs and processes. Culture change doesn’t happen
overnight, so a company—particularly a large company—can need months or
even years to internalize a customer-centric culture.
Data integration. Many older administration systems maintain information
in isolated “silos” that slow the sharing of information within a company.
To meet the demands of today’s customers and offer seamless service, com-
panies may need to implement new systems that integrate information across
operational areas. The investment and effort to integrate can be substantial.
Resource allocation. Companies face competing priorities when it comes to
allocating money among projects. For example, an insurer may need to choose
between upgrading an administration system or hiring and training staff to
interact with customers across multiple channels. Management typically eval-
uates the costs and benefits associated with various projects to maximize the
incremental improvements they can make to the customer experience while
working within fiscal constraints.
Continuous measurement and improvement. Continuous monitoring of
interactions with customers helps a company assess its customer experience
and identify areas for improvement. The process of collecting and analyzing
customer data provides insights that insurers can use to respond to changing
customer needs. Failure to adapt to changing customer expectations may lead
to unnecessary effort, customer frustration, and a loss of business.

Industry disruption. Start-up companies, both inside and outside of the

insurance industry, are challenging the accepted practices of established
insurers. For example, some start-ups are using digital technology to simplify
and speed up the purchasing process. The new entrants are putting pressure on
existing insurers to keep innovating to remain competitive in the marketplace.
A company that is not aware of the latest industry trends risks falling behind
in the minds of customers.
Insurers’ Ethical Duties to Customers

Insurers hold a position of public trust, making ethics—a system of accepted stan-
dards of conduct and moral judgment that combines the elements of honesty, integ-
rity, and fair treatment—essential. Acting in an ethical manner involves behaving
in accordance with accepted legal and moral principles of right and wrong. Every
insurance company employee must act honestly, fairly, and with good judgment.
Specific ethical duties apply to those who work in administration.
Equity in Risk Acceptance

Underwriters must evaluate every application for insurance according to the insur-
er’s established underwriting guidelines and cannot unfairly discriminate when
assessing risks. As a result, underwriters must base an insured’s premium rate solely
on factors that affect the degree of risk the insurer is accepting by issuing the policy.
For individual life insurance, such factors include age, sex, health, occupation, and
avocations of the insured. Discrimination among risks is usually lawful when it is
based on (1) recognized actuarial principles and (2) actual or reasonably anticipated
experience. Note that the term risk can refer not only to the possibility of loss to an
insurer but also to the actual person or persons being insured.
Honest, Objective, and Fair Customer Service

When customers contact an insurer—whether to apply for new coverage, change
existing coverage, or simply ask a question—they deserve honest, objective, and fair
service. Customers also expect prompt, accurate, and empathetic responses. Finan-
cial professionals conducting business with the insurer also deserve such treatment.
Protection of Customer Information

Administration staff who interact with customers have an ethical and sometimes
legal duty to
Use only lawful, reasonable, and ethical means of collecting information
Secure authorization to collect information when required
Use only accurate information
Restrict access to personal information to only those people who have a lawful
and business-specific need for it
Follow an insurer’s written guidelines on how to safeguard confidential
i nformation

Prompt and Equitable Claim Handling

Claim analysts have an ethical and legal duty to process claims in a timely and equi-
table manner. Equitable claim handling includes assessing every claim according
to the policy’s terms and paying only valid claims. States impose fines on insurers
that don’t provide forms or process claims in a timely manner.
Adequate Financial Resources

A life insurer must have enough financial resources to pay policy benefits when
they become due, so insurers must operate in ways that keep them financially
sound and profitable. To strengthen their financial positions, insurers encourage
administration employees to use resources wisely, manage expenses, and work
more efficiently to serve customers.

Key Terms
insurance administration
applicant
proposed insured
insured
policyowner
beneficiary
group policyholder
group prospect
group insured
third-party policy
financial professional
new business
underwriting
underwriter
reinsurance
customer service
policyowner service
member service
claim administration
marketing
actuary
accounting
treasury operations
legal department
compliance department
human resources
information technology (IT)
information system
information management
customer experience
customer experience management (CEM)
touchpoint
customer journey
customer journey map
pain point
customer-centric philosophy
chief customer experience officer (CCXO)
ethics

Insurance Administration Chapter 2: Considerations for Insurance Administration 2.1
Chapter 2
Considerations for
Objectives
2A Identify regulations that affect administration activities in three
different areas of regulatory compliance: privacy, fraud, and unfair
trade practices
2B Define quality control and explain how insurers use metrics to monitor
performance
2C Explain administration systems and how insurers manage processes
and technology to enhance insurance administration
2D Explain how document imaging and management systems, automated
workflow capabilities, straight-through processing, and knowledge
management systems facilitate paperless processing for insurers
2E Explain why data is important to insurers’ administration systems and
how database management systems help insurers manage data
2F Explain why information security is important to insurers and describe
some of the cybersecurity measures used to protect data
2G Describe how business intelligence supports data analysis and
distinguish among three types of data analytics that insurers use

2.2 Chapter 2: Considerations for Insurance Administration Insurance Administration
Outline
Regulatory Compliance Administration Systems and
 Privacy Strategies
 Fraud  Process and Technology
 Unfair Trade Practices Management
Quality Control  Paperless Processing
 Metrics The Power of Data

 Data Visualization Tools  Data Management
 Information Security
 Data Interpretation and Analysis
I
n Chapter 1, you learned about insurance company functions that support
insurance administration activities. You also saw that the manner in which an
insurer treats its customers is an important part of insurance administration.
Additional considerations influence companies’ ability to provide effective
administration services. For example, a company has a legal responsibility to com-
ply with certain regulations. Companies also need metrics to measure the effec-
tiveness of their operations, technology to facilitate administration services, and
tools to collect, protect, analyze, and apply relevant information. In this chapter,
you’ll read about each of these topics and see specific examples of how they apply
to particular administration activities.
Regulatory Compliance
Complying with the many regulations that govern life insurance is a critical aspect
of effective insurance administration. Failure to comply with regulations can result
in fines, lawsuits, and negative publicity for insurers, so all insurance company
employees must know how these regulations affect their work.
The regulatory structure is complex, with both federal and state laws and regu-
lations affecting insurance administration.
Law or regulation?
A law is approved by vote of the federal or state legislature and signed by
a jurisdiction’s executive (the president in the case of federal law and the
governor in the case of state law).
A regulation is created by a federal or state body that has the responsibility

to govern a certain area of commerce or society, such as a state’s
Department of Insurance.
State insurance regulators receive guidance from the National Association of

Insurance Commissioners (NAIC), the private, nonprofit association of U.S. insur-
ance commissioners in all 50 states, the District of Columbia, and the four U.S.
territories. One of the NAIC’s primary functions is to promote uniformity of state

regulation by developing model laws and regulations, which states are encour-
aged—but not required—to enact or adopt. Model laws and regulations in and of
themselves have no legal authority; they are enforceable in a particular state only
if that state has actually enacted the model law or adopted the model regulation for
use in its jurisdiction.
Throughout this text, you’ll learn about regulations that specifically affect new
business, underwriting, reinsurance, customer service, and claim administration.
In this chapter, you will read about three general areas of regulatory compliance
that are key to insurance administration: privacy, fraud, and unfair trade practices.
Privacy
Insurers collect large amounts of information about a customer’s health, finances,
credit, occupation, and avocations. Such information is a vital part of administra-
tion activities. Understandably, customers have concerns about how this infor-
mation is used and whether it is accurate. In response to these concerns, many LEARNING AID
jurisdictions have adopted customer privacy laws and regulations. These laws and
regulations help ensure that insurance company employees who have access to
customers’ private and personal information handle information appropriately.
In addition, insurers must safeguard customer information to prevent identity
theft. Employees should carefully adhere to an insurance company’s protocols to
protect customer information.
Fair Credit Reporting Act

During the underwriting of an application, an insurer may request that a private
business compile or evaluate information about the applicant in the form of a
consumer report. A consumer report is any communication of information by
a consumer reporting agency that (1) bears on an individual’s creditworthiness,
credit standing, character, general reputation, personal characteristics, or mode of
living; and (2) is used or collected as a factor in establishing a consumer’s eligibil-
ity for insurance or credit. The U.S. federal Fair Credit Reporting Act (FCRA)
regulates the reporting and use of consumer information and seeks to ensure that
consumer reports contain only accurate, relevant, and recent information.
To ensure fair practices, the FCRA requires insurers and financial professionals
to give a disclosure notice to the applicant and the proposed insured, informing
them that the insurer may order a consumer report. Insurers routinely include this
disclosure notice in the insurance application. The notice also informs the appli-
cant of her right to request information about the nature, scope, and results of any
investigation. The insurer has five days to respond to such a request.
Sometimes an insurer takes an adverse action based on information in a con-
sumer report. An adverse action is a denial or revocation of insurance coverage, a
change in the terms of existing insurance coverage, or a refusal to grant insurance
in substantially the amount or on substantially the terms requested. If an adverse
action is based on a consumer report, the insurer must inform the applicant that
she has the right to (1) contact the consumer reporting agency and get a free copy
of the report and (2) dispute the accuracy or completeness of the report’s data.

HIPAA Regulation
The Health Insurance Portability and Accountability Act (HIPAA) is the
U.S. federal legislation that sets forth requirements that employer-sponsored group
insurance plans, insurers, and managed care organizations must meet in providing
individual and group health insurance. It also provides customers with important
privacy rights and protections with respect to their health information, including
controls over how health plans and health care providers use and disclose their
health information.
Insurers must review an applicant’s personal health information in order to
determine eligibility for life insurance, and they must comply with HIPAA require-
ments to protect that information. Applicants grant the insurance company access
to their health information by signing a HIPAA-compliant authorization during
the application process.
Gramm-Leach-Bliley Act
The Gramm-Leach-Bliley (GLB) Act is a U.S. federal law enacted in 1999 that
removed many of the regulatory barriers between institutions in the various seg-
ments of the financial services industry and that governs privacy.
The GLB Act requires insurers to disclose policies for obtaining and sharing
customers’ nonpublic personal information at the beginning of the relationship
and at least once a year afterward. Under the GLB Act, customers have the choice
to opt out of information sharing with nonaffiliated third parties. However, the
GLB Act does not restrict insurers from sharing information with affiliated parties
that are related to the insurer by common ownership or control.
The privacy provisions of the GLB Act supersede state privacy laws unless a
state’s laws provide stricter protections for customer privacy than does the GLB
Act. The NAIC responded by introducing two model laws—the Model Privacy
Regulation and the Model Privacy Act—which include privacy requirements simi-
lar to those in the GLB Act.
Model Privacy Regulation

In an effort to protect customers’ personal information, most states have adopted
the Privacy of Consumer Financial and Health Information Model Regulation,
or the Model Privacy Regulation, a model law that was created by the NAIC in
LEARNING AID response to the GLB Act. The Model Privacy Regulation sets standards insurers
must meet to protect the privacy and security of individuals’ nonpublic personal
information. The Model Privacy Regulation specifically limits disclosure of
Nonpublic personal financial information, which includes personally iden-
tifiable financial information such as a person’s income or credit history; and
any list, description, or other grouping of customers that is derived using any
personally identifiable financial information that is not publicly available
Nonpublic personal health information, which includes health information
that identifies an individual who is the subject of the information or that pro-
vides a reasonable basis to think the information could be used to identify an
individual

Model Privacy Act

Some U.S. states have adopted the Insurance Information and Privacy P rotection
Model Act, or the Model Privacy Act, which is an NAIC model law that sets stan-
dards for the collection, use, and disclosure of information gathered in connection
with insurance transactions. The Model Privacy Act
Primarily governs underwriting and claim evaluation practices
Requires insurers to provide customers with written notice of their informa-

tion practices in certain situations, including that the insurer may collect cer-
tain types of information from third parties
Limits an insurer’s right to disclose certain types of customer information to
others
Specifies how an insurer must notify and respond to a customer when the
insurer conducts and prepares a consumer report or an investigative consumer
report
Fraud
Insurance fraud is a crime that anyone connected to an insurance transaction can
commit, including customers, insurance company employees, or financial profes-
sionals. Insurers are particularly vulnerable to fraud because many people incor-
rectly view it as a victimless crime. In reality, an insurer’s policyowners bear the
cost of fraud in the form of increased premiums. Because fraud is such a problem,
almost all jurisdictions have regulations designed to prevent and prosecute insur-
ance fraud.
Fraud is an especially important concern for the claim administration area, as
you’ll see in further detail in later chapters. However, fraud can occur anywhere
within an insurance company, and all insurance administration employees should
be alert to signs of possible fraud and know their company’s policies for reporting it.
Some states have enacted laws based on the Insurance Fraud Prevention Model
Act, which is an NAIC model law designed to permit state insurance departments to
(1) investigate and discover fraudulent insurance acts, and (2) receive assistance
from state, local, and federal law enforcement and regulatory agencies in enforc-
ing laws that prohibit fraudulent insurance acts. These laws require insurers to
include a fraud warning statement in all insurance applications and claim forms.
Example of a Fraud Warning Statement

Any person who knowingly presents a false statement in an application
for insurance may be guilty of a criminal offense and subject to penalties
under state law.
Signature______________________________ Date________________

In most states, if an insurance employee knows, or reasonably believes, that fraud

has occurred, he is required to report that knowledge to the appropriate authorities.
To encourage people to report suspected fraud, most states protect from civil liabil-
ity anyone who in good faith reports possible insurance fraud. That is, the person
reported for possible fraud can’t sue the reporting person as long as the reporting
person had a reasonable belief that fraud had, or might have, occurred.
Several states also require insurers to develop and maintain an antifraud plan
that helps the insurer detect and prevent fraud.
Unfair Trade Practices

To ensure that customers have accurate and complete information about insur-
ance products they may buy, most states have enacted unfair trade practices laws.
In most cases, these laws are based on the NAIC’s Unfair Trade Practices Act,
which defines certain practices as unfair and prohibits them when they are com-
mitted (1) flagrantly in conscious disregard of the law or (2) so frequently as to
indicate a general business practice. Many of the Act’s requirements apply to sales
practices, but some directly affect insurance administration activities. For exam-
ple, the Act
Prohibits unfair discrimination in underwriting and issuing policies
Prohibits unfair discrimination in setting premium rates
Requires insurers to keep records about complaints, claims, ratings, and

underwriting decisions
Market conduct laws are state insurance laws designed to make sure that insur-
ance companies conduct their business fairly and ethically. For instance, these laws
may prohibit (1) failure to provide adequate disclosure for policy cancellations and
(2) lengthy delays in processing claims. State regulators periodically conduct exami-
nations to determine insurers’ compliance with market conduct laws and regula-
tions. Such examinations typically cover many of an insurer’s functional areas,
including new business, underwriting, and claim administration. During examina-
tions by state regulators, insurers may need to rely on accumulated documentation
of transactions as proof that they are acting in good faith toward their customers.
Quality Control
Quality control is the process of ensuring that a company accomplishes its objec-
tives in an effective and efficient way. Quality control helps an insurance company
ensure that its policies, processes, and outcomes conform to its goals and strate-
gies. It also helps the insurer meet regulatory requirements.
The quality of administration is important to insurers because it influences
whether customers
Keep their policies in force and buy additional products from the insurer
Make positive or negative comments about the insurer to other people
File complaints about the insurer
Bring (or threaten to bring) legal action against the insurer

In addition, insurance companies that achieve high levels of accuracy spend less
time and money correcting errors and resolving issues for dissatisfied customers.
Companies set objectives both to measure their current performance and to
guide future activities. As part of its quality control program, the company creates
written documentation of its policies, processes, and procedures. These written
documents define how the processes work and give employees clear guidance on
how they should accomplish administration tasks. The documents also provide a
basis for monitoring compliance with the established procedures.
Periodically, companies evaluate their activities to see how well their perfor-
mance meets their objectives. Most insurers evaluate the quality of their adminis-
tration activities by measuring results and then comparing actual performance to
set standards. Performance measurement is a process through which a company
(1) decides what activities are key to the achievement of the company’s goals and
objectives, how to measure the performance of those activities, and what perfor-
mance standards it hopes to achieve; (2) gathers the measurements; and (3) com-
municates the results. A performance standard is an established level of perfor-
mance against which a company or an individual compares actual performance.
Benchmarks are performance standards, often based on standards achieved by
leading companies, that represent a company’s goals for performance. If a stan-
dard is not being met, the insurer may attempt to identify the causes and make
changes to improve performance.
Example:
A recent survey of 31 life insurance companies shows that, on average, it
takes 2.6 days from the date an application is received in the home office
to the date it is first reviewed by underwriters.
If an insurer measures its own performance and finds that this same
process takes six days at its company, the insurer might investigate ways
to improve that process and bring it closer to the industry average.
Metrics
Insurers use qualitative and quantitative methods to evaluate performance.
Qualitative performance measurement focuses on behaviors, attitudes, or
opinions to determine the quality of an activity, such as, “How clearly does this
employee explain a complex policy benefit to customers?” Because qualitative
methods usually involve subjective judgment, they tend to be more difficult to
administer and interpret than quantitative methods. Quantitative performance
measurement uses numerical measures to track and report objective results, such
as, “How many applications for insurance do we receive in good order?”
One commonly used quantitative method is a metric, a numerical measure that
quantifies the performance of a specified activity. Insurers use metrics to track
progress in many areas of the company, including new business, underwriting,
customer service, and claims. The following is an example of how insurers can use
metrics to measure performance in the call center.

Example:
Abalone Life and Zelda Financial are evaluating the performance of their
call centers by using a metric that measures how many calls are answered
within 30 seconds. Abalone found that 84% of calls to their call center were
answered within 30 seconds. Zelda found that 70% of calls to their call center
were answered within 30 seconds. Each company’s performance goal is to
exceed the industry benchmark of 80% of calls answered within 30 seconds.
Analysis:
Because Abalone’s results were better than the industry benchmark,
Abalone’s call center is exceeding its performance goal. Zelda’s results fell
short of its performance goal. Therefore, Zelda may need to examine its
call center processes to find ways to increase efficiency.
Key Performance Indicators

To be effective, metrics must align with a company’s objectives and provide infor-
mation that managers can use to make decisions. To focus on measuring the most
important aspects of performance, many companies identify specific metrics
known as key performance indicators (KPIs), which are quantitative measures
that indicate the performance level of an activity that is critical to an organiza-
tion’s success. KPIs give managers a snapshot of how well the company, depart-
ment, or team is progressing toward its stated goals and objectives.
For example, think of the key health factors that doctors measure when you
go in for a checkup: blood pressure, cholesterol levels, heart rate, and body mass
index. These few but vital measures help a physician assess your overall health,
identify weaknesses, and reveal potential problems. KPIs are the vital signs for
organizations; by measuring a handful of factors critical to success—of the com-
pany as a whole, or of a specific administration area such as claims—managers
get a simplified view of progress toward goals. They can use this information to
make better decisions that lead to better performance. An insurer can create its
own KPIs or use industry-standard KPIs.
Examples of some KPIs commonly used by life insurers to measure overall

company performance include:
•• Revenue per policyholder: Insurer’s annual total revenue earned ÷
Number of active policyholders
•• Expense ratio: Total company expenses during a specified time period
÷ Total amount of premiums earned during the same time period
KPIs used to measure performance of specific insurance administration
activities include:
•• Time to underwriter: The average number of calendar days between
receipt of application in the home office until first underwriting review
•• Average hold time: The average amount of time that a policyholder
waits on hold during the course of a call, as well as between transfers
•• Claim turnaround time: The average number of calendar days from
receipt of all required information needed for processing to the day
the benefit check is mailed

Data Visualization Tools

For metrics to be useful in decision making at all levels, managers and employ-
ees must have access to them. One way companies can provide this access is by
using data visualization tools to distribute performance results to staff who need
that information to do their jobs. A data visualization tool is a technology-driven
graphical display of an organization’s metrics and key performance indicators.
Available on users’ workstations, these tools graphically present data in easy-to-
understand formats—for example, with charts, graphs, and tables. Managers and
employees can see clearly, at a glance, how the company, a specific area, or an
employee is performing, often relative to a certain goal.
The purpose of data visualization tools is to make complex data more accessi-
ble, understandable, and usable. Generally, visual depictions of data such as charts
or maps are easier to understand than raw numerical data. In addition, data visu-
alization tools typically are interactive, allowing users to click and “drill down”
beyond what’s visible on their screens to access more detailed data.
The types of tools used and the information they present to users vary by com-
pany. Just as each insurer must determine the specific metrics it wants to measure,
each insurer also must determine the most effective way to present results to users.
Dashboards and Scorecards

Two examples of data visualization tools are dashboards and scorecards, and they
typically differ by the kind of information they present, their intended audience,
and the graphic elements they use to show results. A dashboard, or a performance
dashboard, is an information system application that combines information from
multiple business intelligence sources into a single, easy-to-read electronic format
that identifies positive and negative trends for an individual business process or
for the whole company.
Dashboards show what’s happening right now. Like the dashboard in your car,
a performance dashboard is a real-time, visual display of important metrics. It
lets managers, supervisors, and employees monitor the performance of a function,
activity, or person at a specific point in time. Dashboards typically use graphic
elements such as pie charts, maps, dials, or other visuals to show specified metrics
all on one screen, so users can quickly gauge performance levels. A dashboard
may also show historical performance over time and allow users to drill down to
access more detailed data. The data is updated automatically and frequently; daily
updates are common, but frequency varies by company and by purpose.
Monitoring dashboards helps supervisors and employees make sure adminis-
tration activities are performed according to set standards. Figure 2.1 is a sample
dashboard that shows the performance levels of a life insurance company’s claim
administration function.
A scorecard is a data visualization tool that shows progress over time toward
a specified goal. Scorecards allow high-level managers and executives to graphi-
cally see how the company’s KPIs are performing against their target goals. They
typically have a table-like format, with each row showing a KPI, its target goal,
and how well it is progressing toward that goal. Scorecards usually also include
icons that graphically represent each KPI’s status. For example, scorecards often
include a colored circle next to each KPI that indicates the company’s current per-
formance on that KPI. A green circle usually indicates that performance meets or

Figure 2.1. Sample Dashboard
INSURANCE CLAIMS DASHBOARD

TOTAL CLAIMS PER YEAR TOTAL CLAIMS PER MONTH
900
800 835
1322
900
1053 1322 700 755 725
4338 688 693 684 750 734
600 630 691 717 698
1335
1053 552 500
4338
400
1355 300
552 200
100
0
AUTO BUSINESS LIFE/RETIREMENT PROPERTY OTHER JAN FEB MAR APR MAY JUN JUL AUG SEP OCT NOV DEC
YTD DOLLAR AMOUNT OF CLAIMS PAID
Claims Paid: Daily
$927,516.00
exceeds expectations; a yellow circle usually indicates that performance is lower

than expected; and a red circle usually indicates that performance is unacceptable.
Scorecards usually get updated periodically, such as monthly or quarterly, and
may include “trend lines” that indicate a KPI’s progress over a longer period of
time. By monitoring scorecards, managers can ensure that operational activities
stay aligned with the company’s strategic goals.
Some companies combine elements of dashboards and scorecards to create
powerful tools that help users better access and analyze ever-growing amounts
of data.
Administration Systems and Strategies

Regulations and quality control objectives influence the design of informa-
tion systems that insurers use. To manage all of the information gathered about
policyowners, insureds, claimants, financial professionals, and policies, insurers
use administration systems, which are interactive combinations of technology,
people, and processes that collect, manipulate, and distribute information about
insurance policies and customers.

The general purpose of administration systems is to provide employees with

information they need to do their jobs effectively and efficiently. For example,
with an administration system
Underwriters can check to see if an applicant has previously applied for a
policy with the company
Customer service representatives can determine whether a policy contains a
certain benefit when the owner calls and asks
Claim analysts can find out if a policy’s premium payments are up to date to
verify that coverage was in force when the insured died
Employees access administration systems through computer networks.
A computer network is formed from two or more computers linked together
to provide a platform for electronic communication and information sharing.
Two types of computer networks are
Internal networks. An internal network is a computer network that a com-
pany creates to link its people and equipment to each other. Internal networks
allow employees working in various physical locations to access connected
company resources. Some companies also share news, information, and com-
pany publications through intranets and extranets. An intranet is an internal
network that looks and functions much like the internet, but is designed to be
accessible only to company employees. An extranet is a portion of an organi-
zation’s internal network that is accessible to people within the organization
and to selected external parties.
External networks. An external network is a computer network that links
a company to people and computers outside the company. External networks
allow an insurer to share information with other organizations. For example,
a doctor’s office might submit a proposed insured’s medical lab results elec-
tronically—through an external network—to an underwriter.
With constant advances in technology, the rise of real-time transactions, and
rapid, widespread information sharing on social media, today’s customers—
especially younger ones—increasingly expect all companies to sell products and
deliver service in flexible, interactive, and efficient ways. Meeting these expecta-
tions poses some significant challenges to life insurers.
Because of the long-term nature of life insurance products, an insurer must
continue to service products that it no longer sells. Often, these products require
support from outdated computer systems, called legacy systems. An insurer may
have several of these legacy systems operating independently of each other, form-
ing a complex web of administration processes and systems.
Legacy systems lack the flexibility of newer, more dynamic technology to
facilitate data integration, communication, and streamlined processing. However,
updating systems to be more efficient and effective can require major investments
in new technology, staff training, and other resources. Insurers typically must
weigh the expected benefits of such investments against the costs to determine if
new technology is the best use of limited financial resources.
If a systems update involves changes to processes, then regulatory compliance
becomes an issue. Ensuring that new or revised processes comply with applicable
regulations can slow an insurer’s progress in making changes that help it respond
more quickly to customer demands.

Despite these and other challenges, many life insurers are finding ways to man-
age administration so that they can better meet customers’ needs and expectations.
Process and Technology Management

Administration functions, especially underwriting and claims, are very process-
oriented—that is, they involve a series of ordered steps taken to achieve a specific
outcome. For example, claim analysts follow specific steps when evaluating a claim
to determine whether the insurer is liable to pay the claim and, if so, how much that
payment should be. Life insurers attempt to manage these processes to meet custom-
ers’ needs promptly and equitably, while also minimizing operating costs.
Business Process Management

One way insurers work to improve insurance administration is through business
process management (BPM), a strategy that combines proven management prac-
tices with technology to automate and optimize business processes or adapt them
to meet changing needs.
Using BPM, an insurer can analyze a specific business process—such as check-
ing an insurance application for completeness—and then design, develop, and
implement changes to improve it, automating steps wherever possible. Many soft-
ware vendors sell BPM technology suites that help companies automate processes.
A BPM technology suite is a collection of technology tools that support and man-
age the design, modeling, construction, deployment, monitoring, and refinement
of business processes. After a process has been improved, managers continue to
use BPM to monitor and refine it.
BPM helps insurers create more efficient and agile administration processes,
which then allow companies to adapt more quickly to changing market demands
such as new regulations, changes in the economy, and shifts in customer expecta-
tions for sales and service.
Business Process Outsourcing

Another way that insurers optimize administration processes is by contracting out
specific functions or processes to another company, a strategy known as business
process outsourcing (BPO). This strategy allows an insurer to offload to an out-
side organization those functions that must be done but that may not directly con-
tribute to the company’s growth and profitability.
For example, many insurers contract with vendors that call proposed insureds
to get additional medical or other information needed for underwriting. Outsourc-
ing this step allows the insurer’s experienced underwriters to focus on the more
complex task of assessing risks. When outsourcing a process, it is critical for the
insurer to thoroughly document the steps involved so that vendors can perform the
process according to the insurer’s standards.
Insurers typically outsource simple administration processes, such as data
entry. Some insurers also outsource more complex processes, such as underwrit-
ing for specific types of policies or medical underwriting reviews by physicians.
Insurers may also contract with vendors that have expertise in new technology and
social media to provide more flexible customer service options. Many life insurers
use BPO to help them manage closed-book business.

An insurer must service its life insurance policies as long as they remain
in force, even if the company no longer sells that type of policy. Because
maintaining such closed-book business can be costly, some insurers
outsource the administration of these policies to a vendor. Outsourcing
may reduce the insurer’s costs related to the service, claims processing,
and outdated technology that supports such policies.
No matter how or why an insurer uses BPO, it must carefully evaluate each
vendor it contracts with to ensure that the vendor is financially stable and its ser-
vices meet the insurer’s specifications for quality, cost, and regulatory compliance.
While successful BPO can help an insurer reduce administration costs and be
more agile, poorly managed BPO can damage an insurer’s reputation and lead to
dissatisfied customers and lost revenue.
Paperless Processing
Life insurers gather and retain many different forms, documents, and records—
both electronic and hard-copy—as they administer policies. Because organizing,
storing, and retrieving vast numbers of paper documents can be overwhelming
and inefficient, insurers today are converting paper documents into electronic
form. Companies can then use a combination of technologies to manage, store,
preserve, and deliver these documents as needed.
For example, such technologies enable staff to upload, access, and share infor-
mation from their computers—and in many cases, mobile devices—as they pro-
cess customer transactions. Paperless processing technologies used by insurers
include document imaging and management systems, automated workflow sys-
tems, automated decision-making systems, and knowledge management systems.
Document Imaging and Management Systems

Customers, employees, and outside companies submit information to insurers
through various means, including electronic applications, documents sent via
email, data entered into a system manually, and documents submitted on paper.
Through document imaging, paper documents are scanned and saved as digital
image files.
These files can then be indexed and stored in the insurer’s document
management system, a type of technology that stores, organizes, and retrieves
documents that have been converted to digital images. Most document manage-
ment software uses data capture technologies such as optical character recognition
(OCR) and intelligent character recognition (ICR). OCR can recognize printed
text characters in a document, convert them into electronic form, and save them
in a dynamic file from which the insurer can extract data. ICR can also recognize
and convert handwritten characters.

Automated Workflow Systems and Business Rules Engines

Digital files become part of an insurer’s automated workflow system, which coor-
dinates the flow of documents and work tasks associated with a business process.
Basically, this works like a tracking sheet that follows a transaction through its
entire workflow process. The system routes documents to staff members for pro-
cessing, placing the jobs in a work queue so that they are available when staff are
ready to work on them. When one person finishes working on a case, the workflow
system routes the job to the next person.
Automated workflow systems use business rules engines (BREs)—software
that automates the decision-making process by creating and applying rules to all
available information. Any process that can be stated in an “if . . . then . . .” for-
mat can be automated. In underwriting, for example, a BRE could include a rule
stating that if a proposed insured has a certain combination of medical conditions,
then she should be declined coverage.
BREs are particularly useful in making underwriting decisions, which involve
applying certain rules to data and combinations of data. In fact, hard-copy under-
writing manuals are nothing more than business rules books. However, whereas
an underwriter using an underwriting manual can evaluate a moderate number of
variables, business rules engines can consider hundreds of variables. In addition,
BREs can ensure the consistent processing of these variables, leading to more
equitable underwriting decisions.
By using BREs, insurers can engage in exception-based underwriting, or
underwriting in which rules are applied to process all applications electronically,
except the most difficult ones that require an underwriter to apply human judg-
ment in the decision-making process. Business rules engines also can identify
missing pieces of information from people and systems both inside and outside
the company. For example, the software can request data, such as payment his-
tory and claims, on other policies owned by the applicant. It also can request data
from third parties. Insurers are increasingly using BREs in other administration
areas as well, such as helping a policyowner make an address change online and
processing routine claims.
An automated workflow system can use BREs to (1) gauge the priority of a
work item and place high-priority items in the front of queues and (2) determine
what skill set is needed for a certain task and route the work to an employee with
those skills.
Straight-Through Processing
The goal of many insurers that focus on business process management is straight-
through processing (STP), which is the electronic processing of every step of a
transaction without manual intervention. Pure STP results in a paperless environ-
ment in which an insurer maintains all forms and records electronically.
For example, STP can allow total electronic processing of certain types of new
business, from application submission to actual policy issue. An applicant or finan-
cial professional submits an application electronically, and the insurer’s adminis-
tration system does everything else needed to produce and issue the policy, includ-
ing underwriting and printing the policy. Because STP reduces the need for data
entry and other human input, it reduces an insurer’s error rates and increases its
efficiency, consistency, and productivity. In addition, STP of simpler applications
allows staff more time to handle complicated cases.

To achieve straight-through processing, companies must have document man-

agement and automated workflow capabilities that are compatible and integrated
with all the tools in use company-wide—including email, e-payment applications,
company apps, and customer experience management programs.
Knowledge Management Systems

An insurance company’s procedural manuals contain large amounts of important
institutional knowledge, including details about products and internal procedures.
For example, underwriters refer to company manuals for guidance in evaluating
specific medical impairments. By doing so, underwriters benefit from insights the
company gained from its prior experiences with insureds.
In the past, insurers often maintained procedural manuals and other technical
resources in paper format. However, technology now enables insurers to provide
employees with electronic access to these resources through the use of knowledge
management systems. A knowledge management system gathers, evaluates, and
shares a company’s information assets, which are used to apply knowledge to business
activities. Knowledge management systems make it easier and quicker for employees
to find information that would have been difficult to locate in paper manuals.
The Power of Data

Data drives an insurer’s administration systems and processes. Employees need
data about customers and policies to assess risks, issue policies, provide service,
and pay policy benefits. Managers need data to make decisions such as whether to
revise or outsource administration processes.
We live in a data-rich world. When you browse the internet to find a product,
use your GPS-enabled smartphone to get driving directions, and swipe your store
loyalty card to get price discounts, you automatically generate data about who you
are, where you go, and how you buy. As technologies that capture, store, and pro-
cess data evolve, the amount of available data grows exponentially.
As the quantity of data grows, so must an insurer’s ability to manage, pro-
tect, and understand data. Companies such as Google and Amazon are already
leveraging data to provide better service and more flexible, personalized customer
experiences. As a result, these companies are setting high standards for customer
expectations. To remain competitive, companies in all industries—including
insurance—must find ways to use data to their advantage.
Data Management
Insurers typically use databases to keep track of all the data they collect and store.
Insurers create internal databases for their own uses and use external databases
developed and maintained by government agencies, industry associations, busi-
ness partners, and other information providers. An insurer may also store a huge
amount of data in one location by using a data warehouse, which is a system that
consolidates data from various organizational databases and external sources and
houses it in a centralized location on the company’s server.

Insurance company employees can search and manipulate collected data by

using a database management system. A database management system (DBMS)
is a software application that organizes the data in one or more databases or data
warehouses logically and allows users to access, update, and analyze data while
ensuring the integrity and security of the system. Users run queries—database
searches using selected filtering criteria—to retrieve specific data. For instance, an
employee might run a query in a DBMS to pull the mailing address of every life
insurance policyowner living in a certain state.
An insurer can analyze the data in its databases and data warehouses—as well
as data from other sources—through data mining, which is the analysis of large
amounts of data to discover previously unknown trends, patterns, and relation-
ships. For example, mining payment history data and claims experience data for
all of a company’s insureds might reveal a potentially profitable segment of people
whom the insurer could then target for marketing.
Data mining systems can analyze data from internal and external sources. For
example, information on other policies owned by a proposed insured would come
from the insurer’s internal records; additional data—such as the current finan-
cial status of the proposed insured—could come from external sources, such as
credit bureaus. Data mining systems are often internet-based, allowing informa-
tion gathering to be automatic and instantaneous.
Information Security
Technology makes collecting and sharing data electronically faster and easier, but
it also creates the responsibility for making sure that customers’ personal informa-
tion and the company’s proprietary information are available only to those with a
legitimate need to know. To protect the confidentiality of personal and proprietary
information, companies establish security measures. Information security encom-
passes the physical, technical, and procedural steps a company takes to prevent the
loss, wrongful disclosure (accidental or intentional), or theft of information.
Insurance companies use a variety of technology tools to protect against data secu-
rity risks. Figure 2.2 describes some of these risks and the tools used to mitigate them.
A company must organize and continually update its security tools and pro-
cedures as part of its data governance policy. Data governance is the process of
establishing organizational ownership and accountability for data so that busi-
ness processes are optimized and data are secure and protected. Data governance
policies vary depending on a company’s needs, but generally aim to protect the
privacy of customer and company data, protect company systems from risks that
might disrupt business operations, and ensure compliance with regulations.
Cybersecurity
Because insurance companies—and financial services companies in general—
possess large amounts of sensitive customer data, they are tempting targets for
computer hackers. To fend off malicious attacks, companies must engage in
cybersecurity, which encompasses measures undertaken to protect a company’s
computer networks, systems, and data from unauthorized access.

Figure 2.2. Security Risks and Technology Tools
Security Risks Technology Tools
Hackers might gain access to •• Firewall to prevent access

company databases and view, •• Intrusion detection software to detect
manipulate, or steal data. security breaches
Unauthorized persons might •• Encryption to encode data
intercept data traveling over the •• Virtual private network (VPN) to restrict remote access
internet or a private network.
Unauthorized persons might •• Authentication to verify that a user’s identity is autho-
gain access to private customer rized, typically by means of a username and password
information by impersonating •• Cookies—small files that save selected user data—
authorized persons. to identify certain computers
•• Biometric authentication to verify by means of a
physical trait that a user’s identity is authorized
A virus might destroy data and/or •• Antivirus software to find viruses
programs or disable computers.
A natural or man-made disaster •• Data backup software to protect and store data
might destroy data or the system’s •• Disaster recovery software to develop
ability to function. disaster recovery plans
As cyberattacks continue to increase in frequency and sophistication, insur-

ance regulators have begun to address the need for consistency across the industry
in managing cybersecurity risks. The NAIC’s Cybersecurity Task Force has devel-
oped the Insurance Data Security Model Law to create cybersecurity standards
for insurers. Some of the proposed law’s requirements include
Conducting annual risk assessments to identify internal and external threats
to data security
Developing, implementing, and maintaining an information security program
with safeguards to protect nonpublic information
Creating a written incident response plan for responding to cybersecurity
breaches
Notifying state regulators of a cybersecurity incident within 72 hours of the
event
State insurance regulators conducting periodic examinations of insurance com-
pany operations have extended the scope of their reviews to include an insurer’s
cybersecurity practices.

For insurance companies, best practices for managing the risk of cyberattacks
include1
Limiting access to IT assets and associated facilities to authorized users, pro-
cesses, and devices
Coordinating response activities with internal and external stakeholders and
law enforcement agencies
Reviewing the cyber risk management practices of any third-party vendors
the insurer uses
Developing a comprehensive cybersecurity strategy addressing governance,
risk identification, implementation of controls, continuous monitoring, recov-
ery options, and learning from cyber incidents
A cybersecurity breach is one of the potential threats companies commonly
identify during business continuity planning. Business continuity planning, also
called disaster recovery planning, is the process of developing arrangements and
procedures to be used if events occur that would prevent or hamper normal busi-
ness activities. As part of their business continuity plans, most companies reg-
ularly create data backups, which are copies of computer data that are usually
stored in offsite locations. Data backups prevent the loss of important information
and aid in restoring critical operations if a disruptive event occurs.
Data Interpretation and Analysis

Databases are effective means of storing raw, unprocessed data. However, raw
data are not very meaningful to companies. Fortunately, insurers have access to
tools—such as business intelligence and data analytics—they can use to interpret
data and turn it into actionable information.
Business Intelligence
Business intelligence (BI)—the combination of technology, processes, tools, and
techniques a company uses to analyze data and present it as meaningful and use-
ful information to decision makers at all levels—helps insurers make the best use
of available data. For example, data visualization tools are often part of business
intelligence technology suites provided by software vendors.
BI allows a company to manage and interpret big data, which is a large amount of
data gathered from various sources, in various formats, and at a rapid speed, making
it complex and difficult to manage with traditional technology. The goal of business
intelligence is to help companies leverage big data to make smarter decisions about
products, operations, and customer interactions. BI can help life insurers
Improve risk management and underwriting
Detect and prevent fraud
Gain valuable insights into customer behavior
Comply with regulatory reporting requirements

Data Analytics
Most insurers have been using techniques such as data mining for years, but han-
dling big data often requires newer analytic approaches. Data analytics is the pro-
cess of examining data to draw conclusions about it. Generally, data analytics can
be categorized into three types: descriptive, predictive, and prescriptive analytics.
Descriptive analytics—which is the most commonly used type of data
analytics—summarizes or describes raw data to show how past behaviors
might influence future outcomes. It helps managers understand the reasons
for past successes or failures and can help them make better decisions in the
future.
Example:
Reports that provide historical facts about operations, sales, and finances
help managers determine which strategies have been successful.
Predictive analytics is a type of data analytics that determines the probable

future outcome of an event or the likelihood of a situation occurring. Predictive
analytics uses statistical modeling and findings from descriptive analytics to
turn data into information that managers can act on. Predictive analytics—which
often makes connections among data that don’t appear related and wouldn’t be
discovered using traditional analysis techniques—is useful in many administra-
tion areas, including underwriting, policyowner service, and claims.
Example:
Financial services companies use a credit scoring system to determine
whether a customer is likely to make future credit payments on time.
Insurers could use predictive analytics to determine whether customers
with deteriorating credit scores are likely to submit fraudulent insurance
claims.
Prescriptive analytics is a newer and more complex type of data analytics that
makes predictions, suggests decision options based on those predictions, and
shows the possible implication of each decision. It helps managers decide the
best course of action given a variety of options, alternatives, and factors that
might affect the outcome.
Example:
Some insurers use prescriptive analytics to help with risk assessment
during the underwriting process. Using prescriptive analytics, underwriters
can examine information collected from prescription databases to make
predictions about applicants’ impairments and treatments.

More and more life insurers are using data analytics to help them better assess
risks, retain customers, and detect fraudulent claims. Figure 2.3 highlights the
growing popularity of using data analytics in life insurance.
Figure 2.3. Big Data Analytics by the Numbers
90% Of life insurers report using big data analytics to better

compete in today’s market
66% Of companies have been using big data analytics for less
than five years
Around Of companies use big data analytics for 6 or more functions
50%
within their organizations, including: marketing initiatives,
sales lead generation, underwriting, claims/fraud detection
and prevention, improving sales productivity and product
development
Less than
Of companies believe they are ahead of their competition
33% in this field
Source: LIMRA, The Big Picture: Big Data Analytics in Financial Services (Windsor, CT: LL Global, Inc., © 2014).
Most insurers recognize that effectively analyzing big data offers numerous
opportunities for gains in growth and efficiency, but they face several challenges
in fully implementing initiatives across their companies. Common challenges
include lack of both financial and human resources needed, difficulties in access-
ing data in legacy systems, lack of understanding or expertise about big data tech-
nologies and capabilities, and difficulty getting executive buy-in.
Real-Time Data
Traditionally, insurance companies have relied on historical data to support under-
writing and other administration functions. However, as technological advances
increase the availability of real-time data, companies are recognizing its poten-
tial benefits. Real-time data leads to faster assessments of risk, helping insurers
and customers mitigate risks. For instance, insurers can use real-time data gener-
ated by wearable technology to obtain a deeper understanding of mortality and
morbidity.2

Example:
Evan Buono uses a personal fitness tracker to record his exercise activity
and his real-time heart rate. In exchange for a discount on his life insurance
premiums, Evan shares the heart rate information with his insurance company.
Analysis:
Over time, Evan’s insurer uses the real-time data collected from Evan and
other insureds to develop more realistic mortality rate information. For
instance, if the insurer links specific heart rate patterns to higher rates
of death due to heart disease, it benefits from more accurate actuarial
information and better risk assessment during medical underwriting.
In addition, real-time data can be used to enhance the predictive models that
data scientists create. A data scientist uses techniques from statistics and computer
programming to (1) identify patterns and trends in data and (2) create mathemati-
cal models that forecast business outcomes. Data scientists provide insights that
improve insurance administration in many ways, such as helping underwriters by
recognizing correlations between seemingly unrelated risk factors. Real-time data
is valuable to data scientists because it can make their models more accurate.

Key Terms
consumer report computer network
Fair Credit Reporting Act (FCRA) internal network
adverse action intranet
Health Insurance Portability and extranet
Accountability Act (HIPAA) external network
Gramm-Leach-Bliley (GLB) Act business process management (BPM)
Privacy of Consumer Financial and BPM technology suite
Health Information Regulation business process outsourcing (BPO)
nonpublic personal financial document management system
information automated workflow system
nonpublic personal health business rules engine (BRE)
information exception-based underwriting
Insurance Information and Privacy straight-through processing (STP)
Protection Model Act knowledge management system
insurance fraud data warehouse
Insurance Fraud Prevention Act database management system (DBMS)
Unfair Trade Practices Act data mining
market conduct law information security
quality control data governance
performance measurement cybersecurity
performance standard Insurance Data Security Model Law
benchmark business continuity planning
qualitative performance measurement business intelligence (BI)
quantitative performance measurement big data
metric data analytics
key performance indicator (KPI) descriptive analytics
data visualization tool predictive analytics
dashboard prescriptive analytics
scorecard data scientist
administration system
Endnotes
1. Federal Insurance Office, U.S. Department of the Treasury, Report on Protection of Insurance
Consumers and Access to Insurance, 2016.
2. Intel Business Brief, Realizing the Benefits of Big Data and Wearables in Life Insurance,
2016, https:// www.intel. com/ content/dam/www/public/us/en/ documents/solution-briefs/
insurance-analytics-and-wearables-brief.pdf (18 July 2017).

Insurance Administration Chapter 3: The New Business Process and Underwriting Principles 3.1
Chapter 3
The New Business Process and

Underwriting Principles
Objectives
3A Distinguish between field underwriting and teleunderwriting, and
explain how the field underwriting manual is used
3B Describe the types of information in life insurance applications and
how insurance applications are submitted to and handled by insurers
3C Explain common quality control methods used in the new business/
underwriting area
3D Explain the importance of risk assessment and risk classification and
describe the factors that insurers consider when they evaluate a risk
3E Distinguish among the preferred, standard, substandard, and declined
risk classes
3F Explain how an insurer ensures that it approves and issues coverage that
is equitable to the insureds, equitable to the insurer, and deliverable by
the financial professional
3G Identify typical underwriting job positions and authority levels, define
the different approaches that insurers use to organize the work within
underwriting units, and give examples of each approach
3H Define and describe automated underwriting and simplified
underwriting

3.2 Chapter 3: The New Business Process and Underwriting Principles Insurance Administration
Outline
The New Business Process Underwriting Principles
 Field Underwriting  Risk Assessment
 Data Entry and Review  Risk Classification
 Making the Underwriting Decision  Underwriting Philosophy and
 Policy Issue Guidelines
New Business/ Underwriting Organization
Underwriting Quality Control  Job Positions
 Underwriting Documentation  Authority Levels
 Audits  Workflow Organization
 Metrics
Efficiencies in Underwriting
 Automated Underwriting
 Simplified Underwriting
T
he new business process includes all activities an insurer performs from
the time it receives an application until it issues a policy or denies coverage.
In some companies, underwriting and new business are part of the same
unit; in other companies, they are separate units. In this chapter, you’ll learn about
the new business process and about the individual life insurance underwriting
process. You’ll learn about specific aspects of individual underwriting and group
underwriting in later chapters.
The New Business Process

Individual and group insurance applications go through the same basic new busi-
ness process before a policy is issued. Figure 3.1 lists some of the specific activities
involved in processing an insurance application. During this process, the insurer
generally (1) gathers data and enters it into an administration system, (2) assesses
the data, (3) acquires additional data if needed, (4) decides whether to accept
the risk, and (5) if the decision is favorable, issues the policy. The underwriting
processes for individual and group coverages, however, differ in many respects.
Although field underwriting is not technically a part of new business, it is included
because of its importance in the underwriting process.
Field Underwriting
Underwriting an application for insurance often begins well before the application
reaches the insurer’s home office underwriters. Field underwriting is the prac-
tice of gathering initial information about applicants and proposed insureds and
screening proposed insureds to determine if they are likely to be approved for a
specific type of coverage. Effective field underwriting
Reduces the insurer’s costs by eliminating the processing and underwriting of
applications that are clearly unacceptable.
Helps ensure that underwriters have the information they need to assess risks.
Sets realistic expectations for applicants by helping them apply for an appro-
priate amount of coverage at an appropriate premium rate. When applicants
realistically know what to expect, they are more likely to be satisfied with the
underwriter’s decision.
Figure 3.1. Processing an Application for Insurance
1 Field underwriting
99 Gather data
99 Screen applicant and proposed insured
2 Teleunderwriting
99 Gather data
3 Data entry and review

99 Create case file
99 Enter data
99 Conduct good order check
99 Conduct suitability check
99 Search records for existing information on applicant and proposed insured
(if different from applicant)
4 Making the underwriting decision

99 Assess risk
99 Classify risk
99 Make underwriting decision
5 Policy issue
99 Enter data
99 Assemble policy
99 Facilitate policy delivery
99 Collect postissue requirements
Insurers often use field underwriting with informal applications as well as for-
mal applications.
Informal Applications
Financial professionals sometimes use informal applications (also called informals
or trial apps) to shop around to several insurers and determine which company
offers the best terms and premium rates for a specific applicant. Guidelines for
accepting informal applications vary by insurer. Some accept informal applica-
tions for any policy and from any financial professional; others only accept infor-
mals for policies of a certain type or face amount, or from certain financial pro-
fessionals. Some insurers don’t accept informal applications at all. The format for
informal applications also varies. For example, an informal application can follow
an established format or it can be part of an email that a financial professional
sends to multiple insurers to ask for a quick quote. Financial professionals who use

this format expect insurers to respond promptly (typically within 24 to 48 hours)

with a rate quote.
Some insurers allow financial professionals to submit informal applications for
proposed insureds with complex medical histories. For such a case, the financial pro-
fessional may obtain the proposed insured’s medical records and submit them with
the application to several insurers to see which company can offer the best terms and
rates. After an underwriter reviews the case—which can take one to two weeks or
longer—he tells the financial professional what terms and rates the insurer can offer.
Formal Applications
Formal applications for individual life insurance generally request two types of
information: nonmedical and medical. Traditionally, insurers have divided the
application into Part I (nonmedical information) and Part II (medical information),
but this is changing.
Most insurance applications require applicants to provide answers to questions
about the proposed insured’s health status. In some cases, the insurer may also
require an insured to undergo a medical examination by a physician or a para-
medical examiner. If the insurer issues a policy, the applicant’s answers to medical
questions become part of the insurance contract.
Insurance applications also include nonmedical information about the appli-
cant and/or the proposed insured. Figure 3.2 provides examples of the types of
nonmedical information that insurers typically collect. In most cases, insurers use
nonmedical information in the application to confirm the applicant’s and the pro-
posed insured’s identity. Nonmedical information does not become part of the
insurance contract.
Teleunderwriting
Teleunderwriting is a method by which someone other than a financial profes-
sional gathers information needed for underwriting an insurance application.
Insurers use teleunderwriting in different ways depending on the product type and
the workflows and technologies available at various companies. For example, some
insurers use teleunderwriting to allow consumers to apply for insurance directly
with the company. In other companies, the financial professional and applicant
complete a brief application or short-form electronic application that includes only
basic information about the proposed insured and the requested coverage; then
the teleunderwriter—which may be a company underwriter, customer service
representative (CSR), or a third-party vendor—gathers the additional information
needed for underwriting. In other situations, insurers use teleunderwriting to col-
lect information that they did not receive with the initial paper application.
In any case, the teleunderwriter contacts the applicant (or the insured)—either
by telephone or online—and asks scripted questions generated by an automated
system that uses a business rules engine (BRE) to guide the interviewer through
the questions. Based on the answers provided, the BRE prompts the interviewer
to ask specific follow-up questions. An applicant (or insured) typically can sign
a teleunderwriting application (or tele-app) using a voice signature, in which he
simply voices his agreement that he has honestly and fully answered the ques-
tions. Teleunderwriting speeds the underwriting process and improves accuracy
because it helps to ensure that underwriters have all the information they need to
make an underwriting decision.
Figure 3.2. Nonmedical Information on Insurance Applications
•• The proposed insured’s name, government identification number

(for example, Social Security number in the United States or social
insurance number in Canada), date of birth, place of birth, age, sex,
address, telephone number, length of time at current address, marital
status, driver’s license number, occupation, current employer, income,
and length of time with the current employer
•• The applicant’s and/or policyowner’s (if the policy is applied for or is
to be owned by someone other than the proposed insured) name,
government identification number, address, and relationship to the
proposed insured
•• The plan of insurance, face amount, and premium payment mode requested
•• Dividend options and special features or riders desired
•• Name of the beneficiary and relationship to the proposed insured
•• The proposed insured’s
• Avocations and aviation activities, including hazardous activities such as sky diving,
hang-gliding, and scuba d
iving
• International residence and travel
• Driving history
• Tobacco use
• Criminal convictions
•• Insurance history, including
• The total amount of insurance already in force on the life of the proposed insured
with any insurance company and the purpose of such coverage
• Whether any applied-for insurance is pending at the time of this application
• Whether any in-force insurance coverage will be replaced by the coverage applied for
• Whether the proposed insured has ever been declined for insurance coverage, been
offered coverage with restricted benefits or other than standard rates, or applied for
or received insurance benefits because of ill health or injury
Although some insurers still use a formal application to gather medical infor-
mation about a proposed insured needed to determine insurability, others gather
medical information by means of a telephone interview with the proposed insured
or an online questionnaire completed by the proposed insured. Some insurers have
even expanded Part II to include any type of information that affects the amount of
risk a proposed insured represents, such as hazardous or criminal activities, driv-
ing history, and international residence and travel. Whatever type of document the
insurer uses to capture a proposed insured’s medical and other risk-related infor-
mation, it is considered an extension of the application, and becomes part of the
insurance contract. The insurer includes a copy of the document with the policy
at delivery.

Many individual life insurance applications also include a section in which

the financial professional can comment on any factors relevant to the case and
the risk it involves. The financial professional can also explain circumstances that
may otherwise cause delays. When an underwriter knows that a particular finan-
cial professional tends to submit quality business, his comments can be especially
valuable. The insurer keeps comments that financial professionals make confiden-
tial so that they will feel free to comment honestly on elements that affect each
proposed insured’s risk. A typical comments section includes answers to the fol-
lowing questions:
How well do you know the applicant/proposed insured?
What is your impression of the applicant’s/proposed insured’s financial worth

and annual income?
Did you actually see the proposed insured when the application was completed?
If so, did he/she appear to be in good health and free from any condition that
might affect the underwriting decision?
Did you solicit the business, or did the applicant initiate the purchase?
What is the applicant’s reason for buying the requested coverage?
Have you submitted an application on the proposed insured to any other

insurer within the past six months?
Does the policy replace another policy?
The comments section completed by the financial professional does not become
part of the insurance contract.
Field Underwriting Manual

Most insurers have a field underwriting manual, a paper or online document
that (1) presents specific guidance for a financial professional’s assessment of the
risk that a proposed insured represents and (2) guides the financial professional in
assembling and submitting the application and in sharing any other information
needed for the underwriter to evaluate the risk.
A field underwriting manual usually includes the insurer’s
Underwriting philosophy, a set of objectives that guides all of an insurer’s
underwriting actions, generally reflects the insurers’ strategic business goals,
and includes its pricing assumptions for products. It describes in general terms
the types of risks the insurer will and will not accept. It may also describe any
limits to coverage amounts and indicate whether income verification or other
supporting information is required.

Example:
Wonder Life’s Underwriting Philosophy:
We strive for excellence in assessing every application accurately,
fairly, competitively, and profitably while respecting and protecting the
interests of all, including those with certain high-risk medical conditions.
Our underwriting philosophy is open-minded; it balances the parallel
interests of customers, financial professionals, and the company. We seek to
build relationships with our financial professionals, to earn their trust, and
to exceed their expectations while simultaneously achieving our internal
customer service and profitability goals.
Analysis:
Because Wonder Life’s underwriting philosophy mentions potentially
covering insureds with high-risk medical conditions, a financial professional
who is working with a client who has a heart condition, for instance, will
know that Wonder Life can possibly meet this client’s needs.
Age and amount requirements chart, a chart that specifies the kinds of infor-
mation the underwriter must obtain and review in assessing the insurability
of a proposed insured. Usually, the field underwriting manual contains such
a chart for each insurance product it offers. Although financial professionals
generally inform applicants that the insurer may ask for additional informa-
tion in an interview or require that the applicant undergo a medical examina-
tion, they typically are not authorized to order interviews or tests.
Impairment guide, which is a list of common impairments and the probable
underwriting decision for proposed insureds who have each type of impair-
ment. An impairment is a physical or psychological abnormality or loss of
function. For example, an impairment guide might specify that the insurer
would decline coverage for a proposed insured who has a history of alcohol
abuse or treatment and still drinks. Financial professionals use the impairment
guide to let proposed insureds know which coverage types and amounts they
are most likely to be approved for. (We examine the age and amount require-
ments chart and impairment guide in further detail in Chapter 4.) Figure 3.3
lists the typical elements of a field underwriting manual.
Completing and Submitting Applications

Applicants and proposed insureds have a duty to answer all questions in the insur-
ance application completely and honestly. The financial professional generally
helps the applicant (either in person or remotely) complete the application. Com-
pleted applications can be sent to the home office by mail or fax. Most companies
today also accept remote applications or electronic applications (e-applications).

Figure 3.3. Typical Contents of a Field Underwriting Manual
•• Underwriting philosophy
•• Age and amount requirements chart
•• Impairment guide
•• Outline of the financial professional’s responsibilities,
including compliance issues
•• Specific guidance on completing applications and on
submitting changes and reinstatements
•• Brief definitions of common medical terms and com-
mon impairments to help the financial professional
describe impairments revealed by a proposed insured
•• Lists of questions related to common impairments
so that the financial professional can get sufficiently
detailed information about them
•• Criteria for a preferred rating
•• Criteria for qualifying as a non–tobacco user
Remote applications are applications that insurers accept from financial profes-
sionals who meet with clients over the phone or over videoconferencing platforms
such as Skype. Although many insurers accept remote applications, the circum-
stances under which they accept this information vary greatly. For example, some
companies accept remote applications for specific products only or in cases where
the financial professional has met in person with an applicant previously. It is
increasingly common for insurers to accept submissions of some or all application
information via mobile device apps.
An electronic application system, or e-application system, allows financial
professionals working on behalf of applicants, or applicants themselves, to enter
application information into a computer, rather than on paper, and transmit the
information to the insurer over a computer network. In some cases, electronic
application systems enter information directly into the insurer’s new business
administration system. Electronic application systems eliminate the need for home
office personnel to reenter information from paper applications into the system,
which saves time and reduces the likelihood of errors. Electronic application sys-
tems also allow insurers to use reflexive questions in the application. A reflexive
question is a question that triggers additional, more probing questions related to
the original question.

Example:
One of the questions in the Barclay Insurance Company’s e-application
for individual life insurance asks if the proposed insured has a history
of asthma. If the answer to this question is “yes,” the system generates
additional probing questions about the frequency and nature of treatment.
If the answer to the question is “no,” the system does not ask additional
probing questions.
Electronic application systems use rules engines to determine if the informa-

tion submitted is incomplete or inaccurate, and they require the financial profes-
sional and/or applicant to correct a problem before they can continue filling out
the application. While incomplete applications are a common challenge for paper-
based applications, e-application systems essentially eliminate the occurrence of
incomplete applications.
Why are complete applications important?

If an insurer allows an application with missing or incomplete information
to proceed to policy issue, the insurer may lose its right to later contest
the validity of the contract in a court of law should the insurer discover
problems with the contract.
Because courts require signed, original, unaltered documents as evidence
in a lawsuit, no one can alter an application after the applicant submits
it to the insurer unless the applicant affirms the change in writing.
If a change is necessary, most insurers use an amendment, signed by
the applicant, to modify the answer to a question on the application.
This amendment then becomes part of the application.
All completed applications and authorizations for the release, collection, use,
and disclosure of information require signatures from the proposed insureds.
Most insurers that accept electronic applications also accept electronic signatures,
or e-signatures, which are unique personal identifiers that make a legally binding
contract using electronic communications media. A commonly used e-signature is
the “click-wrap,” in which the applicant clicks on an “I Agree” or “I Accept” button.
Using e-applications and e-signatures offers several advantages to insurers,
including improved process efficiency and cycle times, lower processing costs, the
ability to implement straight-through processing (completely paperless process-
ing), simplified transactions, and improved customer acquisition rates.
Premium Receipts
Applicants for life insurance typically pay the initial premium at the time they
complete the application, and in exchange, the insurer often provides some type
of temporary insurance coverage during the underwriting period. How much cov-
erage the insurer provides and when the coverage takes effect is dependent upon
the premium receipt, which the insurer issues to the applicant for a life insurance
policy in exchange for payment of the first premium.

The premium receipt often includes a temporary insurance agreement (TIA),

which is a contract between the insurer and the applicant that provides temporary
coverage on the proposed insured before a policy is issued and delivered. The
coverage available under a TIA, however, may be subject to certain conditions.
For example, a TIA typically states when the coverage becomes effective, what
conditions must be met for the coverage to become effective, and when the cover-
age will end.
Application Status Updates

Financial professionals and applicants often want updates on the status of sub-
mitted applications. Insurers usually provide updates via phone or e-mail as
requested, and many have online systems that track pending applications. Such
systems allow financial professionals—and sometimes applicants—direct access
to status updates. Status updates typically show any outstanding requirements. For
instance, the system might indicate that an underwriter is waiting for a response
from a doctor’s office to complete underwriting.
Insurers typically provide status updates daily, weekly, or bi-weekly. Some
insurers use real-time interfaces that automatically update each time an applica-
tion is reviewed so that financial professionals know an application’s exact status
at all times. These status update tools can provide a competitive advantage for an
insurer and increase a financial professional’s willingness to submit business to a
specific insurer.
Data Entry and Review

For each application received, the new business unit typically creates a case file,
which includes a number code for identification and tracking purposes. Next, they
search the insurer’s records for information about the applicant and the proposed
insured, such as previous insurance applications or claims, and add that informa-
tion to the file.
To carry out data entry and review processes, some insurers assign applica-
tions to case managers who oversee the entire new business process from receipt
of application to policy issue for those cases assigned to them. However, it is more
common for insurers to assign new business case analysts to certain tasks such as
data entry, and policy issue analysts to tasks such as assembling policies.
Some insurers tier their new business service so that the highest-performing
financial professionals receive the highest level of service from the most experi-
enced staff. Other insurers give the highest level of service to new financial profes-
sionals to entice them to perform well and support them in their training.
Good Order Check

When data entry is complete, applications go through a good order check and, for
some products, a suitability check. During the good order check, new business
staff or an automated system determine if an application is in good order (IGO)
by verifying that the
Application form is the proper one for the issuing jurisdiction

Other forms required by the insurer or regulatory authority have been com-
pleted and received
Financial professional is licensed and/or appointed to sell the type of cover-
age requested in the applicable jurisdiction and has completed any required
product training
Application is complete
If the application is not in good order (NIGO), a new business case analyst or
underwriter takes the steps needed to resolve the problem.
Suitability Check
For some products, new business staff also must check the application to deter-
mine whether the amount and type of coverage applied for are appropriate for the
client’s age and financial goals. State insurance laws generally prohibit a financial
professional from selling policies that are unsuitable for the purchasers. More spe- LEARNING AID
cific suitability requirements apply to certain types of products, such as variable
life insurance products or annuities. A suitability requirement is a regulatory
requirement that imposes a duty on financial professionals and insurers to have
reasonable grounds on which to believe a recommended product is suitable for
a customer’s financial situation and purchase objectives. While insurers expect
financial professionals to submit only suitable applications, they typically require
the new business unit to confirm suitability.
Making the Underwriting Decision

The goal of underwriting is to accept the greatest number of qualified proposed
insureds while keeping the insurer financially stable and profitable. Underwriters
carefully assess and classify the risk presented by the applicant, which we discuss
in more detail shortly. After evaluating the degree of risk represented by a pro-
posed insured, the underwriter can take any of the following actions:
Accept the risk and issue the policy as applied for.
Accept the risk, but rate the policy. Rating is the process of increasing the
premium rate for a higher-than-average risk in order to approve the risk.
Example:
Serge Clementine applied for a $100,000 life insurance policy at an
average premium rate from Bountiful Life. Underwriter Felicia Hope
determined that Serge presented a higher-than-average risk because he
flies experimental aircraft, so she approved the application but charged
Serge a higher-than-average premium for the coverage to compensate
for the additional risk.

Accept the risk at the requested premium rate, but offer an amount of coverage
less than that requested.
Example:
Instead of charging Serge a higher premium for a $100,000 policy, Felicia
could approve the policy for a face amount lower than $100,000, but offer
that amount of coverage at the average premium rate.
Accept the risk, but limit the coverage by modifying the terms of the contract.
Example:
Another option Felicia has is to approve the policy, but limit the coverage
provided by adding an exclusion, which is a policy provision that describes
circumstances under which the insurer will not pay the policy benefit
following an otherwise covered loss. An exclusion is a type of insurance
policy rider, which is an amendment to an insurance policy that becomes
part of the insurance contract and either expands or limits the benefits
payable under the contract.
So for Serge the experimental aviator, Felicia can issue the policy at the
requested premium rate and amount of coverage, but add an exclusion
that specifies the policy benefit will not be paid if Serge dies while involved
in experimental aviation activities.
Decline the risk and not issue the policy.
Postpone making a decision. An underwriter may postpone offering coverage

for a specified period of time (usually 6, 12, or 24 months) until the risk is
reduced to a level the underwriter can more reasonably evaluate.
Example:
Louise Bowman applied for a $250,000 life insurance policy from Bountiful
Life. Underwriter Phil Locke finds out from a doctor’s statement that
Louise is scheduled for cardiac surgery next month. In this case, Phil might
postpone offering coverage until after the surgery, when he can better
determine Louise’s risk level.
Policy Issue
After an underwriter approves a case, the next step is to issue the policy. Policy
issue is the process of preparing the insurance contract and delivering the policy
to the policyowner. Policy issue procedures vary by company, but generally during
policy issue, staff
Enter or confirm the policy’s rating and other information in the administra-
tion system
Notify the financial professional (if applicable) of the underwriting decision

Use the administration system to verify that the insurer has received the initial
premium payment and that all policy requirements have been met
Print and bind the policy with any forms required by the jurisdiction, such as a
copy of the application and amended sales illustrations; or, in companies that
deliver policies electronically, convert the policy and related documents into
digital form.
Mail the policy to the policyowner or to the financial professional for delivery
to the policyowner
Some insurers divide these tasks among specific units, such as policy issue,
policy assembly, and post issue. Also, many insurers use systems that perform
these tasks automatically after an underwriter inputs approval of the case.
When the Insurer Rates or Declines the Policy

Most insurers notify the financial professional of the underwriting decision before
sending out the policy, especially if the policy is rated or the coverage is modified.
When insurers rate, modify, or decline coverage, they also typically inform the
applicant (and the proposed insured if different from the applicant) in writing of
the reason for the decision. In some jurisdictions, such notice is required by law.
When letters are sent to both the applicant and the proposed insured, privacy
concerns require that information in the applicant’s letter be more generic than the
information in the proposed insured’s letter. For example, an applicant letter might
state that “the application was declined due to medical reasons,” whereas the pro-
posed insured’s letter would most likely state that “the application was declined
due to cardiac test results.”
When communicating adverse underwriting decisions to financial profession-
als, applicants, or proposed insureds, insurers must comply with regulations that
govern the use of a person’s private health information. Not all of the medical
information discovered during underwriting can be shared, sometimes not even
with the proposed insured. Underwriters know and follow such regulations—and
company guidelines—in their communications.
Typically, an accepted policy is issued and delivered to the financial profes-
sional, who then attempts to deliver it to the policyowner. For a rated policy, deliv-
ery is sometimes more difficult because the policyowner must sign a document
verifying that he understands that the policy was not issued as applied for. How-
ever, a skillful financial professional who can help the policyowner see the inher-
ent value of a rated policy can usually achieve successful delivery.
New Business/Underwriting Quality Control

Insurers regularly measure performance of the new business and underwriting
area to make sure that staff (1) perform every step of underwriting accurately and
(2) evaluate applications fairly and promptly. Underwriters must properly docu-
ment underwriting activities to comply with regulatory requirements and ensure
quality. Two quality control tools often used to measure the efficiency of new busi-
ness and underwriting operations are audits and metrics.

Underwriting Documentation
Underwriters note all communications and actions related to the underwriting deci-
sion—including exact dates and times, actions taken, and signatures—in a case
file or underwriting worksheet. An underwriting worksheet is a document that
contains records of telephone calls, letters, and other communications; documen-
tation of requests for reinsurance; lists of reports and other information requested;
and other notations that explain clearly the manner in which the underwriter has
handled the case, beginning with the submission of the application to the insurer.
Any comments an underwriter makes in the underwriting worksheet must
be objective and relevant to the risk assessment and classification process. They
should also be substantiated by factual information. Unsubstantiated comments in
a case file might indicate a personal bias against the proposed insured.
Example:
An underwriter for the Broadway Insurance Company recently reviewed
two applications for life insurance coverage. In Application A, the financial
professional noted that the applicant “probably drinks more than he
indicated on his application” and “didn’t sound very educated on the
phone.” The financial professional’s statement for Application B indicated
that the applicant had been “cited for driving under the influence” on two
occasions in the past year.
Analysis:
The financial professional’s comments about the applicant’s drinking
habits in Application A are considered unsubstantiated because they
are not backed by facts or evidence. The comments in Application B are
substantiated by police records.
Underwriting documentation must be complete and accurate because it may

be used
By company staff other than the underwriter primarily responsible for the case
As evidence in a court proceeding
To explain unusual or exceptional handling of cases to internal auditors
Processing applications promptly is important in terms of providing a positive
customer experience. It is also important because the insurer can be held liable for
paying benefits if the event insured against occurs before the underwriting decision
is made. For example, if the proposed insured dies before the policy is issued, and a
court determines that the insurer is liable for not acting with reasonable promptness
in processing the application, the insurer will have to pay benefits under the policy
regardless of the proposed insured’s insurability. The courts are especially strict in
holding an insurer liable when an applicant submits a premium with the application.
Consequently, insurers typically issue premium receipts, which we discussed earlier,
to establish the terms under which benefits are payable.

Audits
Insurers often use audits to monitor the quality of their underwriting activities.
An audit is an evaluation of a company’s records and operations to ensure the
accuracy of the records and the effectiveness of operational policies and proce-
dures. The purpose of an underwriting audit is to strengthen risk assessment,
classification, and acceptance. Audits reveal whether underwriters are (1) mak-
ing appropriate and consistent decisions, (2) complying with applicable laws and
regulations, and (3) documenting cases clearly and completely. Audits also gauge
the extent to which an insurer’s underwriting decisions are consistent with the
company’s underwriting guidelines.
Typically, insurers conduct internal audits, that is, audits performed by a com-
pany’s own staff, to ensure they have accurate records and effective procedures
and policies, and also to judge the quality of their underwriters’ work. External
audits are audits conducted by a third party that is not employed by the company
being audited.
One of an insurer’s most important quality control tools is the external audit
conducted by its reinsurance partners. Reinsurers periodically conduct external
audits of most insurers with which they do business. These audits cover an insur-
er’s reinsurance operations as well as its underwriting and claim operations. Insur-
ers are subject to separate audits by each reinsurer with which they do business.
Insurers typically share feedback from reinsurance audits with underwriting staff
to help improve the quality of underwriting activities.
Metrics
Insurers use metrics to indicate how quickly staff process applications and under-
write cases. These metrics allow an insurer to monitor the efficiency of these pro-
cesses, so it can make changes when performance does not meet company stan-
dards. Examples of time and service metrics include:1
Time to underwriter: Number of days from the date the application is
received in the home office to the date of the first underwriting review
Time to underwrite case: Number of days from the receipt of the last under-
writing requirement to the date the underwriting decision is made
Total time to issue: Number of days from the application receipt date to the date
the policy is issued and mailed (i.e., “out the door”) to the financial professional
Time for delivery requirements: Number of days from the date the policy
is mailed to the financial professional to the date all delivery requirements
(signed amendments, outstanding forms) are completed
Total turnaround time: Number of days from the application receipt date to
the date all the delivery requirements are completed
Insurers use similar metrics to evaluate productivity and quality of underwrit-
ing activities.

Underwriting Principles
Risk assessment and risk classification are the foundation of underwriting indi-
vidual and group insurance. These activities also are an important component of
the pricing of an insurer’s products.
Risk Assessment
Risk assessment is the process of determining the degree of risk represented by
each proposed insured using a number of factors established when the insurance
product was designed and priced. Risk assessment for life insurance is primarily
concerned with mortality. Mortality is the incidence of death among a specified
group of people. A mortality rate is the rate at which death occurs among a speci-
fied group of people during a specified period, typically one year.
However, for policies that include waiver of premium, disability, or long-term
care riders, morbidity is also important. Morbidity is the incidence of sickness and
injury among a specified group of people. A morbidity rate is the rate at which
sickness or injury occurs among a specified group of people during a specified
period.
Underwriters assess the level of risk presented by proposed insureds by review-
ing proposed insureds’ risk factors. For individual insurance underwriting pur-
poses, a risk factor is any aspect of a proposed insured’s present health, medical
history, family history, health habits (such as tobacco use), financial condition,
reputation, driving record, criminal record, occupation, or activities that increases
the likelihood that the person will suffer a covered loss. In third-party policy situa-
tions, the underwriter also takes into account the applicant’s financial condition to
determine whether the applicant has the ability to pay for the coverage. Individual
life insurance risk factors typically are categorized as medical risk factors, per-
sonal risk factors, and financial risk factors.
Medical risk factors are physical or psychological characteristics that may
affect a person’s health and longevity. An example of a medical risk factor is
chronic obstructive pulmonary disease (COPD).
Personal risk factors are lifestyle choices that can significantly affect a per-
son’s health or longevity. An example of a personal risk factor is a record of
reckless driving.
Financial risk factors include financial information that an underwriter con-
siders to determine whether a person is applying for more insurance than he
reasonably needs or can afford. An example is a proposed insured applying for
a $1 million policy when his annual income is $30,000.
While assessing risk, underwriters look for evidence of antiselection, verify
the presence of insurable interest, watch for material misrepresentation and moral
hazard, and ensure that they comply with nondiscrimination practices.

Antiselection
In assessing the degree of risk represented by a proposed insured, an underwriter
considers the possibility of antiselection, which is the tendency of people who
believe they have a greater-than-average likelihood of loss to seek insurance pro-
tection to a greater extent than do those who believe they have an average or less-
than-average likelihood of loss. For example, a person who believes she has a seri-
ous illness may be more likely to purchase insurance than a person who believes
he is in good health.
Underwriters stay alert to signs of antiselection—such as someone buying life
insurance for the first time at an older age—so that they can gather enough infor-
mation to evaluate risks accurately and fairly.
Insurable Interest
Insurance contracts cannot be legally enforced if they are purchased for a purpose
that is illegal or against public policy, such as a wagering agreement. A wagering
agreement is any agreement under which either party may gain or lose depending
on the outcome of an uncertain event. In the context of life insurance, a wagering
agreement exists if the policyowner or the insurer may gain or lose from the tim-
ing of an insured’s death.
To guard against the purchase of insurance contracts as wagering agreements
that allow one person to profit from another’s death, laws in many jurisdictions
impose an insurable interest requirement on the issuance of individual insurance
for policies purchased by one person on the life of another. An insurable interest
exists when a person is likely to suffer a genuine financial loss or detriment
should the event insured against occur. Generally, a person is assumed to have an
insurable interest in her own life. An insurable interest is also presumed to exist
between the insured and her spouse, children, parents, and grandparents. Other
relatives can also meet the insurable interest requirement in special circumstances.
Underwriters must make sure that any insurable interest requirement is met before
they issue an insurance policy.
Insurable interest must exist at the time of contracting. If an insurer issues an
individual insurance policy and the policyowner—and in some cases, the benefi-
ciary—did not in fact have an insurable interest in the insured when the contract
was created, then the agreement is void. Most jurisdictions do not require an insur-
able interest to continue throughout the life of the policy. For example, if spouses
purchase life insurance policies on each other’s lives and then the spouses later
divorce, the policies are not voided at the time of the divorce due to lack of insur-
able interest.
Group insurance contracts are not required to meet the insurable interest
requirement because the group policyholder’s interest in the contract does not
induce wagering as does a policyowner’s interest in an individual insurance
contract.

Material Misrepresentation
Applicants and proposed insureds have a legal duty to answer completely and
honestly any questions contained in the application for insurance, asked during a
medical examination, or furnished to the insurer by any other means. Sometimes,
however, an applicant makes a misrepresentation, or an untrue statement, in an
insurance application.
Some misrepresentations do not affect the underwriting decision. For example,
if a proposed insured stated in an application that he broke his left arm in an acci-
dent when it was actually his right arm, this misrepresentation would not affect
the underwriting decision. Another example is if a proposed insured stated in an
application that she had never been hospitalized when, in fact, she’d had her tonsils
removed when she was three and didn’t remember the surgery.
However, if an insurer—knowing the true facts—would have declined to issue
the policy, increased the premium rate charged for the policy, or excluded coverage
for certain risks, then any misrepresentation the applicant made would be consid-
ered a material misrepresentation. A material misrepresentation is a misrepresen-
tation that induces the other party—in this case, the insurer—to enter into a con-
tract that it would not have entered into had it known the truth. Figure 3.4 describes
some warning signs that help underwriters spot material misrepresentations.
Figure 3.4. Warning Signs of Material Misrepresentation
•• The applicant requested an amount of coverage that is

slightly less than the amount of coverage that would require
!
the proposed insured to undergo a physical examination.
•• The applicant’s signature on the application does not match
the applicant’s signature on other documents, such as a
physical examination report.
•• The applicant requested an unusually large amount of cover-
age for her occupation and income.
Material misrepresentations are often discovered during the underwriting of

the application. In such cases, the underwriter will obtain and use the correct
information when making the underwriting decision. When material misrepre-
sentations are discovered after policy issue, the insurer may be able to take a legal
action called rescission, which is a legal remedy provided to an insurer to avoid
a contract when the policy was issued based on a material misrepresentation of
a fact contained in the application. A rescinded contract is void from the begin-
ning. When a policy is rescinded in the United States, the insurer cancels the con-
tract and returns the premiums paid for the policy. In Canada, whether the insurer
returns the premiums depends on the terms of the contract.

Insurers are limited in their right to rescind policies by a policy’s contestable

period, which is the time period within which the insurer has the right to avoid a
life insurance policy on the grounds of a material misrepresentation. Life insur-
ance policies generally include an incontestability provision that defines the con-
testable period. An incontestability provision is a life insurance policy provision
that limits the time within which an insurer has the right to avoid a life insurance
policy on the basis of material misrepresentation in the application—typically two
years from the date the policy was issued.
An exception to the time limit specified in an incontestability provision applies
if the misrepresentation was fraudulent—that is, if the applicant knowingly pro-
vided false information in order to obtain insurance coverage. In some states in
the United States, if an insurer can verify that a misrepresentation in an insurance
contract is fraudulent, the insurer can contest the validity of the contract at any
time. In other states, the insurer’s right to rescind a policy, even for a fraudu-
lent misrepresentation, applies only during the contestable period. In Canada, an
insurer can generally rescind a policy at any time if the insurer can verify that the
misrepresentation was fraudulent.
Example:
Bountiful Life received an application from Jude Jeffries. In Part II of the
application, Jude indicated that he had no serious medical conditions.
Bountiful Life’s underwriters discovered later that Jude had been
hospitalized for an ongoing heart condition. Bountiful Life’s handling of
this situation depends on when the misrepresentation was discovered.
If Bountiful Life found the discrepancy
•• Prior to policy issue, underwriters could investigate the situation or

request new documents. They could also rate or deny coverage.
•• After the policy was issued, underwriters would need to verify when
the contract was issued. If the misrepresentation was discovered within
the two-year contestable period, Bountiful Life could rescind the policy.
•• After the contestable period, Bountiful Life’s options would depend
on the laws of the state in which the policy was issued. In some states,
Jude would be protected by the incontestability provision and would
keep his policy as written, even if he had made a material misrepresen-
tation. In other states, Bountiful Life could contest the validity of the
contract on the grounds of a fraudulent misrepresentation.
Moral Hazard
Another risk factor that underwriters consider is moral hazard. Moral hazard is a
characteristic that exists when the reputation, financial position, or criminal record
of an applicant or proposed insured indicates that the person may act dishonestly
in the insurance transaction. Moral hazard usually exists when a person applies
for coverage with the intention of seeking a financial gain rather than protection
against financial loss. For example, moral hazard is often present in insurance pur-
chased in connection with money laundering and other criminal activities. Moral
hazard is also present if the owner of a failing business sets his store on fire in
order to collect insurance money, or if a person purchases life insurance on a

person in poor health without that person’s knowledge and without disclosing the
person’s health issues. If an underwriter suspects that an applicant or proposed
insured presents a moral hazard to the insurer, the underwriter usually verifies as
much information included in the application as possible.
Nondiscrimination
An underwriter’s responsibility is to distinguish risks that are acceptable from
risks that are unacceptable by carefully examining the facts about proposed
insureds. Such discrimination among risks is usually lawful when it’s based on
(1) recognized actuarial principles or (2) actual or reasonably anticipated experi-
ence. However, many U.S. jurisdictions have enacted laws that prohibit insurers
from using the following factors as underwriting criteria:
Gender
Marital status
Sexual orientation
Blindness or partial blindness
Status as a victim of physical abuse
Race
Underwriters in Canada generally may not discriminate among proposed
insureds for life insurance coverage on the basis of gender. In addition, some
provinces specifically prohibit discrimination on the basis of physical and mental
impairments, marital status, and sexual orientation.
Risk Classification
After assessing a proposed insured’s degree of risk, an underwriter classifies that
person into one of several risk classes. A risk class is a group of insureds in a
given age category who represent a similar level of risk to an insurance company.
Insureds in the same risk class are charged the same premium rate. A person who
represents a higher degree of risk is charged a proportionately greater premium
rate for coverage than a person who represents a lesser degree of risk.
Each insurer defines the parameters of its own risk classes. The terms insurers
use for these classes may differ; however, most insurers identify risk classes as
preferred, standard, substandard, and declined. In general, a
Preferred class includes proposed insureds whose anticipated mortality rates
are lower than average and who represent the lowest degree of mortality risk.
Proposed insureds in the preferred class typically are the healthiest and are
charged lower-than-average premium rates. Note that the preferred class may
be further classified into categories such as Preferred Plus, Preferred Non-
Tobacco, and Preferred Tobacco, with each category representing a different
level of risk within the preferred class. Today, most proposed insureds fall
within preferred classes.

Standard class includes proposed insureds whose anticipated mortality rates

are average. The mortality risk of people in standard classes is higher than the
mortality risk for people in preferred classes, but lower than the mortality risk
for people in substandard classes. As with the preferred risk class, many insur-
ers further classify the standard class into categories such as Standard Plus,
Standard Non-Tobacco, and Standard Tobacco.
Substandard class includes proposed insureds whose anticipated mortality
rates are higher than average, but who are still considered to be insurable.
Many insurers assign to substandard classes those proposed insureds who
are recovering from serious illnesses or accidents, who have cancer that’s
in remission, whose occupations or avocations produce a significant risk of
illness or accident, or who have permanent significant medical conditions.
Insurers charge higher premium rates to people in the substandard classes
than they charge to people in standard classes.
Declined class includes proposed insureds whose anticipated mortality rates
are so great that the insurer cannot provide coverage at an affordable cost or
whose mortality risk cannot be predicted because of recent or unusual medical
conditions or other risk factors.
Some insurers use a postponed risk class for risks that can’t be classified until
the insurer collects all necessary information.
An insurer defines its risk classes when it designs a product. Actuaries struc-
ture premium rates so that the rate charged to each insured is based on the amount
of risk that insured represents relative to others insured by the same product. Actu-
aries also factor into the premium rate calculation the probable rate of loss, or loss
rate, for a given group of insureds. For insurers, knowing the number and timing
of losses that are likely to occur in a specified group of insureds provides protec-
tion against high claim payouts in any particular period. When calculating loss
rates, insurers also consider losses caused by lapses, changes in interest rates, and
changes in expenses.
Underwriters bear the responsibility of assessing and classifying risks appro-
priately to ensure that (1) each insured is placed in the appropriate risk class and
(2) the insurer’s claim experience is as close as possible to the assumed loss rate
used to establish premium rates. Underwriters obtain guidance for risk assessment
and risk classification from an insurer’s underwriting philosophy and underwrit-
ing guidelines.
Underwriting Philosophy and Guidelines

Earlier in this chapter, we discussed how an insurer’s underwriting philosophy
guides all of an insurer’s underwriting actions, generally reflects the insurer’s stra-
tegic business goals, and includes its pricing assumptions for products. An insur-
er’s underwriting philosophy also describes in general terms the types of risks that
the company will and will not accept, and that philosophy strongly influences the
insurer’s underwriting guidelines.

Underwriting guidelines are general standards that underwriters follow as

they establish the level of risk presented by a proposed insured or group. For indi-
vidual life insurance, an insurer’s underwriting guidelines specify the parameters
within which an applicant may be assigned to one of the risk classes established
for each insurance product. Figure 3.5 lists the most common factors considered
in individual and group life insurance underwriting guidelines.
Figure 3.5. Factors Typically Considered in Underwriting Guidelines
Individual life insurance underwriting guidelines

typically focus on medical and personal risk factors
relating to the proposed insured.
Medical risk factors include
•• Age
•• Height and weight
•• Blood pressure
•• Cholesterol levels
•• The presence of specific impairments (such as
coronary artery disease, diabetes, and cancer) or
comorbidity, which is the simultaneous appearance
of two or more illnesses or conditions that may act
in conjunction with one another (such as alcohol-
ism and depression, or heart disease and diabetes)
•• Medical history
•• Family medical history
Personal risk factors include

•• Occupation
•• Specific behaviors (such as tobacco use, substance abuse, poor driving record, and participation
in certain avocations)
Financial risk factors include

•• Financial circumstances
•• The type and amount of coverage applied for
•• The purpose of the insurance
Group life insurance underwriting guidelines typically focus on factors relating to the group, such
as the
•• Size of the group
•• Nature of the group’s business
•• Employee occupational classes
•• Type and amount of coverage requested

In establishing its underwriting philosophy and underwriting guidelines, an

insurer may consider industry experience, which is the collective data about
insurance claim experience generated by industry-wide studies. For instance,
insurers may conduct studies on mortality rates, policy lapse rates, impairments,
and demographics that can contribute to industry experience. These studies gener-
ally are conducted by large insurers, reinsurance companies, and industry associa-
tions. An insurer also uses the experience data from its own insurance products.
Industry experience and an insurer’s own experience are useful guidelines for
the insurer’s future actions and decisions, especially for establishing underwriting
requirements, risk classes, and premium rates for new coverages.
As an insurer’s experience changes over time, the insurer may modify its under-
writing philosophy and underwriting guidelines. Despite these modifications,
underwriters always must focus on approving and issuing coverage that is equitable
to the insureds, equitable to the insurer, and deliverable by the financial professional.
Equitable to the Insureds

Risk classification maintains equity among insureds by ensuring that premium
rates reflect the degree of risk represented by the insured. By charging higher rates
for higher risks and by declining risks that could weaken the company’s financial
stability, underwriters help the company provide appropriate coverage for all the
risks it does accept.
To be equitable to insureds, risk assessment and risk classification must be
as objective as possible—that is, underwriters must evaluate risks fairly, without
bias or prejudice. Being objective in underwriting is sometimes difficult, though,
because underwriters make decisions under considerable pressure from financial
professionals, actuaries, and managers. For example,
Financial professionals want underwriters to issue coverage quickly and assign
proposed insureds to preferred or standard classes.
Actuaries want underwriters to use risk classification methods that keep actual
mortality rates very close to those assumed when the product was priced.
Managers want underwriters to accomplish both these objectives—fast issue and
favorable mortality rates—while keeping underwriting costs as low as possible.
Equitable to the Insurer

An insurer’s underwriting guidelines and premium rates help ensure that the
underwritten coverage will be equitable to the insurer. If an insurer’s underwriting
guidelines are too strict or its premium rates are not competitive with other com-
panies, financial professionals are less likely to submit applications to the com-
pany. As a result, the insurer will lose potential premium income. If an insurer’s
underwriting guidelines are too lax or its premium rates are too low for the risks
accepted, the insurer might not have sufficient funds to pay all legitimate claims.
Eventually, the insurer could become financially impaired or insolvent, which
would be inequitable to the insurer, as well as the insureds, policyowners, and
shareholders. To prevent these losses, regulators in many states monitor insurance
company premium rates to ensure that they are fair to the consumer and adequate
enough to prevent the insurer from going out of business.

Deliverable by the Financial Professional

An individual insurance applicant makes the final decision whether to accept an insur-
ance policy when it is delivered. If an applicant chooses not to accept a policy when
a financial professional attempts to deliver it, the policy is said to be undeliverable.
For example, a policy may be undeliverable because the underwriter has rated the
policy.
One of an underwriter’s greatest challenges is explaining tactfully and persua-
sively to a financial professional the reasons for rating or declining an application.
If the financial professional believes that the underwriting decision was equitable,
she’ll be able to explain the decision to the applicant and place the policy. A suc-
cessful underwriter not only makes equitable decisions but also earns financial
professionals’ confidence and respect in doing so.
Underwriters form a productive relationship with financial professionals by
Completing work on each application as quickly as possible
Assessing each application in a consistent manner
Providing updates on progress in cases that are delayed because of require-
ments for additional information
Communicating with financial professionals about rating, modifying, or
declining an application (without disclosing confidential information)
Educating financial professionals and their staff about the insurer’s underwrit-
ing philosophy and guidelines
Underwriting Organization
The exact ways in which underwriting departments are organized vary by com-
pany, but they generally are composed of different ranks of underwriters who are
categorized according to their authority levels.
Job Positions
The typical underwriting job positions include underwriting trainee, junior under-
writer, intermediate underwriter, senior underwriter, underwriting manager, and
chief underwriter. Figure 3.6 illustrates how underwriters advance through these
different positions.
The chief underwriter is the highest ranking underwriter in an insurance com-
pany. This individual is an expert in risk selection and also is quite knowledgeable
about claim administration, reinsurance, and customer service. Chief underwriter
responsibilities include
Establishing the insurer’s underwriting philosophy and guidelines
Monitoring the cost and quality of underwriting
Assisting with underwriting large or unusually difficult cases
Helping to negotiate and administer reinsurance agreements
Deciding which products, services, and vendors to use
Overseeing the training of all underwriters
Reviewing contestable claims
Figure 3.6. Typical Underwriting Job Positions
Underwriting Junior Intermediate Senior Underwriting Chief

Trainee Underwriter Underwriter Underwriter Manager Underwriter
People are promoted from one rank to another

as their knowledge, skills and abilities improve
The chief underwriter also serves as a liaison with the insurer’s other opera-
tional areas, which includes working with (1) legal/compliance staff to create con-
tract wording; (2) information technology staff to develop underwriting systems;
and (3) actuarial staff to establish appropriate pricing, preferred risk criteria, and
other product characteristics. Note that, in some companies, underwriting man-
agers—rather than the chief underwriter—may oversee workflow and personnel
issues. Also, the chief underwriter may be the highest-level technical underwriter
and the vice president of underwriting, who manages the department.
Most insurers engage physicians as underwriting medical experts who consult
with underwriters on cases with unusual or difficult medical histories and may
develop and update the insurer’s medical underwriting guidelines. Large insurers
usually appoint a medical director to lead a medical underwriting staff composed
of physicians and other medical personnel.
Authority Levels
In general, an underwriter’s authority to approve, rate, or decline applications
increases with experience, as the underwriter demonstrates an improved ability
and quality of judgment. Insurers base an underwriter’s authority level on two
criteria: (1) the maximum coverage amount that the underwriter can approve and
(2) the degree to which the underwriter may rate or decline a policy without
approval or review by a more experienced underwriter.

Authority to Approve Specified Coverage Limits

Most individual life insurers develop charts or schedules of underwriting author-
ity to specify the highest amount of coverage that each level of underwriter can
approve. Figure 3.7 provides an example of authority levels to approve specified
coverage limits for individual life insurance.
Figure 3.7. Examples of Case Authority Levels
Underwriter Approve Approve Decline

Level Standard Substandard Cases up
Cases up Cases or Cases to
to with Exclusions
up to
Junior Underwriter $100,000 Not authorized Not

with less than 1 year without review authorized
of experience at this without
level review
Junior Underwriter $400,000 $100,000 Not

with 1 year of authorized
experience or more without
at this level review
Intermediate $500,000 $200,000 Not

Underwriter with less authorized
than 1 year of without
experience at this review
level
Intermediate $750,000 $500,000 Not

Underwriter with 1 authorized
year of experience or without
more at this level review
Senior Underwriter $1 million $500,000 $200,000

with less than 1 year
or experience at this
level
Senior Underwriter $3.5 million $3 million $500,000

with 1 year of
experience or more
at this level
Chief All amounts All amounts All

Underwriter amounts
Note: The dollar amounts stated in the figure are used for illustration only. Specific amounts and
the number of levels of coverage approval authority vary from one insurer to another.

Authority to Rate or Decline Cases

As Figure 3.7 indicates, some insurers require that a higher-level underwriter
review and approve underwriting decisions to rate a policy, add an exclusion rider,
or decline a case. In other words, the underwriter’s authority to approve a case as
applied for does not also permit the underwriter to rate, modify, or decline the case
without review by a higher-level underwriter.
In some insurance companies, all rated and declined cases are reviewed by an
underwriter one level higher than the original underwriter. Other insurers require
the chief underwriter to perform this kind of review. The purpose of the review
is to
Ensure the appropriateness of the original underwriting decision
Ensure the consistency of underwriting actions
Evaluate the underwriter’s job performance

Train the underwriter
Enhance financial professionals’ confidence in the insurer’s underwriting

practices
Workflow Organization
Some insurers establish separate underwriting units to handle applications for
group and individual coverage. For group coverage, insurers may organize their
underwriting departments by case size, geographic location, or type of group.
Typically, senior group underwriters work on larger, more complex groups. Some
group underwriting departments assign groups randomly to vary underwriters’
experience. For individual coverages, insurers may organize underwriting units
into a case management system or a work division system, or some combination
of the two systems.
Case Assignment System

A case assignment system is a method of assigning cases to underwriters based
on the characteristics of the case. The basis for assigning cases varies depending
on the insurer’s size, number of applications usually received, and difficulty of the
cases.
An advantage of this system is that underwriters may become more productive
and effective through specialization. A drawback of this system is that underwrit-
ers can become well-informed about only their own areas of specialization. As a
result, employees’ vacations and absences may cause other underwriters to work
temporarily—and probably less productively—with cases unfamiliar to them.
Insurers control this problem, however, by rotating assignments and cross-training
so that underwriters learn about different types of cases.

Case assignment systems typically assign cases to underwriters according to

one or more of the following characteristics:
Type of application or policy change. When cases are based on the type
of application or policy change requested—usually an increase in the cover-
age amount or the addition of a rider—one life insurance underwriter may
be assigned only nonmedical applications that don’t require medical proof of
insurability, a second underwriter may handle only applications requiring a
medical examination report, and a third underwriter may be responsible only
for requests for accidental death benefit coverage.
Geographic origin. If the geographic origin of the application is the basis of
an insurer’s case assignment system, the underwriting department is divided
into regional sections, with each section handling all business submitted from
a specific geographic area. Case assignment on the basis of geographic ori-
gin enables underwriters to become more knowledgeable about legislative
and regulatory requirements within specific jurisdictions, learn more about
impairments or occupations that may be peculiar to a certain geographic
region, and operate in the same time zones as their customers.
Financial professional submitting application. Alternatively, some insurers
assign specific financial professionals to each underwriter, regardless of the
financial professionals’ geographic locations. This case assignment method
enables an underwriter to become familiar with and develop effective working
relationships with financial professionals.
Work Division System

A work division system is a method of assigning cases to underwriters that divides
cases according to the person or group that underwrites them. Insurers divide
cases among underwriters working independently, in teams, or as a committee.
Independent underwriting is a work division system in which underwriters
work alone to assess each risk. Some insurers assign only cases requiring
extensive research to independent underwriters.
Team underwriting is a work division system in which underwriters are
divided into small groups. The team usually includes one or more senior
underwriters who handle large-amount or complex cases, and one or more
lower-level underwriters who handle simpler cases. Team members typically
have considerable autonomy in making underwriting decisions. They set work
assignments and priorities for themselves. They also make recommendations
to the supervisor or chief underwriter on such issues as team training and
development, work and vacation schedules, solutions to production issues, and
conflict resolution. Compared to other underwriting methods, team under-
writing can be more cost effective and can provide financial professionals with
faster service, because if one team member is out of the office, another team
member can handle the case.

Cases involving large coverage amounts or special considerations, such as

unusual occupations, may require committee underwriting. Committee
underwriting is a work division approach in which a committee of highly
qualified people from inside and outside the underwriting function is called
together for case assessment. The committee usually includes the chief under-
writer, the medical director, and staff from the legal and actuarial depart-
ments. By pooling their technical expertise, committee members can reach
an appropriate decision on cases that otherwise might have to be passed from
person to person in a less efficient manner.
Efficiencies in Underwriting
In an effort to create a faster, more consistent underwriting process, insurance
companies are increasingly implementing new technology. Some of the chal-
lenges insurers face in maximizing the use of technology include meeting budget
constraints, updating systems, integrating new technologies with legacy systems,
effectively managing data, and protecting personal information. However, compa-
nies that are effective in addressing these challenges experience better underwrit-
ing outcomes.
Another important consideration is how well technology tools address cus-
tomer experience needs. For example, a customer who applies online may also
want to talk with a financial professional or advisor and then easily return to his
saved application. The questions on the application need to be appropriate and
easy to understand. In addition, customers want to know that their confidential
data is secure.
Two growing trends are automated underwriting and simplified underwriting.
Automated Underwriting
Most insurers use some form of automated underwriting, which is a type of under-
writing in which technology performs some or all of the steps needed to assess
and classify insurance risks. It is usually an essential part of straight-through pro-
cessing (STP), in which all steps from application to policy issue are completed
electronically, and produces the best results when integrated with e-applications,
e-signatures, and e-delivery.
Automated underwriting helps insurers
Reduce costs by increasing efficiencies
Reduce time from receipt of application to policy issue
Decrease errors caused by human mistakes
Improve underwriting consistency and quality
Better satisfy financial professionals and customers with faster policy issue
and less intrusive underwriting practices
Free underwriters to focus on complex risks

Automated underwriting takes different forms, including fully automated

underwriting, partially automated underwriting, and a triage approach to under-
writing. Application triage is an automated underwriting approach that allows
applicants to obtain coverage at the same price they would pay under a standard,
fully underwritten approach, but in less time. With application triage, underwrit-
ers can expedite application approval from one or more months to just 48 hours,
and financial professionals receive commission payments weekly rather than quar-
terly. Most triage systems rely heavily on predictive analytics to identify appli-
cants who are likely to need additional coverage and to qualify for that coverage.
Automated Underwriting Technologies

The technology used in automated underwriting ranges from tools that alert under-
writers to risk factors on applications to systems that evaluate risks and make
underwriting decisions without any human intervention. Most insurance compa-
nies use the following technologies to facilitate automated underwriting:
Business rules engines. A business rules engine (BRE) automates a
decision-making process by creating and applying rules to all available situa-
tions. Automated underwriting uses BREs to make decisions that would oth-
erwise require human input. For instance, a BRE can identify missing infor-
mation required for underwriting and order the information from internal and
external sources. A BRE can also determine that a case meets certain criteria
and approve it for issue. If the BRE determines that the case doesn’t meet
specified criteria, it can decline the case or send it to an underwriter. BREs can
consider hundreds of variables when making an underwriting decision, which
speeds the process and makes it more consistent.
Predictive analytics. Predictive analytics enables insurers to evaluate a wide
range of applicant data—including age and gender, tobacco use, family his-
tory, medical information, motor vehicle records, net worth, occupation, and
lifestyle information—and use that data to produce models that better predict
a person’s mortality risk. As insurers improve their predictive analytics capa-
bilities, the speed and accuracy of automated underwriting increase.
Simplified Underwriting
Many insurers use simplified underwriting for specific products, sometimes called
simplified-issue policies. In simplified underwriting, only a few key risk factors
are considered in assessing and classifying an insurance risk. In simplified under-
writing, insurers typically
Ask a small number of risk-related questions on the application
Interview applicants by phone to ask additional questions, if needed
Check external databases that track potential risk factors (such as prescription
drug history and driving records)

Insurers often use simplified underwriting for guaranteed-issue policies that

are available, without individual underwriting or rating, to any individual who
applies and meets specified conditions. When using simplified underwriting,
insurers typically do not request lab tests, medical records, or other information
that can cause underwriting delays. The goal is to quickly assess a risk based on
limited factors and then either accept or decline that risk. Because of the simplified
process, insurers can offer these types of policies online and through nontradi-
tional channels such as banks and retail stores, often reaching a broader group of
potential customers.
Simplified-issue policies are particularly attractive to consumers who may oth-
erwise avoid buying life insurance because they don’t want to be subjected to lab
tests or medical exams, or because they don’t want to wait days or weeks for their
applications to be underwritten. For these consumers, simplified-issue policies
that have fewer underwriting requirements offer an easier, quicker, and less inva-
sive buying process—and this may be a primary reason such consumers choose to
purchase life insurance at all.
Because simplified underwriting omits some of the steps involved in full under-
writing, it may increase the risk to the insurer. As a result, simplified-issue policies
sometimes cost more than identical fully underwritten policies. To mitigate risk,
insurers frequently issue simplified-issue policies up to a certain amount of cover-
age without any surcharge relative to fully underwritten policies.
Real-Time Underwriting
Simplified underwriting can be done manually, but it can be done faster and
more cost-effectively when it is automated—so much faster, in fact, that insurers
with the right combination of technology can perform real-time underwriting,
in which technology performs all of the steps needed to assess and classify insur-
ance risks. With real-time underwriting, insurers can make decisions instantly,
while the customer waits.
Real-time underwriting combines multiple capabilities—from e-applications
to automated, simplified underwriting to online policy status updates for finan-
cial professionals and customers—into a system that quickly evaluates a risk and
makes an underwriting decision. Customers who have applied online or while sit-
ting in a financial professional’s office can know immediately if they are approved
for a policy.
Not all insurers offer real-time underwriting, but its use is increasing as con-
sumer demand for simpler, faster products and services increases.

Key Terms
field underwriting personal risk factor
field underwriting manual financial risk factor
underwriting philosophy antiselection
age and amount requirements chart wagering agreement
impairment guide insurable interest
impairment misrepresentation
remote application material misrepresentation
electronic application system rescission
reflexive question contestable period
electronic signature incontestability provision
premium receipt moral hazard
temporary insurance risk class
agreement (TIA) preferred class
suitability requirement standard class
teleunderwriting substandard class
rating declined class
exclusion underwriting guidelines
policy rider comorbidity
policy issue industry experience
underwriting worksheet undeliverable
audit case assignment system
internal audit work division system
external audit independent underwriting
risk assessment team underwriting
mortality committee underwriting
mortality rate automated underwriting
morbidity application triage
morbidity rate simplified underwriting
risk factor real-time underwriting
medical risk factor
Endnote
1. LOMA, 2014 Individual Life Insurance Service Turnaround Times Survey (Atlanta, GA: LL Global,
Inc., © 2014).

Insurance Administration Chapter 4: Individual Life Insurance: Assessing Mortality Risk 4.1
Chapter 4
Individual Life Insurance:

Assessing Mortality Risk
Objectives
4A Describe how life insurance underwriters use information in the
application for insurance, various medical reports and tests, personal
interviews, investigative consumer reports, and pharmaceutical
databases to assess an insured’s medical risk factors
4B Describe how insurers can and cannot use the underwriting information
available from MIB Group, Inc.
4C Explain the importance of the following factors for underwriting
individual life insurance: impairments, age, gender, and build
4D Describe the sources of information used to assess personal risk factors
in individual life insurance underwriting
4E List the personal risk factors used in underwriting and describe how
individual life insurance underwriters assess a proposed insured’s
personal risk factors

4.2 Chapter 4: Individual Life Insurance: Assessing Mortality Risk Insurance Administration
Outline
Sources of Medical Information Sources of Personal Information
 The Application for Insurance
Assessing Personal Risk Factors
 The MIB Group, Inc.
 Occupation
 Physician Reports
 Driving History
 Medical Tests
 Avocations
 Personal History Interviews
 Tobacco Use
 Inspection Reports
 Alcohol Use
 Pharmaceutical Databases
 Drug Abuse
Assessing Medical Risk Factors  Physical Abuse
 Impairments  Criminal History
 Age  Aviation Activity
 Gender  Military Status
 Build  International Residence and Travel
 Foreign Citizenship
I
n Chapter 3, you learned about the new business process insurers follow when
they receive an application for life insurance coverage. You also learned how
they use underwriting to (1) identify the type and amount of risk a proposed
insured represents and (2) ensure that the identified risk falls within the limits
established during product design and development. In this chapter, you’ll learn
more about the medical and personal risk factors that affect a proposed insured’s
mortality risk and how the type and amount of coverage requested affect risk.
You’ll also learn where underwriters can find information about those factors, how
they use that information to make underwriting decisions, and how they balance
the need for detailed information against the time and cost required to obtain that
information.
Sources of Medical Information

To accurately assess a proposed insured’s mortality risk, underwriters need infor-
mation about a proposed insured’s current health status and past medical history.
They can generally find this information in sources such as
The application for insurance
The MIB Group, Inc.
Physician reports
Medical tests
Personal history interviews
Inspection reports
Pharmaceutical databases
According to a recent blog post on LIMRA’s Industry Trends, 91 percent of life
insurers in the United States as of 2017 are either currently using or planning to
use many of these sources to automate their underwriting processes.1 Figure 4.1
shows the number of insurers currently using or planning to use information avail-
able from electronic databases and other automated information sources.

Figure 4.1. Electronic Databases and Information Sources Used and Planned
Current Planned No plans
Medical Information 94% 3%3%

Bureau (MIB)
Prescription drug 69% 8% 23%

database
Motor vehicle 69% 8% 23%

records
Milliman 44% 5% 51%
Laboratory results 41% 28% 31%
LexisNexis Risk 28% 18% 54%

Solutions
Instant ID 20% 31% 49%
Credit records 18% 38% 44%
Criminal records 15% 26% 59%
Attending physician 10% 15% 75%

statement (APS)
Publicly available 10% 13% 77%

information
TransUnion TrueRisk 8% 26% 66%
Electronic health 2% 39% 59%

records (EHRs)
APS summary 2% 13% 85%

services
Consumer data 2% 5% 93%

(e.g. Axciom)
Social media 2% 98%
Source: LIMRA, “Half of Life Insurers Using Automated Underwriting,” blog post, LIMRA’s Industry Trends (Windsor, CT: LL Global, Inc.,
© August 22, 2017). Used with permission; all rights reserved.

The Application for Insurance

Applications for life insurance coverage include two basic types of information:
General information about the proposed insured, the proposed beneficiary,
and, in some cases, the proposed insured’s parents and siblings, including
names, ages, addresses, and current health status. If a parent or sibling is
deceased, the applicant asks for the date and cause of death. The application
also specifies the amount and type of coverage requested.
Important medical history information about the proposed insured, includ-
ing details about past and current medical conditions, diseases, and injuries;
drug, tobacco, and alcohol use; and family history of medical impairments.
The proposed insured is required to sign the medical history portion of the
application as a way to verify that the information provided is complete and
accurate.
Insurers can use one or more of the following application forms to collect infor-
mation about a proposed insured’s medical history:
A nonmedical supplement is a form that contains a proposed insured’s
answers to general medical history questions that a financial professional or
teleunderwriter collects during the application process. Insurers typically use
LEARNING AID nonmedical supplements when the amount of coverage requested is less than a
specified nonmedical limit, which represents the maximum amount of insur-
ance the insurer will issue without requiring the proposed insured to undergo
a physical examination. In most cases, the maximum amount is the total of all
in-force and applied-for coverage. The chart below shows possible nonmedical
limits for different age groups. As you can see, an insurer’s nonmedical limit
typically decreases as the age of the proposed insured increases.
Age Nonmedical Limit

0–30 $250,000
31–40 $200,000
41–45 $100,000
46–50 $75,000
51–60 $50,000
A paramedical report is a form that contains a proposed insured’s answers

to medical history questions and the results of an examination conducted by
a paramedical examiner who is not a licensed physician but who is trained to
examine a patient and to assess the patient’s current medical condition. Insur-
ers generally use paramedical reports when the requested amount of coverage
exceeds the specified nonmedical limit for the proposed insured but is not
high enough to require a formal medical report. During the examination, the
paramedical examiner records the proposed insured’s height, weight, blood
pressure, and pulse rate. The paramedic usually also collects blood, urine, or
saliva samples. In some cases, underwriters may order additional tests, such as
an electrocardiogram (EKG), based on the amount of coverage requested and
the applicant’s age. Underwriters evaluate the results of all tests and submit
findings to the insurer.
A medical report is a form that contains general information about a pro-

posed insured collected and recorded by a physician who is not the proposed
insured’s personal physician and the results of a formal medical examination
conducted by that physician. In general, a medical report provides more exten-
sive information than a paramedical report. For example, in addition to basic
information such as height, weight, and blood pressure, a medical report fre-
quently includes information about the proposed insured’s heart, lungs, liver,
eyes, ears, nose, and throat; detailed information about impairments disclosed
on the application for insurance; and symptoms noted by the physician dur-
ing the examination. The physician may also order additional tests, especially
if the proposed insured is above a specified age or the amount of coverage
requested is high. For example, a physician examining an older person might
order X-rays, an inspection report, or tests to determine the person’s mental
acuity or balance and gait.
All disclosures about a proposed insured’s medical history made by an applicant
or proposed insured on the application or in a nonmedical supplement and all dis-
closures made by a proposed insured to a paramedical or medical examiner become
part of the contract. Test results, however, do not become part of the contract.
Today, insurers are increasingly replacing separate reports with a triage
approach that includes teleunderwriting, interviews, and paramedical examina-
tions and are using this approach for amounts of coverage as high as $1 million.
Insurers usually base their decisions about the type and amount of medical
information they require on a particular application on the company’s age and
amount requirements chart. This chart identifies the kinds of information a sales
intermediary must submit and an underwriter must review to assess the insur-
ability of a proposed insured. Figure 4.2 shows a portion of an age and amount
requirements chart for a specific individual life insurance product. In general,
applications that represent a greater degree of risk—such as a large amount of
coverage or insurance for an older person—require more information about insur-
ability than do applications that represent lower risks.
The MIB Group, Inc.

The MIB Group, Inc. (MIB) is a not-for-profit membership corporation that
maintains information about individuals who have applied for insurance coverage
from member companies. It was created to protect companies and customers from
proposed insureds who knowingly or unknowingly omit information or provide
false information about their insurability. Without the information collected by
MIB, insurers could unknowingly provide coverage for people with uninsurable
medical conditions or charge insufficient premium rates for people with insurable
medical conditions.
Underwriters of member companies interact with MIB in two ways: by report-
ing impairment information they gather on applications for insurance to MIB and
by requesting information about applicants from MIB. MIB has established pro-
cedures for each of these activities, as well as procedures that insurers must follow LEARNING AID
when using MIB information during underwriting. MIB also requires members to
ensure the confidentiality of personal medical information.

Figure 4.2. Sample Age and Amount Requirements Chart for Individual
Life Insurance
Amount of Coverage
Age at Last Birthday Underwriting Requirements
Requested
31–40 Up to $99,999 Nonmedical

$100,000 to $300,000 Nonmedical, blood profile
$300,001 to $1,000,000 Paramedical, blood profile
$1,000,001 to $2,000,000 Paramedical, blood profile,
ECG
$2,000,001 and up Medical, blood profile, ECG

$100,000 to $300,000 Paramedical, blood profile
$300,001 to $1,000,000 Paramedical, blood profile
ECG
$1,000,001 to $2,000,000 Medical, blood profile, ECG
$2,000,001 and up Medical, blood profile, ECG,
X-ray, inspection report

$50,000 to $100,000 Paramedical
$100,001 to $200,000 Paramedical, blood profile
$200,001 to $1,000,000 Paramedical, blood profile,
ECG
$1,000,001 to $3,000,000 Medical, blood profile, ECG,
$3,000,000,001 and up Medical, blood profile, ECG,
51–60 Up to $99,999 Paramedical

$100,000 to $750,000 Paramedical, blood profile,
ECG
$759,001 to $2,000,000 Medical, blood profile, ECG
$2,000,001 and up Medical, blood profile, ECG,

Reporting Information to MIB

If a member company receives an application for insurance that indicates a pro-
posed insured has any significant risk factors, the company is required to submit
a coded summary of information discovered during the underwriting process that
may have a bearing on a proposed insured’s health or longevity. To facilitate this
process, MIB furnishes its member companies with a confidential list of factors
that are considered important to risk selection and a code that identifies each fac-
tor. Insurers are expected to use these codes in their summaries. MIB also requires
insurers to provide coded information about how much coverage an applicant has
applied for with other companies. However, codes that have been reported within
the past year are generally not reported again unless the insurer has new informa-
tion about those risk factors.
Member companies are also required to notify MIB if they have reason to
believe that information about a proposed insured is inaccurate or incomplete.
For example, insurers must notify MIB if recent tests indicate problems that were
not identified on earlier MIB reports or if a condition that has been coded in the past
is no longer evident. Member companies typically do not send MIB actual medi-
cal reports or information about (1) underwriting decisions or (2) claim d ecisions.
Requesting Information from MIB

Member companies can also request information from MIB to determine whether
a proposed insured has significant impairments or nonmedical risks that were not
disclosed on the current application for insurance. Before making a request for
MIB information about a proposed insured, an insurer must
Obtain the proposed insured’s written authorization for the release of informa-
tion to the member company on a form naming MIB as an authorized source
of information.
Furnish the proposed insured with a written notice specifying that a report
regarding the person’s insurability may be sent to MIB and that if the proposed
insured later applies for life insurance with another MIB member company,
MIB may provide that company with a report. The notice must also indicate
that the proposed insured has a right to contact MIB for a copy of his MIB file.
In response to an approved request for information, MIB provides coded infor-
mation about impairments that the applicant has disclosed or that other insurance
companies have detected in connection with previous applications for insurance.
The MIB also maintains an Insurance Activity Index (IAI) that provides informa-
tion about the number of times an MIB request for information about a particu-
lar applicant was entered into the system during the last two years. Insurers can
use the index to identify applicants who may be applying for multiple low-face-
amount policies from different insurers as a way to avoid undergoing a formal
medical underwriting process.
MIB information sent to member companies is intended only to alert member
companies of the need to initiate further investigation of a proposed insured’s
insurability. Member companies must ensure that the identities of the proposed
insured and the person named in an MIB report have been clearly matched and

that all coded information has been verified by independent investigation. In addi-
tion, MIB information must be kept confidential and access allowed only to autho-
rized medical, underwriting, and claims personnel at member companies. State
laws based on the NAIC Insurance Information and Privacy Protection Model
Act support these requirements by preventing companies from making an adverse
underwriting decision on the sole basis of information received from an “insur-
ance support organization.”
Physician Reports
Insurance companies also rely heavily on information they obtain from exam-
ining physicians and attending physicians. An examining physician is a physi-
cian who examines a proposed insured at the request of the insurance company.
For insurers, the primary advantage of using an examining physician is that the
physician’s findings are not likely to be influenced by past interactions with the
proposed insured. An attending physician is a primary care physician or specialist
who has provided medical care for a proposed insured at the individual’s request.
The advantage of using an attending physician is that the physician has an estab-
lished relationship with the proposed insured and is often able to provide more
in-depth information about the proposed insured’s medical status.
Today, information is obtained from attending physicians in the form of elec-
tronic health records. Electronic health records (EHRs) are digital versions of a
patient’s paper records that include the patient’s medical history, diagnoses, medi-
cations, treatment plans, immunizations, radiology images, and laboratory tests
and results. Because EHRs are delivered electronically, they can present real-time
information to authorized users instantly and securely.
Underwriters can obtain detailed information about specific medical conditions,
such as coronary artery disease, chest pain, or diabetes directly from a proposed
insured’s attending physician or examining physician by requesting a specialized
medical questionnaire that provides detailed information about a specific illness
or condition. Figure 4.3 is an example of a specialized medical questionnaire ask-
ing for detailed information about a neuropsychiatric condition.
When underwriters need clarification or additional detail about informa-
tion included on an insurance application, they frequently request an attending
physician’s statement (APS), which contains a proposed insured’s medical records
and is completed by a physician who has treated or is currently treating the pro-
posed insured. Underwriters frequently order an APS when
The insurer’s age and amount requirements chart specifies that an APS is
required.
The application or the personal, paramedical, or teleinterview mentions a spe-
cific illness, such as coronary artery disease or cancer. In these cases, insurers
often require an APS from both the primary care physician and any specialist
involved in treating the illness.
The application indicates a recent visit to a doctor and the underwriter wants
to confirm the absence of antiselection.
Information on the application isn’t consistent with information from MIB or
a prescription history search.

Figure 4.3. Specialized Medical Questionnaire for a

Neuropsychiatric Condition
NEUROPSYCHIATRIC QUESTIONNAIRE
Please complete from patient’s existing medical records. A current medical exam is NOT required.
Patient’s Name
Application Number
1. Please classify the disorder
Affective Disorder Personality Disorder
Anxiety Disorder Psychotic Disorder
Organic Brain Disorder
2. What is the appropriate DSM V American Psychiatric Diagnostic Code?
3. Date of onset?
4. Please classify the degree of impairment
Mild Moderate Severe
5. Please indicate if any of the following have occurred
Substance Abuse Suicide Ideation
Suicide Attempt
6. Indicate dates of psychiatric care
Inpatient (hospitalization)
Outpatient
7. Please specify the type of treatment prescribed
Individual Counselling
Electroconvulsive Therapy
Medication (include name and dosage of drug)
Group Counselling
Other (please specify)
8. Is the condition under effective control?
Yes. For how long?
No
9. Date of full recovery and return to work or school
10. Is there any reason to believe that psychiatric care may be necessary in the future?

Date:
Physician’s Name (signature not required)

An underwriter can also gather additional information about a specific disor-

der, verify dates and details of treatment, or clarify reasons for a particular diagno-
sis or medication by contacting a proposed insured’s attending or examining phy-
sician directly. For example, underwriters typically contact a proposed insured’s
physician if information obtained from other sources—such as an APS or MIB
report—indicates a medical condition that the proposed insured did not report on
the application. Although underwriters can usually obtain some information from
physicians by telephone, they may also need to have physicians provide informa-
tion in writing in order to comply with regulatory requirements.
Medical Tests
Although sales intermediaries typically order the medical tests needed to satisfy
an insurer’s published age and amount requirements, underwriters may order
additional laboratory tests, such as electrocardiograms, urinalysis, blood chemis-
try profiles, or oral specimen tests. Figure 4.4 describes these tests. Insurers often
have specific rules for additional tests, referred to as “reflexive tests,” that are
triggered if one or more results on the standard panel of tests are abnormal. Any
information provided by medical tests must be kept confidential and disclosed
only to those people with a legitimate need to know the results.
Personal History Interviews

Underwriters often order a personal history interview if the information included
in an insurance application is inadequate. A personal history interview (PHI)
is a conversation between an underwriter or other insurance company employee
and the proposed insured that is designed to verify the accuracy of information
already received about the proposed insured or to obtain any additional infor-
mation needed for underwriting. Insurers can also use PHIs to identify the pres-
ence of cognitive impairment. For example, the underwriter may ask the proposed
insured to answer a short list of questions about the current date and season, the
proposed insured’s current location, or other topics that a person with cognitive
impairment might find difficult to answer.
In some cases, insurers also conduct a PHI with the proposed insured’s medical
caregiver. However, to comply with privacy requirements, the underwriter typi-
cally must obtain the proposed insured’s consent to contact the caregiver and dis-
cuss the proposed insured’s medical information. Depending on the information
obtained during a PHI, the underwriter may request a face-to-face interview with
the applicant or the applicant’s physician to gain additional information.
Inspection Reports
Insurers usually rely on information gathered during a personal history inter-
view when underwriting applications for coverage below a specified limit.
For applications that involve higher amounts, insurers may order an inspection
report. An inspection report is a type of investigative consumer report that a con-
sumer reporting agency prepares about the proposed insured. When ordering an
inspection report, the insurer must adhere to requirements specified in the Fair
Credit Reporting Act.

Figure 4.4. Medical Tests Commonly Ordered for Underwriting

An electrocardiogram (ECG) provides a graphic record of the electrical forces produced
by the heart and is used to detect a disease or an abnormality of the heart. General indus-
try practice is to obtain a resting ECG—taken when a proposed insured is at rest and
the heart is beating at its normal rate—to reveal past heart damage. Insurers, however,
may also request a stress ECG—taken during and after the performance of a defined
amount of exercise by a proposed insured—to assess a proposed
insured’s potential for future heart problems. Although a stress
ECG provides a more detailed analysis of a proposed insured’s
cardiac condition than a resting ECG, it is also more expensive and
time consuming. As a result, stress ECGs are generally limited to
cases that involve higher age and amount combinations.
Urinalysis is the analysis of a urine specimen. It is frequently required because it can detect
the presence of protein, sugar, blood cells, prescription medications, and other drugs.
A required urine specimen typically is collected during a paramedical or medical examina-
tion, and insurance industry laboratories produce detailed reports of the findings. Because
it detects the presence of byproducts of nicotine, insurers often use urinalysis to verify
whether a proposed insured who claims to be a nonsmoker qualifies for non-smoker rates.
Insurers may also use urinalysis to test for human immunodeficiency virus (HIV).
A blood chemistry profile is a group of laboratory tests that analyze
a sample of blood to identify factors that point to possible chronic and
acute diseases. The standard blood profile has 15 to 18 components
related to liver and kidney function, glucose/diabetes, blood lipids, and
serum proteins.
Some insurers also require nicotine, genetic, and/or HIV tests. Blood samples are typi-
cally collected during paramedical or medical examinations and are analyzed in insurance
industry laboratories.
An oral specimen (saliva) test uses a sample of a proposed insured’s saliva to identify
habitual use of nicotine, cocaine, or other drugs, and the presence of HIV antibodies.
Specimens are collected by the sales intermediary at the time of application and sent to
a laboratory for analysis. Oral specimen testing is usually more convenient, less expensive,
and less invasive than blood or urine testing. However, oral specimen tests cannot be used
to test for as many substances as blood or urine tests.
An inspection report usually includes some of the same basic medical infor-
mation that is in a PHI—such as the proposed insured’s height, weight, and health
history. However, the primary focus of an inspection report is on personal and
financial information obtained from public records—such as court records, bank-
ruptcy records, motor vehicle records, credit reports, and business ownership
contracts—and from interviews with the proposed insured or with the proposed
insured’s friends, neighbors, and business associates.
If the information provided in an inspection report conflicts with information
provided on the application for insurance, an underwriter may request further
investigation.

Pharmaceutical Databases
In the United States, insurance underwriters can also obtain medical underwrit-
ing information from pharmaceutical databases that contain records of prescrip-
tions filled by individuals enrolled in health care prescription benefit programs
that are generally managed by clearinghouses called pharmacy benefit managers
(PBMs). Insurers typically order pharmacy database searches from vendors that
have contracts with the PBMs.
Prescription databases are a valuable source of information for underwriters
because a proposed insured’s prescriptions are often indicative of the conditions
he has and the treatment he is receiving.
Example:
Samantha Evans, an underwriter for the Fenway Insurance Company, was
underwriting a life insurance policy covering Franklin Oakley and noticed
that Mr. Oakley had included Suboxone in his list of medications. Samantha
did some research and found that Suboxone is used to treat opiate
addiction. After obtaining Mr. Oakley’s consent, Samantha consulted a
pharmaceutical database and confirmed Mr. Oakley’s use of the drug, On
the basis of this information, Samantha declined the application.
In many cases, obtaining a prescription history can be less expensive and time
consuming than obtaining an APS. However, prescription histories are avail-
able only if a proposed is enrolled in a health care prescription benefit program.
In addition, like MIB information, information from prescription databases can-
not be obtained without the proposed insured’s written consent.
Assessing Medical Risk Factors

Individual life insurance underwriters need to have considerable medical knowl-
edge to accurately assess the impact of medical risk factors on a proposed insured’s
mortality. Although a detailed discussion of these risk factors is beyond the scope
of this text, this section provides basic information about the effect that medical
impairments and characteristics such as age, gender, and build have on a proposed
insured’s mortality risk.
Impairments
An impairment is defined as any physical or psychological abnormality that results
in a loss of function. For example, a ruptured disc in a proposed insured’s spinal
column may prevent the proposed insured from walking or lifting objects, and an
abnormality in the nervous system may interfere with a proposed insured’s ability
to speak or hear. Life insurance underwriters pay particular attention to impair-
ments that affect major body systems and organs—such as heart, kidney, or liver—
and specific diseases or defects associated with those systems and organs—such
as diabetes, cancer, alcohol and drug abuse, neurological disorders, and AIDS.

Age
Although age doesn’t fit the definition of a medical risk factor, it has a direct
impact on mortality risk. For example, young proposed insureds—age 15 through
39—are much more likely to die from accident or injury than from impairments.
For proposed insureds over age 70, on the other hand, the chance of developing
an impairment that leads to death is relatively high. As a result, an underwriter
evaluating a 72-year-old proposed insured who indicates that she has not seen any
doctors during the previous five years or who lists only minor or very few injuries
or illnesses would most likely conduct a thorough review of the case and even
require the applicant to undergo a full medical examination.
Age can also be an indicator of antiselection, especially if the decision to pur-
chase life insurance coverage is based on the applicant’s concern about his declin-
ing health. For example, a 60-year-old man purchasing life insurance for the first
time is statistically a greater risk for possible antiselection than is a 60-year-old
man who has purchased insurance throughout his adult life.
Even when antiselection is not an issue, most insurers will not offer coverage
to proposed insureds above an established maximum age limit. Age limits often
vary according to the insurance product applied for and are generally lower for
term insurance (about age 75) than for whole life insurance (about age 80). Some
insurers, however, issue policies to proposed insureds up to age 85 or even 90.
Gender
Competitive pressures and insurance laws prohibiting discrimination often pre-
vent individual life insurance underwriters from considering the gender of a pro-
posed insured when determining the amounts and types of coverage they will
issue. However, many insurers do use gender-based actuarial tables to establish
premium rates because, statistically, females live longer than males.
One factor that complicates gender-based underwriting is the fact that an appli-
cant’s biological gender may be different than the applicant’s identified gender.
Although insurance regulators are currently considering this situation, no specific
recommendations have been proposed. As a result, practices vary.
Some insurers argue that biological or birth gender is a more accurate predictor
of mortality risk than identified gender. Other insurers allow applicants to self-
identify and underwrite according to the gender indicated on the application. Still
other insurers base decisions on a particular applicant’s status. For example, an
insurer may use birth gender rates if an applicant has not undergone gender transi-
tion surgery or has completed only part of the necessary surgery and use identi-
fied gender rates if an applicant has completed the transition.
Build
Build is the shape or form of the body, including the relationships among height,
weight, and distribution of weight. It is an important risk factor for insurers because
being above or below normal weight is often an indicator of increased mortality
risk. For example, a proposed insured whose weight is significantly above normal
ranges represents a higher mortality and morbidity risk than a proposed insured
whose weight is within established parameters. A proposed insured whose weight
is significantly below normal ranges also represents higher risk, especially if low
weight is linked to disease or medical impairment. Substantial or rapid gains or
losses in weight can also indicate potential medical impairments.
Historically, insurance underwriters have used build charts to evaluate risks

associated with a proposed insured’s weight. A build chart shows the average
weights for various heights and the mortality debits (increases) associated with
weights above those averages. Underwriters typically use separate build charts for
males and females and for adults, children, and infants. Figure 4.5 shows a portion
of a build chart for adult males.
Figure 4.5. Sample Build Chart for Adult Males
Average Mortality Debits (based on height/weight)

Height Weight
(Male) +25 +50 +75 +100 +125
5’5” 151 225 235 245 255 265
5’6” 155 230 240 250 260 270
5’7” 159 235 245 255 265 275
5’8” 163 240 250 265 275 285
5’9” 167 250 260 270 285 295
5’10” 172 255 265 280 290 305
5’11” 176 260 275 285 300 310
6’0” 181 270 280 295 305 320
Because build charts typically don’t address problems associated with being
underweight or with rapid weight gains or losses, many underwriters now use
body mass index results instead of build charts to determine risk classes. Body
mass index (BMI) measures an individual’s body fat based on the individual’s
weight relative to his or her height. The basic formula for calculating BMI is
Weight (lbs) ÷ Height (in)2 × 703

The multiplier in the equation (703) is used to translate metric measurements

(in kilograms) into pounds. BMI calculators are available from a variety of online
sources.
The primary advantage of using BMI to evaluate risks associated with build
is that it offers a description of an individual’s overall weight status rather than a
simple measure of whether an individual’s current weight is below, at, or above the
average. The chart below shows standard adult weight status categories associated
with BMI.
BMI Weight Status

Below 18.5 Underweight
18.5–24.9 Healthy weight
25.0–29.9 Overweight
30.0 and over Obese
Weight status categories usually differ by gender (male or female) and by age
(adults, teens, and children).
Sources of Personal Information

When assessing a proposed insured’s personal risk, underwriters typically exam-
ine factors such as occupation and/or avocations; driving history; tobacco, alcohol,
and drug use; physical abuse; criminal history; civilian and military aviation; mili-
tary status; international residence and travel; and foreign citizenship. Information
about these factors is available from a variety of sources, including
Applications for insurance. As you learned in Chapter 3, applications
for life insurance coverage in the United States are relatively standard and
include both medical and nonmedical information about the proposed insured.
The application also includes information about the amount and type of insur-
ance coverage the applicant is applying for. If any of the personal information
provided on the application appears contradictory or indicates the possibility
of increased risk—such as participation in dangerous avocations, tobacco or
drug use, criminal activity, or unexplained gaps in employment—the under-
writer may seek additional information.
Agent statements. Because financial professionals and other sales interme-
diaries interact with and often know proposed insureds personally, they can
provide first-hand knowledge about the proposed insured’s personal history,
activities, finances, and insurance needs. As a result, the agent’s statement
included in the application for insurance is often one of the first places under-
writers look when assessing a proposed insured’s personal risks.
Inspection reports. Earlier in this chapter, you saw how underwriters use
inspection reports to gather basic information about a proposed insured’s
medical risk factors. The primary purpose of these reports, however, is to
gather valuable information about the proposed insured’s personal risk fac-
tors. For example, an inspection report typically includes information about
the proposed insured’s avocations, driving history, police record, and employ-
ment—including the type of business in which the proposed insured works,
the length of his employment, and typical work duties.

Personal questionnaires. Applicants who participate in activities that are

known to increase the risk of injury, illness, or death may be required to com-
plete questionnaires that address topics such as avocations (hobbies), alcohol
use, and drug use. When completed and signed, these questionnaires become
part of the insurance application. The questions in personal questionnaires
are based on statistical information about the relationship of specific activities
to injury and death. For example, avocation questionnaires usually ask if the
proposed insured is licensed or certified to take part in a specified activity,
such as scuba diving, and by whom. Insurers often rely on standard question-
naires that have been used in the industry for years and have been shown
to provide useful information for underwriters. To ensure the quality of any
questionnaires that will be signed by the proposed insured and will become
part of the application, insurance regulators require that insurers submit ques-
tionnaire forms for approval before they are used. If an insurer discovers that
a proposed insured made a material misrepresentation on a questionnaire that
is considered part of the policy, the insurer can use that information to rescind
the policy.
Motor vehicle records. A motor vehicle record (MVR) is a report that
includes information about a person’s driving history, including traffic viola-
tions, arrests, and convictions. Underwriters use this information to assess the
degree of risk represented by a proposed insured’s driving habits. However,
MVRs may not be available to underwriters in all jurisdictions because of pri-
vacy regulations or because the fees charged to obtain an MVR are p rohibitive.
Assessing Personal Risk Factors

Like medical risk factors, personal risk factors affect how insurance companies
underwrite individual life insurance contracts.
Occupation
A proposed insured’s occupation usually doesn’t affect underwriting of individual
life insurance unless the insurer considers the occupation to be hazardous. Insur-
ance underwriters evaluate two categories of occupational hazards:
Accident hazards are typically associated with activities that present a signif-
icant risk of injury. Accident hazards are common among construction work-
ers, lumber workers, demolition experts, firefighters and other individuals
whose jobs involve fire or explosives, police officers, and people who perform
stunts in films.
Health hazards are typically associated with activities that present a signifi-
cant risk of illness. Health hazards are common among workers such as labo-
ratory workers or analysts who are exposed to toxic chemicals such as radium
or poison gases.
Some workers, such as coal miners and firefighters, may be exposed to both
types of hazards.

Whether an insurer issues standard or rated policies to applicants employed in

hazardous occupations depends on the applicants’ actual job duties. For example,
an insurer might issue a standard policy to a coal miner who is an above-ground
machinist, but issue a rated policy to a coal miner who works underground. Simi-
larly, an insurer might issue a standard policy to a person who holds a clerical posi-
tion in a police department, but issue a rated policy to a patrol officer or detective.
An insurer can reduce or even remove a rating for occupation if the insured’s
occupation changes. To qualify for a change, the insured must work for at least one
year in a less hazardous occupation and must not be likely to return to the more
hazardous occupation. Some insurers automatically remove occupational ratings
when an insured reaches a certain age, such as age 65.
Driving History
Motor vehicle accidents are a primary cause of accidental death, and people who
have many traffic violations generally pose greater risks for fatal accidents. Thus,
underwriters pay close attention to details about a proposed insured’s driving his-
tory, such as the number, type, and timing of traffic violations and whether alcohol
or drugs were involved in any violations.
To identify poor drivers who represent increased risk, most insurers include at
least one question in the application for insurance that asks if the proposed insured
has been convicted of a moving traffic violation or been charged with driving
under the influence (DUI) within a certain period of time. If an applicant has an
unfavorable driving history but is still considered insurable, the insurer can man-
age risks by rating the policy or modifying the benefit amount to compensate for
the extra risk. For example, an insurer may rate a policy for an older applicant who
has had one DUI within a given period but deny coverage for a younger applicant
who has had one DUI during the same period. Most insurers deny coverage for
any applicant who has had two or more DUIs within the last five years.
Avocations
Underwriters typically consider applicants who pursue a particular activity as an
occupation to be professionals and applicants who pursue an activity as an avoca-
tion, or leisure activity, to be amateurs. For example, an individual who works as
a pilot for a major airline is considered a professional because flying is the indi-
vidual’s occupation. A person who pilots small planes for personal pleasure and
not as an occupation is considered an amateur.
Most life insurance underwriters use specialized personal questionnaires to
gather information about a proposed insured’s avocations. These questionnaires
can focus on just one activity or gather information about several activities. A pro-
posed insured’s answers in the personal questionnaire, along with factors such as
the proposed insured’s age, training, and type and quality of equipment, typically
determine whether the policy should be rated for participation in a potentially
risky avocation. Figure 4.6 shows an example of a personal questionnaire request-
ing information about a proposed insured’s scuba diving activities.

Figure 4.6. Sample Personal Questionnaire
SCUBA DIVING QUESTIONNAIRE

Purpose of diving Business Pleasure
Type of diving (if applicable) Instruction Construction Salvage
Research Night diving
Where do you dive? Inland waters Ocean or sea
Diving History
Last 12 months Next 12 months
Average Duration Average Duration

Depth (in ft.) No. of Dives No. of Dives
of Dives of Dives
<50
50-100
>100
Maximum depth obtained

Are you a member of a diving organization? Yes No
Are you a certified diver?
If yes, please list certification(s) and level

Have you ever had a diving-related accident? Yes No
If yes, please give details:

I declare that the above information is true and complete and shall form part of my
application to ABC Assurance Company.
Signature
Date
Because individuals who actively participate on social media and other online
sites often post information about dangerous avocations or other risky behaviors
they have engaged in or are planning to engage in, insurers often check these sites
to gather information that can help them identify the amount of risk an applicant
represents. Some states even post criminal record check (CRC) information on
state-sponsored sites. Online sites also provide information about personal assets.

Example:
An underwriter for the Starlight Insurance Company noted that an applicant
for a life insurance policy included his house among his personal assets and
listed the value of the house at $1 million. The underwriter looked on Zillow,
which frequently posts reports on average housing values in specified areas,
and found that houses in the applicant’s area were valued between $250,000
and $500,000.
Analysis:
Although the underwriter knew that individual house values could vary,
the difference between the posted values and the value declared by the
applicant was significant enough to warrant further investigation.
As a result, searching online sites for information about proposed insureds has
become a routine part of the underwriting process in many insurance companies,
especially if an applicant applies for a large amount of coverage, if the applicant is
a celebrity performer or professional athlete, or if the underwriter suspects fraud.
However, because of the requirements of the Fair Credit Reporting Act (FCRA),
which regulates the reporting and use of consumer credit information, insurers
usually use information gathered from online sites only to determine whether
additional investigation is necessary to accurately underwrite an insurance appli-
cation. They typically do not use online information as the sole basis for making
an underwriting decision.
Tobacco Use
People who use any form of tobacco have higher mortality rates at every age than
people who do not. Insurers charge tobacco users higher premium rates for insur-
ance coverage than they charge nonusers, and so tobacco users may be hesitant
to admit to tobacco use. As a result, when a proposed insured undergoes a para-
medical or medical examination, the insurer usually instructs the laboratory to
test a sample of the proposed insured’s blood, urine, or saliva for the presence of
cotinine, which is a common marker for tobacco use. Insurers can also require a
tobacco usage questionnaire or an inspection report that includes comments on the
proposed insured’s tobacco use.
Insurers can establish different rates for tobacco users by
Developing separate premium rate schedules for tobacco users and nonus-
ers to acknowledge the possible negative effects of tobacco on the proposed
insured’s mortality risk. For example, an insurer may place tobacco users in a
standard class and place nonusers in a preferred class. An insurer might also
offer discounted premiums for nonusers.
Assigning tobacco users higher ratings for impairments that are sensitive to
tobacco use, such as coronary artery disease, cancer, and lung disease, than
the impairment ratings they would assign to nonusers.

Alcohol Use
A proposed insured’s degree of alcohol use affects whether an application for insur-
ance is issued as applied for, rated, or declined. Insurers can gather information
about proposed insureds’ alcohol use from applications, inspection reports, MVRs,
APSs, PHIs, telephone interviews, and alcohol usage questionnaires. Such question-
naires ask for information about the proposed insured’s level of alcohol use and the
effect of alcohol use on the proposed insured’s health, driving, and occupation. If
necessary, insurers can also order routine liver function tests or specific laboratory
tests such as carbohydrate-deficient transferrin (CDT) tests. Positive results on these
tests, which are known as alcohol markers, can indicate heavy alcohol use.
Drug Abuse
Drug abuse usually refers to excessive or inappropriate use of prescribed drugs—
such as pain medications, stimulants, sedatives, and antianxiety drugs—or the use
of illegal drugs—such as cocaine, heroin, and hallucinogens. Whether marijuana
use is considered illegal depends on the state in which a user resides and the reason
for use. For example, many states now allow marijuana use for medical purposes,
and some states have legalized marijuana use for any purpose.
Although proper use of most drugs can improve health, abuse can lead to psy-
chological impairments, physical dependence, or personality disorders that can
increase a proposed insured’s medical risk. Use of illegal drugs or mixing drugs
with alcohol increases a proposed risk of death due to overdose or accidental poi-
soning. In addition, the fact that a proposed insured uses illegal drugs raises the
question of moral hazard.
However, gathering information about potential drug abuse is often difficult,
because applicants may be unwilling to admit to illegal drug use. As a result,
when information in an application for insurance indicates possible drug abuse,
underwriters should conduct a thorough investigation, regardless of the amount of
coverage applied for. Such an investigation often includes an APS, a urine test, a
drug usage questionnaire, a blood profile, and/or an inspection report focused on
drug abuse. When conducting such an investigation, the underwriter must verify
that tests for the presence of illegal drugs are conducted properly and that the
results are kept confidential.
Physical Abuse
Gathering information about suspected physical abuse of a proposed insured by
a spouse, partner, or other family member can be difficult because laws in many
jurisdictions prohibit insurers from requesting or using information about possible
abuse in making an underwriting decision.
In those states that allow insurers to consider a proposed insured’s abuse status,
underwriters must impartially evaluate the level of risk that the abuse represents
and determine the degree to which the risk is acceptable or unacceptable for the
insurer. Underwriters can gather information about possible abuse from hospi-
tal records that indicate treatment for traumatic injuries and from the proposed
insured’s regular medical records. Because physical abuse often is accompanied
by alcohol abuse, drug abuse, or depression, underwriters also consider inspection
reports and sales intermediaries’ comments. Unless the abuse constitutes a grave
risk of serious injury or death, insurers typically provide coverage.

Criminal History
Occasionally, underwriters evaluating an application for life insurance coverage
discover evidence of a proposed insured’s past participation in criminal or ille-
gal activities. Although past criminal behavior doesn’t necessarily indicate future
criminal behavior, underwriters usually conduct a thorough review of recorded
facts, an extensive inspection report, and interviews with people who are likely
to know about the current activities and character of the proposed insured before
issuing coverage. During this review, underwriters generally focus on the
Length of time the proposed insured was involved in criminal activities
Length of time that has elapsed since the proposed insured’s last involvement
Nature of the offense or offenses committed
Proposed insured’s history in relation to police, courts, and correctional insti-

tutions
Underwriters usually decline applications for proposed insureds with a record of
Recent criminal activity
Arrest for multiple or violent crimes
Involvement in criminal activity over a period of time
Criminal activity coupled with alcohol abuse, drug abuse, compulsive gam-
bling, extreme aggression, or severe psychological problems
Insurers often issue rated coverage on proposed insureds with a criminal his-
tory that includes DUI or traffic offenses. Insurers usually either accept at stan-
dard rates or decline coverage if applicants have a consistent work record and have
no history of violent crime or no criminal family members or associates. Insurers
may also be more lenient if a crime committed by a proposed insured occurred in
the distant past and the proposed insured appears to be rehabilitated.
Aviation Activity
If a proposed insured indicates that she is involved in aviation, the insurer typi-
cally requires the completion of an aviation questionnaire, an inspection report,
and a personal history interview. The underwriting process differs for civilian and
military aviation.
Civilian Aviation
Civilian aviation generally includes both personal activities—such as ballooning
and flying for pleasure—and commercial activities—such as flying a company-
owned airplane for business purposes or flying for business purposes such as air
ambulance, crop dusting, firefighting, power line and pipe inspection, mail ser-
vice, mapping, policing, and weather or traffic control activities.

When reviewing a proposed insured’s personal aviation activities, underwrit-

ers consider factors such as the person’s (1) total hours of flying experience, (2)
total hours of flying annually, and (3) certification or ratings. Studies show that
proposed insureds with extensive flying experience and high levels of certification
or ratings have a greater degree of skill and a lower risk of being involved in avia-
tion accidents than proposed insureds with less experience or lower certification
or ratings.
Insurers issue individual coverage to most civilian pilots at a standard rate.
However, an underwriter who determines that a pilot engaged in civilian aviation
activities represents a greater-than-standard risk may classify the proposed insured
as an aviation hazard and rate the policy. The underwriter may also issue the pol-
icy with an aviation exclusion rider, if allowed by state insurance laws. Exclusion
riders, however, are generally used only in cases in which (1) the extent of the
hazard cannot be measured; (2) the pilot has a history of certain medical impair-
ments, such as depression, stroke, or heart disease; or (3) the proposed insured is
unwilling to pay the extra premiums associated with the aviation activity.
In assessing risk for pilots flying employer-owned aircraft for commercial pur-
poses, underwriters consider many of the same factors used to determine coverage
for individuals engaged in personal aviation activities. In addition, they typically
determine whether the pilot has either an airline transport certificate or a commer-
cial certificate with an instrument flight rating, indicating that the pilot is qualified
to fly in all weather conditions. Most insurers issue coverage at a standard rate
to pilots who hold one or both of these certificates and rate policies or even deny
coverage for pilots who do not hold at least one of these certificates.
Military Aviation
Many insurers offer coverage for proposed insureds engaged in military aviation,
but rate policies to account for the associated risk. Ratings are generally based on
factors such as the duty area of the applicant, the type of aircraft the applicant flies,
the age of the applicant, and whether the applicant is a pilot or crew member. For
example, military aviation ratings are generally higher for individuals under age
30 than for individuals age 30 and older, and rates charged for pilots are usually
higher than rates charged for aviation crew members.
Military Status
Most insurers approve career military personnel not engaged in aviation for cov-
erage at standard rates if a country is not at war or involved in military conflict.
In general, these individuals are good risks, and insurers underwrite them as if
they were civilians. However, for individuals involved in armed conflict or serv-
ing in a hazardous location, insurers usually deny coverage or attach a rider to the
policy excluding losses resulting from war until those individuals no longer have
pending hazardous assignments.

International Residence and Travel

Many insurers in the United States and Canada do not offer coverage to proposed
insureds who reside abroad for extended periods of time because of the difficulty
of gathering complete underwriting information and the difficulty and cost of
investigating claims. Whether an insurer issues coverage to a proposed insured
who resides permanently in a foreign country also depends on the type of insur-
ance requested. For example, insurers generally decline applications from pro-
posed insureds who request the lowest premium term insurance and want to pay
premiums monthly. Underwriters typically consider this type of coverage to be
“trip insurance” and assume that the applicant is likely to stop coverage when the
trip is completed.
An exception applies if an insurer has established offices in a foreign country
and a proposed insured resides in that country. However, insurers often require all
aspects of the insurance transaction, including application, underwriting, medical
examination, if any, and policy delivery to be completed in the United States. In
addition, the rates insurers charge for this coverage are generally higher than the
rates for people not living abroad.
Insurers frequently offer coverage for individuals who travel abroad for limited
periods of time, usually six weeks or less, at standard rates. They may issue cover-
age at substandard rates, limit coverage, or decline coverage if proposed insureds
plan to travel to an area experiencing significant political unrest, criminal activity,
military activity, widespread deadly disease, or poor access to health care. How-
ever, several states have either passed or are considering legislation that prohibits
insurers from declining or rating coverage based on a proposed insured’s foreign
travel plans. Whether an insurer issues coverage to a proposed insured who resides
permanently in a foreign country depends on the type of insurance requested.
Foreign Citizenship
Underwriting for proposed insureds who are citizens of foreign countries is based
on factors such as the risk presented, the reason for the insurance purchase, the
reputation of the sales intermediary, and the quality of the sales intermediary’s
previous business. Today, most insurers give favorable consideration to foreign
applicants who
Intend to become permanent residents of the country in which the insurer does
business
Possess a permanent resident visa
Own property or have bank accounts in the country in which the insurer does
business
Factors that are prevalent in many developing countries—such as scarcity of
medical resources, malnutrition, unsafe water, poor sanitation, and inadequate
education about healthy practices—can contribute to higher morbidity and mor-
tality. As a result, citizens of developing countries who apply for life insurance
coverage in the United States generally must undergo a medical examination and
a complete blood profile for any amount of coverage.

Key Terms
nonmedical supplement
nonmedical limit
paramedical report
medical report
MIB Group, Inc. (MIB)
Insurance Activity Index (IAI)
examining physician
attending physician
electronic health records (EHR)
specialized medical questionnaire
attending physician’s statement (APS)
electrocardiogram (ECG)
urinalysis
blood chemistry profile
oral specimen (saliva) test
personal history interview (PHI)
inspection report
pharmacy benefit manager (PBM)
impairment
build
build chart
body mass index (BMI)
motor vehicle record (MVR)
Endnote
1. LIMRA, “Half of Life Insurers Using Automated Underwriting,” LIMRA’s Industry Trends, blog post,
22 August 2017.

Insurance Administration Chapter 5: Individual Life Insurance: Financial Underwriting and Risk Classification 5.1
Chapter 5
Individual Life Insurance:

Financial Underwriting and
Risk Classification
Objectives
5A Describe the risks deterred by financial underwriting
5B List and describe the sources of financial information used in
underwriting individual life insurance
5C Identify three generally accepted needs for purchasing personal life
insurance
5D Describe the financial factors an underwriter assesses to determine
whether the amount of individual life insurance coverage requested is
appropriate
5E Use a factor table and the percentage-of-income rule to calculate the
maximum amount of coverage a proposed insured with a specified
income could qualify for
5F Explain how underwriters use the numerical rating system to classify
individual life insurance risks and calculate the total risk represented by
a proposed insured
5G Describe three methods of charging for substandard individual life
insurance risks and identify which method is most appropriate based
on whether a risk is expected to increase, decrease, or remain constant
over time

5.2 Chapter 5: Individual Life Insurance: Financial Underwriting and Risk Classification Insurance Administration
Outline
Financial Underwriting Risk Classification
 Risks Deterred by Financial 
Numerical Rating System
Underwriting 
Charging for Substandard Risks
 Sources of Financial Information
 Assessing Life Insurance Needs and
Financial Factors
 Tools to Determine the Appropriate
Amount of Insurance
A
lthough assessing mortality risk and personal risk is critical to the under-
writing process for each individual life insurance policy, an underwriter
also needs to evaluate financial risk factors. In this chapter, you’ll learn
about the specific risks that financial underwriting deters, the information that an
underwriter uses to determine an individual applicant’s financial condition, and
the methods that underwriters use to evaluate an applicant’s insurance coverage
needs. You’ll also learn how underwriters place proposed insureds into appropri-
ate risk classes and determine premium rate adjustments for substandard risks.
Financial Underwriting
An individual life insurance underwriter analyzes a proposed insured’s finan-
cial condition to determine whether (1) the proposed insured needs the coverage,
(2) the amount of coverage applied for is reasonable in relation to the need for
the coverage, and (3) premiums are affordable. The underwriter’s assessment of
the proposed risk based on financial factors is known as financial underwriting.
Note that when we refer to the proposed insured’s financial condition, we assume
that the proposed insured, applicant, and policyowner are the same person. If the
proposed insured is not the policyowner and will not be responsible for paying
premiums, the underwriter also assesses the policyowner’s financial condition to
evaluate the ability to afford the premium payments.
Failure to adequately gauge the proposed insured’s needs may result in over-
insurance. Overinsurance is an amount of applied-for insurance that, when com-
bined with in-force coverage, is excessive in relation to the need for which cover-
age is being purchased. Overinsurance increases an insurer’s exposure to financial
risk. Through financial underwriting, an insurance company avoids overinsuring
proposed insureds, thus limiting the insurer’s exposure to financial risk.
Risks Deterred by Financial Underwriting

Financial underwriting focuses on four potential sources of financial risk: lapse,
antiselection, speculation, and money laundering.

Lapse
Insurers know from experience that proposed insureds who buy more insurance
than they can afford or need tend to let their policies lapse, or terminate as a result
of nonpayment of premiums. If the lapse rate for a product is higher than the rate
that was projected when the product was designed, the lapses can negatively affect
an insurer’s profitability. Therefore, a primary goal of most insurers is maintain-
ing an excellent persistency rate, which is the percentage of a specified group of
contracts that remain in force during a specified period, such as a year. Financial
underwriting helps achieve this goal by confirming that the proposed insured can
afford the premium payments necessary to keep the policy in force. However,
when the application is for relatively inexpensive term life insurance, underwrit-
ers may forgo examining the proposed insured’s ability to pay premiums. In such
a scenario, the underwriter still evaluates the individual’s need for the amount of
applied-for coverage.
Antiselection
People who apply for more life insurance than they need or can afford may be
engaging in antiselection. Underwriters play an important role in guarding against
antiselection by verifying that the proposed insured has a justifiable need for the
amount of coverage requested.
For example, if a person has never applied for life insurance before and is doing
so now at an advanced age, the underwriter—suspecting antiselection—may
investigate. If the underwriter discovers an undisclosed impairment, he is likely
to request additional information and may even deny coverage. However, if the
underwriter determines that the proposed insured needs insurance to provide her
dependents with the means to pay for estate taxes after her death, the underwriter
is likely to approve coverage.
Although the omission or misrepresentation of medical risk factors is the pri-
mary manner in which antiselection occurs, financial factors can also contribute.
For example, if an applicant requests a large amount of coverage, the underwriter’s
investigation would include financial underwriting, which may reveal facts that
would prompt him to decline the coverage. Insurers’ experience has shown that
the possibility of antiselection tends to be greater when applicants seek policies
with large face amounts. In underwriting an application for a substantial amount
of coverage, the underwriter needs to know considerably more about the proposed
insured’s financial background than is necessary for cases involving smaller
amounts.
Speculation
A central tenet of life insurance maintains that a death benefit must not create
a situation in which an insured is worth more dead than alive. Accordingly, an
underwriter reviewing an insurance application must confirm that the purchase
does not involve speculation, which is the unethical purchase of insurance to
make a profit on the proceeds rather than to protect against the risk of financial
loss. Financial underwriting prevents speculation by ensuring that the amount of
coverage applied for is consistent with the potential financial loss.

In most cases, confirmation that a life insurance policy is not being used for
speculative purposes comes in the form of the policyowner’s insurable interest in
the life of the proposed insured. In other words, the underwriter must have reason
to believe that the policyowner will benefit from the insured’s continued existence
and suffer a financial loss if the insured dies. Without an insurable interest, a poli-
cyowner could actually profit from the insured’s death, either by illegally wager-
ing on the timing of the insured’s death or by directly causing the insured’s death.
The insurable interest standard only applies to third-party life insurance policies,
because an individual is assumed to have unlimited insurable interest in his own
life.
Example:
Barry Winters does not have a meaningful relationship with his aunt, Agnes,
and has not seen her in seven years. However, after hearing about Agnes’
bout with pneumonia last year, Barry decides to apply for a $500,000 life
insurance policy on Agnes, naming himself as the beneficiary.
Analysis:
The underwriter evaluating the application determined that Barry did not
have an insurable interest because he will not suffer a financial loss in
the event of Agnes’ death. The underwriter, therefore, concluded that the
coverage was speculative and denied the application.
Two types of life insurance arrangements involving third parties may involve
speculation:
Life settlements. A life settlement is the sale of a life insurance policy to
a third party for more than its cash surrender benefit and less than its face
amount. A policyowner may decide to sell her policy through a life settlement
because she no longer wants or needs the policy, or she needs to generate
funds. Under a life settlement, the policyowner—usually an older person with
a large-amount policy—assigns an existing policy to a company (generally
known as a life settlement provider) in return for a cash payment. The life
settlement provider assumes ownership of the policy, pays premiums when
due, and receives the death benefit when the insured dies.
Example:
Eight years ago, Jane Winchester, age 71, took out a $300,000 life insurance
policy on herself. Recently, Jane slipped in her house and broke her hip.
After her injury, Jane experienced persistent difficulty walking around her
house and decided to install ramps and railings and to create a new master
bedroom on the first floor. Her contractor estimated her renovation costs to
be $75,000. Due to the cost of the renovations, Jane could no longer afford to
pay her life insurance premiums and was prepared to let her policy lapse.
Jane’s financial advisor suggested a life settlement so that she could gain
immediate funds for her home repairs. Jane sold her $300,000 policy to
Wiley Arcadia & Associates, a life settlement provider, in exchange for a
lump sum of $85,000. Jane used the proceeds from the sale to pay for her
home renovation.

Because the life settlement provider expects to earn a profit by receiving

the full death benefit when the insured dies, opinions in the financial ser-
vices industry and general public are divided about whether life settlements
are speculative. However, life settlements are legal and are allowed by many
insurers as long as the policy was originally purchased in good faith, mean-
ing the policy was bought with the intention of providing a death benefit to a
beneficiary with an insurable interest in the life of the insured.
Stranger-originated life insurance (STOLI). A life insurance policy is not
purchased in good faith if the applicant intends to sell the policy to a third
party upon issuance. Stranger-originated life insurance (STOLI) is gener-
ally defined as life insurance for which an investor (or group of investors), act-
ing as a third party, instigates the purchase of a policy on the life of a person in
whom the investor has no insurable interest. As part of a STOLI arrangement,
the policyowner transfers ownership of the policy to the investor. Since the
investor, or group of investors, intends to receive an investment gain upon the
insured’s death, this activity is viewed as wagering on human life.
A STOLI transaction differs from a life settlement transaction in terms of tim-
ing and intent. If a policyowner applies for insurance with the intent to keep the
policy, but decides to sell his existing policy after 10 years because his personal
needs change, then his sale is a life settlement. However, if a policyowner sub-
mits an application for coverage knowing she intends to sell her contract to a
prearranged buyer eventually, then her sale is a STOLI transaction.
Example:
Bailey March, age 67, dreamed of sailing around the world but never
had enough money saved to fund a sailing trip. While at a boat show, he
struck up a conversation with Arnold Wolf, an investment advisor with
Zelphia Advisors. Bailey expressed his desire to purchase a boat and
lamented his inadequate savings. Arnold proposed a mutually beneficial
arrangement wherein Bailey would apply for a $1,450,000 life insurance
policy under Arnold’s guidance. Once the policy was in force, Bailey would
sell the policy to Zelphia. In exchange, Zelphia would give Bailey a lump
sum of $175,000, enough to buy a boat plus equipment for his trip. In
addition, Zelphia would pay all future premiums. Bailey happily agreed,
unknowingly helping Arnold to apply for a STOLI policy.
Figure 5.1 lists red flags that underwriters should watch for to indicate a poten-
tial STOLI transaction.
STOLI is illegal in many states in the United States and is considered insurance
fraud in some jurisdictions. The National Association of Insurance Commission-
ers (NAIC) and the National Conference of Insurance Legislators (NCOIL) cre-
ated model laws to help states regulate life settlements and prevent STOLI trans-
actions. Additionally, an insurer may require an applicant to sign a statement of
policyowner intent with warnings about committing insurance fraud.

Figure 5.1. Warning Signs of STOLI Policies
•• Age of proposed insured is 65 or older.

•• Application is for a high face amount (generally $1 million or more).
•• Application is for a large face amount and proposed insured has
no previous coverage history.
•• Inspection report shows previous coverages not disclosed in the
application.
•• Listed beneficiary seems unusual, such as an out-of-state trust with
no discernible connection to the insured or an irrevocable trust
established near the time of policy issue.
•• Premiums are to be paid by someone other than the policyowner.
•• Premium payments are financed by a loan with the policy as
collateral.
Money Laundering
Insurance companies are required to comply with federal laws designed to detect
and prevent money laundering. Money laundering is the practice of engaging
in financial transactions to hide the identity, source, and/or destination of money
associated with criminal activity.
The USA Patriot Act of 2001 is a federal law designed to strengthen the federal
government’s ability to investigate, prosecute, and seize the assets of terrorists.
The Patriot Act extended anti–money laundering (AML) requirements to all finan-
cial institutions, including insurers. Additionally, each insurer’s AML compliance
program is required to train and monitor any financial professionals that sell their
covered products. Examples of products covered by AML rules are individual per-
manent life insurance policies, individual annuity contracts, and other insurance
products with cash value or investment features.
The Financial Crimes Enforcement Network (FinCEN) is a bureau of the
U.S. Treasury Department that requires financial institutions, including insurers
that sell covered products, to have AML programs in place. These programs must
Include policies, procedures, and internal controls to monitor for money laun-
dering
Designate a compliance officer responsible for the implementation and main-
tenance of the AML program
Provide ongoing training for employees responsible for AML compliance
Use independent testing to confirm that the company’s AML program com-
plies with federal law
As part of their AML programs, insurers must demonstrate due diligence
when collecting and verifying information about existing and potential customers.
This due diligence requirement is commonly referred to as Know Your Customer
(KYC). In addition to verifying customer identities, insurers need to monitor for

suspicious transactions and file Suspicious Activity Reports when appropriate.

A Suspicious Activity Report (SAR) is a form that a financial institution must
prepare and file with FinCEN whenever the institution detects evidence of a ques-
tionable financial transaction among its customers.
The Office of Foreign Assets Control (OFAC) is an office of the U.S. Trea-
sury Department that maintains a list of countries, individuals, and organizations
that participate in or sponsor terrorism and other illegal acts. Underwriters should
consult OFAC’s list to make sure that applicants, policyowners, proposed insureds,
and beneficiaries are not on the list.
Insurers typically comply with FinCEN and OFAC requirements by using com-
puter software designed to check transactions for signs of suspicious activity and
for the involvement of prohibited individuals and entities.
Criminals have used insurance products, such as permanent life insurance with
a cash value feature, to launder money. As a result, underwriters must remain alert
for suspicious situations that could indicate money laundering activities, such as
when an applicant
Applies for an insurance product that seems inconsistent with the customer’s
needs
Indicates a desire to use an unusual method of paying premiums, such as pay-
ing in cash
Shows little concern for the financial performance of a product but great inter-
est in the product’s early termination features
Is reluctant to provide identifying information when purchasing a product or
provides minimal or seemingly fictitious information
Sources of Financial Information

Most underwriters gather financial information about individual applicants from
three primary sources: (1) the application for insurance, (2) the financial profes-
sional, and (3) the inspection report. If additional information is needed due to
large dollar amounts of requested coverage or the presence of an unusual risk, an
underwriter might request tax documents and a financial questionnaire. In addi-
tion, if the proposed insured owns a business, the underwriter would likely review
the financial statements associated with that business. An underwriter may use a
financial worksheet to organize financial information and develop a clear picture
of an applicant’s financial condition.
Application for Insurance

The application for insurance provides the underwriter with an initial picture of
the proposed insured’s financial status. A person’s financial status includes his
(1) current income expressed in terms of amount, sources, and permanency, and
(2) net worth, which is an amount representing the difference between all of a
person’s assets and liabilities. Information from the application can also help an
underwriter determine whether the amount of insurance requested is appropriate.
See Figure 5.2 for examples of financially relevant information included in an
insurance application.

Figure 5.2. Information on the Insurance Application with Significance

to Financial Underwriting
INFORMATION UNDERWRITING SIGNIFICANCE
Age of proposed insured Years of future employment
Occupation Future potential income
Income Current income
Insurance in force and amount of Current and requested coverage

requested coverage compared to total needed coverage
Relationship between proposed

insured and policyowner, if not Presence of insurable interest
the same person
Relationship between proposed Presence of insurable interest

insured and beneficiary Justification of amount of coverage
Determination of appropriate
Net worth amount of coverage needed to
preserve a proposed insured’s estate
An underwriter may contact an applicant’s accountant or banking representa-

tive to verify data from the application if the amount of requested coverage is
large, the applicant has unusual income streams, or the applicant’s net worth is
difficult to determine.
Underwriters can also use the internet to verify information found in the insur-
ance application. For example, an underwriter may search social media sites, such
as Facebook or LinkedIn, to see if an applicant’s profile matches the position and
employer listed in the insurance application. Any discrepancies between the results
of an online search and the insurance application warrant further investigation by
the underwriter. The following example illustrates one way that social media can
be used in underwriting.

Example:
Abraham checked a box on his insurance application indicating that he
was completely honest in disclosing his financial status. While reviewing
Abraham’s Facebook postings, Samantha, an underwriter for Wrightname
Insurance Company, noticed Abraham’s post about successfully lobbying his
homeowner’s association for permission to install a hot tub in his condo in
Florida. The post caught Samantha’s attention because Abraham’s application
stated that he owned a house in Florida worth $1.5 million.
Samantha entered the house’s street address into Zillow’s website and
discovered that the property Abraham claimed was his house was actually a
condominium building. Furthermore, Abraham’s condo was worth $450,000.
Abraham misrepresented the nature of his Florida property in his application
and had overreported his true net worth. As a result, Samantha reached out
to Abraham’s agent with additional questions on other aspects of Abraham’s
finances.
Financial Professional
Another resource available to the underwriter to provide context to the applicant’s
answers is the financial professional who submitted the application. A financial
professional who has a history of presenting qualified proposed insureds and has a
high degree of familiarity with the insurer’s products can serve as a reliable source
of financial information for an underwriter. If the underwriter has questions or
doubts about the applicant’s need for the amount of requested insurance, the
underwriter typically communicates with the financial professional to clarify the
submitted information. For requests of large amounts of coverage, the underwriter
may also ask the financial professional to provide a written explanation—often
called a cover letter—describing the purpose of the insurance and the method
used to determine the amount of coverage requested.
Inspection Report
Underwriters often use an inspection report to verify information from an applica-
tion or the financial professional or to gather further information. For example, an
underwriter may ask a consumer reporting agency to check the proposed insured’s
financial history for any liens—which are claims on the proposed insured’s prop-
erty in connection with outstanding debts—bankruptcies, poor credit history,
outstanding lawsuits, and other significant debts. An underwriter who finds sig-
nificant discrepancies between the information in the application and the inspec-
tion report might ask the consumer reporting agency to interview the proposed
insured’s attorney, tax advisor, and/or accountant to verify or gather further details
about financial information on the application.
The increased amount of information stored in electronic credit reports and
electronic inspection reports (EIRs) and the availability of advanced data analytics
reduces the time underwriters need to collect and analyze applicant information
and make underwriting decisions.

Tax Documents
Tax documents, such as a proposed insured’s W-2 form and annual income tax
return, provide valuable information to underwriters. The W-2 form is an Internal
Revenue Service (IRS) tax form used by employers in the United States to report
wages paid to employees and taxes withheld from employees within a given cal-
endar year. Additionally, a proposed insured’s personal income tax returns can
provide details about
Sources of income, including interest and dividend income
Alimony paid or received
Business income and expenses
Unemployment compensation
Social Security benefits

Medical or dental expenses
Charitable giving
An applicant can personally provide W-2 forms or tax returns to the insurer
or he can authorize the insurer to retrieve past tax returns directly from the IRS
by submitting a Form 4506-T, which gives the IRS permission to provide a third
party, the insurer, with a transcript of a taxpayer’s past data. The IRS usually
delivers the transcript to the insurer within 48 hours, saving considerable time for
an underwriter needing to verify a proposed insured’s income.
Tax documents help an underwriter assess the insurability of a proposed insured.
For example, when a proposed insured has listed alimony paid or large amounts
of business losses, the underwriter may question whether the proposed insured
has sufficient funds to pay for insurance. Similarly, if the proposed insured lists a
considerable deduction for medical or dental expenses, the underwriter may seek
further information about the proposed insured’s health, especially if the informa-
tion signals the possibility of a significant health impairment.
For applications involving large coverage amounts, some insurance companies
use statements from a proposed insured’s banker or certified public accountant.
These statements, which typically cover a multiyear period, contain information
prepared by qualified professionals about the proposed insured’s gross income, net
income, net worth, and financial losses.
Financial Questionnaire
For applications involving larger amounts of coverage—typically $1 million or
more—the insurer may require the proposed insured to complete and sign a finan-
cial questionnaire. Each insurance company typically designs its own financial
questionnaire to gather specific detailed information about a proposed insured. In
handling financial questionnaires, the underwriter is especially careful to adhere
to the insurance company’s rules of confidentiality to protect the privacy of the
applicant.

If a proposed insured is requesting life insurance as a means of paying a future

estate tax liability, the underwriter may use a financial questionnaire to gather
information about the estate itself, such as the
Total value of the estate
Composition of the estate (for instance, property, investments, and other

sources of assets)
Estimated value and the dates of all gifts made from the estate
Estimated amount of estate tax payable
Name of the person who will be responsible for paying the estate tax at the
time of the proposed insured’s death
When the prospective policyowner is not the proposed insured, many insur-
ers will request a financial questionnaire to acquire information about the future
policyowner’s financial status to determine her ability to pay the policy’s renewal
premiums.
Financial Statements
An individual proposed insured who owns a business introduces another ele-
ment of risk. To evaluate such risk, the underwriter typically requests financial
statements to determine the value and stability of the business and the proposed
insured’s income and net worth.
In assessing financial statements, an underwriter usually considers the follow-
ing information:
The historic trend of profit or loss in the business, typically for a period of at
least three to five years prior to the date of the insurance application
Financial obligations to which the business is or will be committed
Evidence of plans to expand, restructure, or sell the business

The debt load of a business can fluctuate significantly during the course of a
year. Therefore, an underwriter typically favors annual financial statements over
recent quarterly reports when reviewing the amount of debt a company carries.
Multiyear trend analysis allows for a better measure of the company’s ongoing
financial strength or weakness. Figure 5.3 describes the types of financial state-
ments an underwriter may examine.

Figure 5.3. Financial Statements Used by Underwriters

•• Statement of owners’ equity. A statement of owners’
equity is a financial statement that shows the changes in
owners’ equity in a business during a specified period. In this
context, equity is the current value of the funds invested in a
business by its owners. The underwriter uses the statement
of owners’ equity, also known as a statement of changes
in owners’ equity, to determine the dollar amount of the
owners’ shares in a business.
•• Balance sheet. A balance sheet is a financial statement
that shows a business’s financial position at a specific point
in time – for example, on the last day of the calendar year.
The b alance sheet includes information about (1) the assets of a business, which are the items
of value the business owns; (2) the liabilities of the business, which are the debts and future
obligations that the business must pay; (3) and the owner’s equity. The owner’s equity is cal-
culated by subtracting the total dollar amount of the business’s liabilities from the total dollar
amount of the business’s assets.
•• Income statement. An income statement, also known as a profit and loss statement, is a finan-
cial document that reports a business’s revenues (gross income) and expenses (costs of doing
business) during a specified accounting period and indicates whether the business experienced
a positive net income (profit) or a negative net income (loss) during the period. The underwriter
looks for signs of a financially unstable business by noting periods with a net loss or trends of
decreasing net incomes.
•• Cash flow statement. A cash flow statement, also called a statement of cash flows, is a finan-
cial statement that provides information about a company’s cash receipts (inflows), cash dis-
bursements (outflows), and the net change in cash (the difference between cash inflows and
cash outflows) during a specified accounting period. Aggregate cash flow information is split
into the business’s operating, investing, and financing activities. This statement helps an under-
writer assess a firm’s ability to generate adequate cash from continuing operations. A company
that shows decreasing net cash inflows from year to year is likely experiencing financial dif-
ficulty.
•• Annual report. Some businesses—typically those that sell shares of stock to the public—
produce annual reports that are helpful to an underwriter. An annual report is a financial
document that a corporation issues to its stockholders and potential investors to report on
the company’s business activities and financial performance during the preceding year. The
annual report includes independently audited financial statements, along with commentary
and analysis from the business’s management team concerning the organization’s current and
future performance and business position relative to competitors.
Assessing Life Insurance Needs and Financial Factors

Underwriters use financial information to ensure that (1) the proposed insured’s
stated need for insurance is valid, (2) the proposed insured’s need is not already
met by an in-force policy, and (3) the premium payments will be affordable.

Need for Life Insurance

Life insurance is designed to provide compensation for financial losses caused by
the insured’s death. Levels of coverage should be appropriate to avoid paying a
benefit greater than the loss is worth, a scenario resulting in an excessive gain for
the beneficiary. Financial underwriting provides context for an underwriter trying
to determine whether a proposed insured’s need for coverage is legitimate. Some
generally accepted financial needs for purchasing personal life insurance include
Family income protection. The proceeds of a life insurance policy can be
used to pay the living expenses of a family that were formerly paid by the
income of the deceased insured. Underwriters generally approve coverage for
family income protection if the applicant clearly demonstrates that the amount
requested to support the surviving family members is justified.
Estate settlement. An estate is legally defined as the totality of an individual’s
net worth, and includes all owned assets and all liabilities of the individual.
See Figure 5.4 for examples of assets and liabilities of an estate. At the time
of an insured’s death, life insurance proceeds can provide the funds necessary
to cover expenses associated with settling an estate, including payment of
estate taxes, medical expenses not covered by insurance, funeral costs, attor-
neys’ fees, and outstanding debts owed by the deceased. Underwriters usually
approve coverage intended to pay such expenses when evidence of the obliga-
tions is clear.
Figure 5.4. Examples of Assets and Liabilities of an Estate
Assets Liabilities
Cash Credit card debt

Stock & bond Mortgages
investments
Unpaid bills
Houses
Business debts
Land
Outstanding personal
Automobiles loans
Jewelry
Art collections
Charitable contributions. A person who has made regular contributions to

a charitable organization may wish to continue to support that organization
after her death by naming the charity as the beneficiary of her life insurance
policy. The policy proceeds can be used to replace the future contributions she
would have made. Even if a person has made no previous contributions, using
life insurance proceeds to benefit a charity is a legitimate and widely recog-
nized way of making charitable gifts. However, some insurers may want to see
a history of charitable giving by the applicant before approving life insurance
for this particular need.

Insurance in Force
Each insurer sets its own limits for the total acceptable amount of in-force coverage.
To make sure that the proposed insured is not overinsured, the underwriter evaluates
the amount of insurance that a proposed insured currently has in force with all insur-
ers and the amount of insurance for which the person is applying. If the proposed
insured is replacing one policy with another, the underwriter subtracts the amount
of the policy being replaced from the proposed insured’s total amount of coverage.
In some insurance companies, the calculation of the amount of insurance in
force includes an accidental death benefit (ADB), which provides a death benefit
in addition to the face amount of the policy if the insured dies in an accident as
defined by the policy. Some insurers establish separate limits for face amount cov-
erage and for ADB coverages.
When reviewing an application for personal life insurance, an underwriter typi-
cally does not include as in-force coverage (1) any business life insurance coverage
paid for by the proposed insured’s employer when the employer is the beneficiary,
(2) the death benefits of pensions and Social Security, and (3) group life insurance.
Financial Status
To determine whether the requested amount of coverage is appropriate, the under-
writer needs to analyze the proposed insured’s financial status. A full evaluation of
the person’s financial status includes reviewing current income, potential income,
net worth, and the impact of any personal bankruptcies.
Current income. Current income, also referred to as annual income, is the
total amount of income received by an individual during a given year. Current
income may be earned or unearned. Earned income is income that will not
continue after the insured dies—such as salary from a full- or part-time job,
regular bonuses and commissions, and stock options—and is a measure of the
financial loss that family members would suffer in the event of the insured’s
death. Unearned income, commonly referred to as passive income, is income
that may continue after the insured dies, such as interest income, dividends,
and capital gains on investments. Many insurance companies will consider
only the proposed insured’s earned income when determining the need for
insurance, but will consider both the earned and unearned income when deter-
mining ability to pay for the coverage.
Potential income. An individual may be in the process of establishing her
career and may not have reached her full earning potential. If a proposed
insured has an irregular or unstable income—for instance, if a person has
little business experience and is starting a new company—the underwriter
may have difficulty estimating the person’s potential income. To assist in the
evaluation of the case, the underwriter may consult with the chief underwriter
or obtain information about the performance of similar business enterprises.
Net worth. Underwriters use an individual’s net worth—the difference
between a person’s owned assets and liabilities—to determine the appropriate
amount of coverage needed to preserve the value of a proposed insured’s estate.
Note that while the face amount of life insurance in force is not included when
calculating net worth, the cash value of any cash value life insurance policy in
force is considered an asset and is included in the calculation.

Bankruptcy. An underwriter who discovers that a proposed insured has been

or is involved in a bankruptcy assesses the increased risks of antiselection and
lapse posed by the effects of the bankruptcy. The underwriter also investigates
whether an applicant involved in a bankruptcy still has the legal capacity to
enter into an insurance contract involving the payment of premiums. For a
proposed insured with a bankruptcy history, the financial professional submit-
ting the application should provide the underwriter with a letter explaining
what caused the bankruptcy, how the proposed insured has settled or is set-
tling the bankruptcy, and how the proposed insured is managing his current
finances. If a proposed insured is involved in an ongoing bankruptcy pro-
ceeding, many insurers postpone making an underwriting decision until the
individual has been discharged from bankruptcy for a certain period of time,
usually one to seven years.
Tools to Determine the Appropriate Amount of

Insurance
According to a 2016 LIMRA study on life insurance ownership, only 30 percent
of all U.S. households believe they can cover everyday living expenses beyond
several months if a primary wage earner dies unexpectedly.1 Because projecting
one’s future expenses can be difficult, underwriters cannot rely on the judgment
of a proposed insured to accurately estimate the amount of life insurance coverage
needed. Fortunately, there are tools available to assist underwriters in determining
appropriate coverage levels. These tools are guidelines, not firm decision-making
rules, and underwriters may consider other factors in determining an appropriate
amount of coverage for a specific case.
Factor Tables
Most underwriting guides developed by insurers include a factor table to deter-
mine a proposed insured’s income replacement needs for life insurance cover-
age. A factor table is a chart that shows the maximum amount of insurance—
expressed in multiples of a person’s salary or current gross earned income—that
an insurer typically approves in each of several age ranges. Factor tables consider
only earned income; unearned income can continue to be received after the death
of the insured and does not represent a financial loss that surviving family mem-
bers must overcome. Figure 5.5 provides an example of a factor table.
Example:
Antonia Rivera, a 53-year-old high school guidance counselor with a current
gross earned income of $70,000 and no in-force life insurance, applied for
$650,000 in coverage. Based on the multiple in Figure 5.5’s factor table,
her request is within the maximum ($70,000 × 10 = $700,000) and would be
approved by the underwriter.

Figure 5.5. Sample Factor Table for Life Insurance
Age Multiple of Current Gross

Earned Income
20–40 20
41–50 15
51–60 10
61–64 5
65 and older 4
An underwriter usually is not bound by the numbers in a factor table. Higher

amounts of coverage can be approved for proposed insureds whose current gross
earned income is low but who can be expected to have higher earnings in later
years, such as young doctors or attorneys. For such proposed insureds, an under-
writer often requests documentation indicating the proposed insured’s potential
future earnings. Since income replacement is not the only purpose of life insur-
ance, an underwriter should consider additional legitimate needs, such as estate
protection or key-person coverage for a business owner, before making a final
decision.
Example:
Rich Stein, a 24-year-old paralegal with a current gross earned income of
$45,000, applied for $1.5 million in life insurance coverage. Based on the
multiple in Figure 5.5’s factor table, his request is over the maximum ($45,000
× 20 = $900,000). However, the underwriter has received documentation
that Rich recently passed the bar exam. According to a copy of his firm’s
promotion policy, passing the bar exam makes Rich eligible to be promoted
to an attorney at his firm and will increase his salary to $75,000. Based on
Rich’s impending promotion, the underwriter looks beyond the factor table
calculation and approves the full amount of Rich’s coverage request.
Percentage-of-Income Rule
To determine an individual’s ability to pay premiums, some insurers use a
percentage-of-income rule, which calculates the amount of money a proposed
insured can afford to spend annually on insurance as a specified percentage of
the person’s current gross earned and unearned annual income. The percentage
generally varies between 6 percent and 20 percent, depending on the level of the
person’s income and the type and amount of coverage requested. Each insurer
establishes its own percentages for each insurance product.

Example:
Drylandia Insurance Company’s percentage-of-income rule states that a
proposed insured for one of its life insurance products can afford premiums
no greater than 7 percent of the first $10,000 of the applicant’s current gross
earned and unearned annual income, 11 percent of the next $15,000, and 18
percent of the remainder.
Joan French is applying for life insurance and currently earns $100,000 a year.
Based on Drylandia’s percentage-of-income rule, applied below, Joan can
afford to pay a maximum annual premium of $15,850 for her coverage:
$700 [0.07 × $10,000]
+ 1,650 [0.11 × $15,000]
+13,500 [0.18 × $75,000]
$15,850
By applying this rule, Drylandia’s underwriter knows that Joan’s approved

coverage level should not exceed the amount of coverage that $15,850 a year
in premiums can purchase.
While the percentage-of-income rule can be helpful to underwriters, insurers

use factor tables more frequently than percentage-of-income rules.
Future Estate Value Calculations

Life insurance benefits are often used to help pay estate taxes and other expenses
when an insured dies. Without the policy proceeds, beneficiaries may be forced to
sell portions of the estate to cover its tax liability, which can become complicated
when an estate holds illiquid assets such as real estate or ownership in a business.
While the exact dollar amount of the future estate tax liability cannot be known
in advance, an underwriter can project the future value of an estate and the estate’s
tax liability. Using these estimates, the underwriter can determine the appropriate
amount of life insurance coverage needed to pay for estate settlement expenses
while preserving the estate’s assets. The underwriter’s challenge is to determine
the necessary amount of coverage while not creating excess coverage. Overinsur-
ance of an estate creates an incentive for beneficiaries to harm the insured and vio-
lates the edict that an insured individual should not be worth more dead than alive.
Life insurance underwriting guidelines regarding estate conservation can vary
significantly among insurers. Generally, an underwriter starts with the proposed
insured’s current net worth, which includes both earned income and unearned
income. Next, a reasonable annual growth rate is applied to the current net worth
figure. Many insurers give 6 percent as an appropriate maximum rate, but higher
estimated rates of growth may be allowed if the application provides written docu-
mentation explaining the increase. Underwriters also need to factor in the number
of years of estate growth, either by applying a fixed number of years based on the
applicant’s current age or by using an estimated remaining life expectancy. Once
the future estate value has been calculated, the anticipated estate tax rate can be
applied to determine the tax liability. The underwriter uses the calculated amounts
to arrive at an amount of coverage in line with the insurer’s instructions.

Example:
Priya Palan’s estate includes luxury condominiums and other assets. Priya
wants to buy a life insurance policy so that her family will have the funds
needed to pay taxes on her estate without having to sell the estate’s assets
when she dies. She contacts her insurance agent, Kevin Reynolds, who works
with Byzantine Insurance Company to calculate Priya’s future estate value,
estate tax liability, and maximum coverage amount.
Based on Byzantine’s calculation procedures, Kevin inputs the following:
•• Current value of Priya’s estate: $1,215,000
•• Estimated annual growth rate of the estate: 6 percent
•• Estimated remaining years of estate growth: 30
Byzantine’s future value calculator estimates that Priya’s estate will grow to
be worth $7 million in 30 years. Suppose that current federal estate tax law
states that any amount of an estate’s value over a $5 million threshold is
taxed at 40 percent. The portion under $5 million is not taxed. As a result,
the taxable portion of Priya’s projected estate value is $2 million ($7 million
– $5 million). Priya’s future estate tax liability is estimated to be $800,000 ($2
million × 0.40).
Byzantine’s underwriting policy is to approve life insurance coverage up to 85
percent of the projected estate tax liability. Therefore, Byzantine will provide
Priya a maximum of $680,000 ($800,000 × 0.85) of coverage for estate tax
purposes.
Risk Classification
After an underwriter has assessed the medical, personal, and financial risk factors
associated with a proposed insured, the underwriter considers the total risk of
issuing the policy and assigns a risk classification of preferred, standard, substan-
dard, or declined. In this section, you’ll learn how underwriters determine which
of these classes is appropriate for a proposed insured. You’ll also learn some of the
methods underwriters use to determine the premium rates for substandard risks.
Numerical Rating System

Most individual life insurance underwriters use the numerical rating system to
place a proposed insured into the appropriate risk class. The numerical rating
system is a risk classification method in which an underwriter calculates a numeri-
LEARNING AID cal value for the degree of risk a proposed insured presents to the insurer. The
underwriter then places the proposed insured in a risk class according to the
numerical value; higher numerical values represent higher degrees of risk to the
insurer.
Medical and personal risk factors are used in the numerical rating system, but
financial risk factors are not used. However, financial risk factors may lead an
underwriter to decrease the amount of coverage offered or to decline the proposed
insured’s application. For example, a proposed insured’s health becomes irrelevant
if the insurer determines that the policy is intended for money laundering activity.

When evaluating a proposed insured’s application, the underwriter typically

uses a score of 100 to represent the average, or standard, mortality risk. The under-
writer then assigns a positive number or negative number to each medical and
personal risk factor that has been shown statistically to have a positive or negative
impact on the mortality risk presented by the proposed insured.
Medical and personal risk factors that have an unfavorable effect on mortality
are assigned “plus” values (such as +25) and are called debits. Debits increase the
numerical value assigned to an applicant. In contrast, a proposed insured’s medi-
cal and personal risk factors that have a favorable effect on mortality are assigned
“minus” values (such as –25) and are called credits. Credits lower the numerical
value assigned to an applicant. All of the proposed insured’s debits and credits
are applied to the base score of 100 to determine the numerical value of the risk
represented by the proposed insured.
Example:
Mark, age 31, was born with an enlarged heart. The underwriter assigns Mark
a debit of +50 for this condition. However, Mark is diligent in getting regular
checkups with his physician. He exercises regularly, his blood pressure and
cholesterol levels are low, and his weight is in a healthy range for a person
of his height and age. Because of Mark’s attentiveness to practicing healthy
behaviors, the underwriter gives Mark a credit of –35. When combined with
the starting standard score of 100, Mark is assigned a numerical value of 115
(100 + 50 – 35).
Example:
Sally, age 43, has a moderate case of sleep apnea. The underwriter assigns a
debit of +100 to reflect this condition. Based on the underwriter’s build chart,
Sally is slightly overweight for her height and age. The underwriter adds a
debit of +15 for this factor. The underwriter learns that Sally’s father died of
sleep apnea at age 58 and assigns another debit of +50 for the heightened
risk illustrated by Sally’s family history. Sally has been using the sleep apnea
treatments recommended by her physician and is beginning to see some
reduction of her symptoms. The underwriter gives Sally a credit of –30 for her
efforts to mitigate her condition. When combined with the starting standard
score of 100, Sally is assigned a numerical value of 235 (100 + 100 + 15 +
50 – 30).
Total scores significantly lower than 100 indicate that a proposed insured is
suitable to be placed in the preferred risk class; total scores well above 100 indicate
that the proposed insured is a substandard risk—or possibly even an unacceptable
risk that must be declined. Generally, the higher the numerical rating an individual
has, the higher the premium rate charged to that individual will be. The higher
premium rate compensates the insurer for accepting the additional risk. Figure
5.6 provides an example of debits and credits being applied to an underwriting
worksheet.

Figure 5.6. Underwriting Worksheet

Life App $
Life Underwriting Worksheet ELR $
3
WP 3
AD GB VB PUA
Personal 3
Male 3
Non-Smoker +/- Request Requirements Receive Clear Waive
Female Smoker
Age: Para
Height Weight Med
Family History Ecg
Yes
MB No X-Ray
1
General Spec 2
Blood Profile
Insp.  MVR 47 
Aps/Dr
Aps/Dr
EP 1
18 2
23 
25 
29 
F37 
Smoking Q
F170
Fin. Ques.
17
Reinsurance
45
Branch Reply
02
Replacement
29
ELR/CTB Male Non-Smoker

Female Smoker
Age:
Height Weight
Family History
Yes
MB No
General
Financial Calculation Life A.D.

In Force (all Co’s)
New (all Co’s)
Total
Income: Required Income
Factor: $
Note: The total of the debits and credits equals 40, but the number representing the proposed insured’s mortality risk is
140, representing the standard mortality of 100 plus the total of the debits and credits.
The information an insurer uses for numerical rating is contained in a document

known as an underwriting manual, which is a guide for (1) assigning numeri-
cal values (debits/credits) to risks, (2) describing impairments, and (3) outlining
underwriting actions. An underwriting manual, which is typically in electronic

form, uses an insurer’s own assumptions about risk factors and expected mortal-
ity. As a result, values and ratings can vary from one insurer to another. Most
insurers emphasize that the suggested actions and ratings listed in their underwrit-
ing manuals are intended to be flexible and may be modified by an underwriter
according to individual circumstances. Figure 5.7 lists the information commonly
found in an underwriting manual.
Figure 5.7. Typical Information in an Underwriting Manual
•• A list of debits and/or credits for specific impairments and personal

factors
•• Descriptions of various impairments associated with each organ
and system of the body
•• An index listing synonyms and derivative terms for characteristics,
with page references
•• A list of basic laboratory test data and a range of “normal” values for
the most commonly used laboratory tests
•• A glossary of symptoms, medical terms, and medical a bbreviations,
to help underwriters interpret medical information
Charging for Substandard Risks

A proposed insured may fail to meet the requirements for the standard risk class
but still be insurable as a substandard risk. Insurers compensate for accepting the
increased mortality risk by charging a higher premium rate than the rate for a
proposed insured who qualifies as a standard risk. Charging more to people who
represent higher risks to the insurer than to people who represent lower risks is one
way that an insurer stays equitable to all of its insureds. To determine the premium
rates for substandard risks, underwriters use the table rating method, the flat extra
premium method, or a combination of the two. The approach to charging for a par-
ticular substandard risk depends on whether the mortality risk of a given medical
or personal factor is assumed to increase with age, remain constant, or decrease
with age. Details for making premium adjustments based on these methods can be
found in the insurer’s underwriting manual.
Table Rating Method

Underwriters use the table rating method when individuals classified as substan-
dard risks possess extra mortality risks, such as diabetes or cardiovascular dis-
ease, that increase with the insured’s age. The table rating method adjusts indi-
vidual life insurance premium rates to compensate for extra mortality by dividing
substandard risks into broad groups—or tables—according to the values assigned
by the numerical rating system.

The extra mortality for each substandard group is expressed as a percent-

age added to standard mortality. Predictions about standard mortality are based
on each insurer’s actual mortality experience and may vary among insurers.
The total mortality for each substandard group is presented in an extra-percentage
table, which is a document that lists all the tables used in the table rating method.
Each table is labeled by either a number or a letter of the alphabet and typically
represents an additional 25 percent increase in the standard premium. Underwrit-
ers calculate a proposed insured’s numerical rating and determine which table
applies to that rating. The table rating is then entered into the insurer’s admin-
istration system, which automatically calculates the appropriate premium rate.
For example, if an underwriter determines that a person is a substandard risk and
falls into the first extra-percentage table, then the person’s premium rate will be
125 percent of the standard premium rate. If the standard premium for this person
would be $100, then the individual is actually charged a premium of $125 ($100
× 1.25) based on the table rating method. If a person falls into the second extra-
percentage table, the person’s premium rate will be 150% of the standard premium.
Underwriters use table ratings for the majority of substandard risks. While the
table ratings for substandard risks are generally structured the same from one
insurer to another, insurers can differ in the application of the tables due to vary-
ing assessments of an individual’s mortality risk. As an example, a person with an
impairment who would be rated as Table 1 (or A) at one insurer might be rated as
Table 2 (or B) at another insurer because of the same impairment.
Many underwriters classify total numerical mortality values above 125 as sub-
standard or declined and classify total numerical values below 125 as either stan-
dard or preferred. Figure 5.8 is one example of an extra-percentage table.
The total mortality for each table is equal to 100 (representing standard mor-
tality) plus the sum of all debits (representing unfavorable mortality factors) and
credits (representing favorable mortality factors). Using Figure 5.8 as an example,
Table 1’s (or A’s) total mortality of 125 equals 100 debits for standard mortality
plus 25 debits for the extra mortality. The composition of the extra mortality fig-
ure can vary. For instance, the net value of 25 debits for extra mortality could be a
result of 50 debits for extra mortality offset by 25 credits for favorable mortality.
Each table represents an increase in extra mortality of 25 debits. Therefore, a
case rated Table 1 has a mortality rating of 125, or 1.25 times the standard mortal-
ity; a case rated Table 2 has a mortality rating of 150, or 1.5 times standard mortal-
ity; and so on.
Another way to calculate the amount of extra mortality represented by each
table is to multiply the table number by 25, then add 100 (which represents stan-
dard mortality). For instance, a case rated Table 4 has a mortality rating of 200
[(4 × 25) + 100] or 2 times the standard mortality, and a case rated Table 5 has a
mortality rating of 225 [(5 × 25) + 100] or 2.25 times the standard mortality.
Flat Extra Premium Method

The flat extra premium method is a method of charging for substandard risks in
which the insurer adds to the standard premium a specified extra dollar amount
for every $1,000 of individual life insurance coverage. In contrast to the table
LEARNING AID rating method, the flat extra premium method is used mainly in cases involving
extra mortality risk that is considered to be either constant or decreasing with the
insured’s age.

Figure 5.8. Typical Extra-Percentage Table
Total Mortality
Table (or
(Standard Mortality +
Substandard Class)
Extra Mortality)
1 or A 125
2 or B 150
3 or C 175
4 or D 200
5 or E 225
6 or F 250
8 or H 300
10 or J 350
12 or L 400
16 or P 500
Note: Tables 7, 9, 11, 13, 14, and 15 do exist and each increases by 25 debits over the prior table, but underwriters rarely use
these tables.
The amount of extra premium charged under this method varies according to
the amount of risk represented by the medical impairment or personal factor, but
does not vary from year to year during the time the extra premium is charged.
For example, an insurer may charge $2 per $1,000 for a mild impairment, but $7
or $15 per $1,000 for a more serious impairment. Whatever the amount charged,
it will remain the same ($2 or $7 or $15) throughout the period that the flat extra
premium is charged.
An insurer may charge either a temporary or a permanent flat extra premium.
A temporary flat extra premium is an amount added to the premium for a risk
factor for which the extra mortality risk is expected to decrease and eventually
disappear over a limited time period. A temporary flat extra premium is charged
for impairments such as cancer in remission and a heart condition from which
the proposed insured is recovering. Most insurers program their administration
systems to remove this type of premium automatically at the appropriate time.
When insurers do impose a flat extra premium for a medical impairment, the extra
premium is almost always temporary.
A permanent flat extra premium is an amount added to the premium for cases
in which a personal risk factor is expected to remain constant throughout the life
of the policy. This type of rating is most commonly used for individuals with
risky lifestyle factors such as hazardous occupations, dangerous avocations (such
as aviation, rock climbing, or auto racing), or unfavorable driving records.

Combining Methods
Insurers often use a combination of a flat extra premium and a table rating when
the risk of death is expected to increase during a certain period and to decrease
after that period. For example, experience has shown that people who have been
treated for certain cancers have the greatest risk of recurrence during the first 10
years following their initial treatment. After 10 years, the risk of recurrence is
much lower, although it still exists. Thus, a proposed insured who was treated for
cancer six years before applying for life insurance might be accepted with a Table
4 rating (200 percent), plus a $15 flat extra premium per $1,000 of coverage for
each of the next four years. After four years, the $15 flat extra premium would be
removed automatically, but the table rating would continue.
Key Terms
financial underwriting equity
overinsurance balance sheet
lapse assets
persistency rate liabilities
speculation income statement
life settlement cash flow statement
stranger-originated annual report
life insurance (STOLI) estate
money laundering current income
USA Patriot Act of 2001 earned income
Financial Crimes Enforcement unearned income
Network (FinCEN) factor table
Suspicious Activity Report (SAR) percentage-of-income rule
Office of Foreign Assets numerical rating system
Control (OFAC) debit
financial worksheet credit
financial status underwriting manual
net worth table rating method
lien extra-percentage table
W-2 form flat extra premium method
Form 4506-T temporary flat extra premium
statement of owners’ equity
Endnotes
1. LIMRA, Life Insurance Ownership in Focus (Windsor, CT: LL Global, Inc., © 2016).

Insurance Administration Chapter 6: Underwriting Specialized Individual Life Insurance Products 6.1
Chapter 6
Underwriting Specialized
Individual Life Insurance
Products
Objectives
6A List the basic features of multi-life policies, juvenile insurance policies,
and direct-to-consumer policies and explain how each type of coverage
is typically underwritten
6B Describe the needs met by business life insurance and list the basic
features of a buy-sell agreement, key-person life insurance, split-dollar
life insurance, and creditor insurance
6C Describe the underwriting process for business life insurance and
identify the warning signs that indicate a business is in financial
difficulty or may be engaging in commercial fraud
6D Describe three methods an underwriter can use to estimate the value of
a business
6E Calculate a debt-to-equity ratio, current ratio, quick ratio, and
return-on-equity (ROE) ratio and explain how an underwriter uses
these ratios to assess a business’s solvency, liquidity, and profitability
6F Identify the underwriting considerations for each type of business life
insurance coverage
6G Describe underwriting considerations for policy replacements
6H Identify different types of supplemental benefits that life insurance
policies may provide and describe typical underwriting considerations
for each type of benefit

6.2 Chapter 6: Underwriting Specialized Individual Life Insurance Products Insurance Administration
Outline
Underwriting Niche Policies Underwriting Policy Replacements
 Multi-life Policies  Section 1035 Exchanges
 Juvenile Insurance Policies
Underwriting Supplemental Benefits
 Direct-to-Consumer Policies
 Disability Benefits
Underwriting Business  Family Benefits
Life Insurance  Guaranteed Insurability Benefits
 Business Needs Met by  Accidental Death Benefits
Life Insurance  Accelerated Death Benefits
 Financial Assessment of a Business
 Underwriting Considerations for
Types of Business Life Insurance
I
n the previous chapters, you learned about the underwriting process for basic
individual life insurance policies. In this chapter, you will see how insurers
underwrite life insurance policies that meet customers’ specialized personal
and business needs.
You will also learn how insurers underwrite (1) new policies that replace
in-force policies and (2) supplemental benefits, which are benefits or additional
coverages added to the coverage specified in a basic insurance policy.
Underwriting Niche Policies

In addition to basic life insurance policies, some insurers offer policies that are
designed to address the personal insurance needs of a specific marketing segment,
or niche. These niche policies are underwritten using many of the same factors
as traditional life insurance policies. Three common niche policies are multi-life
policies, juvenile insurance policies, and direct-to-consumer (D2C) policies.
Multi-life Policies
A multi-life policy is a life insurance contract that is written on two or more lives.
The two most common types of multilife policies are the
Joint life insurance policy, also known as a first-to-die life insurance policy,
which pays policy proceeds when the first of two (or more) insureds covered
by the policy dies. Couples often purchase joint life insurance as a way to
replace the income of a deceased insured and help the surviving insured pay
ongoing living expenses.
Last survivor life insurance policy, also known as a second-to-die life
insurance policy, which pays policy proceeds only after all people insured by
the policy have died. Couples often purchase last survivor life insurance as
part of an estate plan to cover estate taxes and preserve estate assets for the
insureds’ heirs.
When establishing the premium rate for a multi-life policy, an underwriter
evaluates each proposed insured separately. If the risks are relatively equal, the
underwriter usually bases the premium rate on the average age of the proposed

insureds. The average-age approach often results in a lower premium amount for
all insureds than if the individuals purchased separate policies. If the underwriter
determines that one of the proposed insureds is a ratable risk, the policy typically
can be issued at an increased premium rate.
Although underwriters assess many of the same factors for individual and
multi-life insurance policies, the underwriting standards for last survivor life
insurance usually are more lenient. For example, last survivor policies sometimes
insure a person who would have been declined for individual life insurance cov-
erage. Insurers make this allowance because the benefit won’t be paid until the
death of the last insured, who is likely healthier and expected to live longer than
the other insured.
Financial factors also affect underwriting for multi-life policies. For joint life
insurance, the underwriter considers the projected income needs of the surviving
insured upon the death of the first insured, as well as estate taxes that will be due
upon the death of the second insured. For last survivor life insurance, the under-
writer must project estate taxes for years into the future, which involves estimating
the future value of an estate based on assumptions of growth and the proposed
insureds’ future expenditures.
Juvenile Insurance Policies

A juvenile insurance policy is an insurance policy issued on the life of a child
but owned and paid for by an adult—usually the child’s parent, grandparent, or
legal guardian—who is typically also the beneficiary. One purpose of juvenile
insurance is to pay final expenses in the event of the insured child’s death. In addi-
tion, a whole life juvenile insurance policy covers the child into adulthood without
requiring additional evidence of insurability and the policy’s accumulated cash
value can be used for a child’s future expenditures, such as college tuition or a
down payment on a house.
Most insurers will wait to approve coverage until a newborn child is at least
15 days old and has been released from a hospital. For infants born prematurely,
insurers may postpone issuing coverage until the child’s weight and other mea-
sureables reach normal levels for his age. Insurers treat adopted children the same
as biological children, but usually do not issue coverage until an adoption is final.
Underwriters use most of the same information sources to assess a juvenile
proposed insured as those used for an adult. Some insurers offer a special, non-
medical juvenile application that is similar to an adult nonmedical application and
is completed by the adult applying for coverage on the child’s life. If the infor-
mation provided on the juvenile application indicates that the child has a health
problem or if the parent or legal guardian cannot complete the nonmedical por-
tion of the application, then the underwriter may request an attending physician’s
statement (APS).
When parents are not the owners of a policy covering a child, the underwriter
typically obtains the parents’ written consent to the issuance of the coverage.
The underwriter also requires the parents, who should have firsthand knowledge
of the child’s current state of health, to attest to the accuracy of responses to medi-
cal questions. The parental consent is kept on file with the application and is made
a part of the policy.

In evaluating an application for juvenile insurance, underwriters consider

many of the same factors used to assess an adult. These factors include the age and
medical history of the child and the financial status of the policyowner. However,
insurers typically do not require a physical examination for juvenile insurance
because (1) after the first year of life, the mortality rate for children is very low and
(2) most juvenile insurance applications do not involve large amounts of money
and therefore do not justify the expense of a physical examination.
Underwriters evaluate the requested policy face amount and policy ownership
differently for an application for juvenile insurance than for an application for an
adult. In evaluating the appropriateness of the face amount requested, an under-
writer considers the insurance in force on the parents or guardian. Some insurers
require parents or guardians to have life insurance coverage—either in force or
applied for—on their lives for an amount at least equal to the amount requested for
the child. Other companies require the parents or guardians to have up to twice as
much coverage as the juvenile proposed insured. Such requirements are in place
to prevent antiselection. Some state jurisdictions also limit the amount of coverage
that can be issued on the life of a juvenile.
In addition to the prospective policyowner’s level of coverage, an underwriter
considers whether other children in the family are insured at similar levels. If only
one child of several is insured, or if one child is being insured for a larger amount
of coverage than are the other children, the underwriter investigates the reason for
the different treatment of that child. Unequal treatment of children when applying
for life insurance coverage may indicate the presence of antiselection. However,
singling out one child for life insurance coverage might be justified if that child
brings in an income—for example, as a child actor—that would represent a finan-
cial loss if the child dies.
Underwriters also consider who will be the owner and the beneficiary of a
juvenile policy. Usually, only parents, grandparents, or legal guardians are con-
sidered to have an insurable interest in the life of a child. Therefore, insurers typi-
cally require that one of these parties must be the owner and/or the beneficiary
of the policy. When grandparents purchase a juvenile policy, an underwriter also
considers insurance in force and applied for on all other grandchildren to ensure
antiselection is not present.
Some juvenile policies include a waiver of premium for payor benefit, which
is a supplemental life insurance policy benefit that provides that the insurer will
waive its right to collect the policy’s renewal premiums if the payor—the person
paying the policy premium—dies or becomes totally disabled before the insured
child reaches a specified age, usually 21. Before approving this benefit, insurers
usually require basic evidence of insurability from the payor, such as the payor’s
age, occupation, height and weight, and a brief medical history. Insurers usually
don’t require a medical examination of the payor unless the payor’s medical his-
tory indicates that an examination is warranted. Moreover, insurers normally issue
the waiver of premium for payor benefit rider only if the payor is rated as a pre-
ferred, standard, or slightly substandard risk.
Direct-to-Consumer Policies
Direct-to-consumer (D2C) sales are non-face-to-face distribution programs
directed by the insurance company. In a D2C interaction, the insurance company
can encourage the purchase of its products through marketing directly to con-
sumers or the consumers can recognize their needs on their own and contact the

c ompany directly. Policies that are distributed through a direct response system
may be underwritten on a guaranteed-issue basis, underwritten on a nonmedical
basis, or fully underwritten.
When products are offered on a guaranteed-issue basis, no individual under-
writing takes place. Every eligible proposed insured who applies and meets speci-
fied conditions is automatically issued a policy. Note that guaranteed-issue does not
mean that everyone who applies is approved; it means that any proposed insured
who meets the eligibility requirements for the policy will be approved. The eligi-
bility requirements are relatively simple and typically focus on the insured’s age or
the amount of coverage already in force with the insurer. For example, guaranteed-
issue products usually limit coverage only to people within a certain age range,
such as between the ages of 50 and 85.
Guaranteed-issue products typically impose maximum limits on the face amounts
of coverage that will be issued to one person. The maximum amount of coverage
allowed usually decreases as the proposed insured’s age increases. Many guaran-
teed-issue products also have graded benefits, which are benefits that are limited
initially and become fully payable after the policy has been in force for a specified
number of years. If an insured of a guaranteed-issue policy dies within a certain time
frame—typically within two years of policy issue—the beneficiary usually receives
a return of the premiums paid, although some insurers pay a portion of the death
benefit. After the policy has been in force for the required duration, the insurer pays
the beneficiary the full benefit at the time of the insured’s death.
If a direct-to-consumer policy is underwritten on a nonmedical basis, the
insurer does not require a paramedical or medical examination. Instead, the appli-
cation asks a proposed insured to respond to certain medical history inquiries,
such as
Within the past five years, have you consulted a doctor or received medical
treatment for heart trouble, stroke, cancer, lung disease, chest pains, tumors,
convulsions, and/or diabetes?
Within the last five years, have you tested positive for the human immuno-
deficiency virus (HIV) or been told you have acquired immune deficiency
syndrome (AIDS)?
Within the last three years, have you consulted a doctor, been hospitalized, or
taken prescription medication?
Most insurers that use such direct-to-consumer policy applications either accept
or reject the application solely on the basis of the answers to these medical ques-
tions. However, after reviewing an applicant’s answers to the medical questions,
some insurers will go on to request additional medical information before accept-
ing or rejecting the application. In some companies, if the underwriter determines
that the proposed insured falls outside the parameters of the direct policy applied
for, the underwriter may suggest another product. In such a case, the underwriter
would request additional medical information from the proposed insured and
underwrite in accordance with that product’s guidelines.
Insurers that offer direct-to-consumer policies must be alert for antiselection.
The likelihood of antiselection is much greater with applicants seeking life insur-
ance policies with no underwriting requirement than with applicants applying
for fully underwritten coverage. Due to the higher associated risks, direct-to-
consumer policies tend to have higher premium rates than traditional, fully under-
written life insurance policies.

Underwriting Business Life Insurance

Like individuals, business organizations have a variety of reasons for buying insur-
ance. Such organizations address their needs through business insurance, which
is insurance that serves the needs of a business organization rather than those of
a person. The term business insurance includes both life insurance and property
and liability insurance, but the focus in this text is on business life insurance.
Unlike most personal life insurance, business life insurance is usually third-
party insurance. The proposed insured is not the applicant and will not be the
policyowner if a policy is issued. One example of an exception is a business life
insurance policy issued to the sole owner of a business: the proposed insured,
applicant, and policyowner are the same person.
As with personal life insurance, an insurable interest must exist for business
life insurance. For a business, an insurable interest is present if the premature
death of the insured party in a business relationship would result in a financial loss
to the surviving parties or to the business. For example, insurable interest gener-
ally is considered to exist when partners in a business partnership wish to insure
each other’s lives or a business wishes to insure the lives of certain key employees
who are essential to the continued success of the company.
In this section, you will learn about
Business needs for individual life insurance and the different kinds of policies
designed to meet these needs
The underwriter’s assessment of a business’s (1) level of need for life insur-
ance, (2) financial condition, and (3) ability to pay the premiums
Underwriting considerations for each type of business insurance product
Business Needs Met by Life Insurance

To protect its long-term interests, a business can request life insurance coverage
to (1) ensure business continuation, (2) attract and retain quality employees, or
(3) reassure creditors that a loan will be repaid.
Business Continuation Needs

Life insurance is often bought as part of a business continuation insurance plan,
which is an insurance plan designed to ensure the continued financial viability of
a business after the death or disability of an owner or other person important to the
LEARNING AID business. A business continuation plan usually takes one of two forms:
A buy-sell agreement. A buy-sell agreement is a contract between two or
more parties in which (1) one party agrees to purchase the financial interest
that a second party has in a business following the second party’s death or
permanent disability and (2) the second party agrees to direct his estate to
sell his interest in the business to the purchasing party. When life insurance
is used to fund a buy-sell agreement, the first party takes out a life insurance
policy on the second party’s life. Upon the death of the second party, the first
party uses the policy proceeds to purchase the business interest from the estate
of the second party.

Key-person life insurance. A key person is an individual whose continued

participation in a business is vital to the success of the business and whose
death or disability would cause significant financial loss to the business. A key
person can be anyone important to the business—including an owner, a top
salesperson, or an employee—who possesses special skills, knowledge, busi-
ness contacts, or other abilities. Key-person life insurance is individual life
insurance that a business purchases on the life of a key person with the ben-
efits typically payable to the business. The business owns, pays the premiums
on, and is the beneficiary of a key-person life insurance policy.
Employee Benefits Needs

To attract and retain quality employees, an employer often provides an employee
benefit plan, which is a program under which an employer provides its employees
with various benefits in addition to their wages. For example, group life insur-
ance is a popular employee benefit. Another type of life insurance benefit that
employers may offer to executive-level employees or key persons is participation
in a split-dollar life insurance plan. A split-dollar life insurance plan is a legal
arrangement between an employer and an employee that describes (1) how each
party to the arrangement will contribute to the employee’s life insurance premium
payments and (2) the nature of each party’s entitlement to the policy’s cash value
and death benefits. In other words, the employer shares the costs of premiums for
the employee’s individual policy—which is usually a cash value life insurance pol-
icy—and can recoup the costs at a later time. Either the employer or the employee
is the policyowner, depending on the terms of the arrangement.
The split-dollar plan explains the rights and responsibilities for each party
to the arrangement. If the policy is surrendered, the employer and the covered
employee will typically each receive the amount they paid in premiums from the
policy’s cash value. Since the accumulated cash value of a life insurance policy
on an executive or a key person can become substantial over time, the insured can
use her portion of the cash value amount as a source of supplemental retirement
income. If the insured dies, the employer can recoup its portion of the premi-
ums paid from the policy’s death benefit. The employee’s designated beneficiary
receives the remainder of the death benefit.
Creditor Protection Needs

Creditors sometimes want assurance that they will be repaid for a business debt
in the event of the death of a key person at the business who has borrowed funds.
Creditor insurance, also known as loan coverage or debt coverage, is coverage
designed to pay for the economic loss suffered by a creditor when a key person of a
debtor business dies before the debt is paid. To maintain the principle of insurable
interest, the proceeds of the creditor insurance policy are never greater than the
amount of the unpaid debt.

Financial Assessment of a Business

When underwriting business life insurance, underwriters examine the same risk
factors for proposed insureds—medical, personal, and financial—as they do when
underwriting individual life insurance that serves personal needs. However, if an
applicant is purchasing life insurance for business reasons, the underwriter focuses
more closely on the business’s finances than she would if evaluating the risk repre-
sented by an applicant who owns a business and is buying insurance for personal
reasons. Underwriters assess the value and financial well-being of a business to
ensure that (1) a legitimate need for the insurance exists, (2) the amount of cover-
age requested is appropriate, and (3) the business will be able to pay the premiums.
Many of the sources of financial information used in underwriting business
life insurance are the same as those used in underwriting personal life insurance.
These sources of financial information include
The application for insurance
The financial professional’s statement
An inspection report
The business’s income tax returns
The business’s financial statements

An underwriter may also use a specialized questionnaire called a business
financial supplement, which is a document that requests information about the
type of business, the current financial condition of the business, and the purpose
for which the insurance is being requested. Additionally, if a business’s creditor
has required the proposed insured to be covered by a specific amount of insurance,
the underwriter usually requests copies of relevant loan documents.
When reviewing audited financial statements, underwriters verify that accept-
able accounting methods were used to value assets and liabilities and to report
profits and earnings. Underwriters may ask the insurer’s accounting area for help
with investigating and understanding the business’s financial documents. The
insurer’s accountants can also help underwriters look for indications that a busi-
ness is in financial difficulty and may not be able to pay required premiums. See
Figure 6.1 for signs of financial stress in a business.
Because new businesses have a high rate of failure within the first two to three
years of operation, underwriting business insurance for a new company is more
conservative than for companies with a longer history of operation. The insurer is
concerned that a new business might fail before the insurer has collected enough
premiums to cover the expenses of underwriting, issuing, and administering the
policy.
While analyzing a business’s finances, underwriters also look for signs of com-
mercial fraud. Figure 6.2 lists some typical warning signs of commercial fraud.

Figure 6.1. Signs of Financial Stress in a Business
•• Negative cash flow from operations and inadequate financing

•• Excessive debt that probably cannot be paid within a reasonable time or cannot be paid
without reducing the funds that the business needs for maintenance and expansion
•• Unusual financing arrangements, such as loans from family members, subsidiaries of the
business, clients of the business, or disreputable loan institutions
•• Dependence on only a few projects or clients
•• A trend of declining sales or revenues
•• A history of defaults on loans or debts, denial of credit by lenders,
or recent financial restructuring
•• Unexplained or illogical sale of substantial assets
•• Bankruptcy
•• Labor strife
•• Recent or substantial litigation
•• Large losses that insurance did not cover
Figure 6.2. Warning Signs of Commercial Fraud
•• Evidence that the ownership of a company is being concealed

•• A partner or other key person has worked for a
number of
companies that are no longer in business
•• A partner or other key person is unable to provide information
concerning his business history and past associations
•• An overly complex organizational or partnership structure, or a
confusing web of subsidiaries and c onglomerates
•• Trade, bank, or business references that appear fraudulent or
unbelievably positive
•• Financial statements that have been issued at irregular intervals, list assets that cannot be
confirmed by other sources, use round figures instead of specific amounts, or list accounts
receivable that are inconsistent with other figures, such as inventory and purchasing records

Business Valuation
In addition to examining a business’s financial statements, underwriters want to
know the value of a business to determine the appropriate amount of insurance
coverage. Typically, a certified public accountant (CPA) for the business supplies
an assessment of the business’s value when providing the business’s financial
statements. If no assessment is provided, the underwriter needs to assess the value
herself, with help from the insurer’s accounting or investment department.
Underwriters can value a business using one of the following approaches:
An asset-based approach focuses on calculating the book value of the busi-
ness, which is the excess of the business’s assets over its liabilities.
An income-based approach focuses on the earning capacity of the business.
A market approach focuses on the selling prices of comparable businesses.

General guidelines have been established to aid an underwriter in the valua-
tion of businesses using a market approach. For example, on average, dental
practices sell for 70 percent of annual gross sales.
Figure 6.3 lists additional factors that underwriters consider during business
valuation.
Figure 6.3. Factors Considered When Assessing the Value of a Business

•• Tangible assets (such as buildings, equipment, and
inventory)
•• Intangible assets (such as goodwill, an established
customer base, favorable industry reputation, market
presence, franchise value, name recognition, a desir-
able location of the business, logos, copyrights,
trademarks, and patents)
•• Historic trend of profit or loss, especially the average
earning capacity over a period of at least three to five
years prior to the date of application for insurance
•• Performance of the business relative to its industry during the same
three- to five-year period
•• Current economic conditions and the future outlook of the business sector
in which the business operates and of the economy as a whole
•• Availability of qualified employees and customers so that the business
may maintain its present position, continue to grow and strengthen itself,
or both
•• Current price and recent sales of the company’s stock, if any, and the
dividend-paying capacity of the business
•• Financial obligations to which the business is or will be committed
•• Evidence of plans to expand, restructure, or sell the business

Solvency, Liquidity, and Profitability

Underwriters also assess a business’s financial condition by examining the busi-
ness’s solvency, liquidity, and profitability. This evaluation can be simplified by
using financial ratios. A ratio is a comparison of two numeric values that results
in a measurement expressed as a percentage or fraction. Financial ratio analysis
consists of calculating the relationships between various pairs of financial state-
ment values for the purpose of assessing a company’s financial condition.
Financial ratios alone do not provide much insight to underwriters. Therefore,
underwriters typically compare the ratios for a particular business to the range of
acceptable values established for other businesses in the same or similar indus-
tries. Appropriate value ranges differ by industry. By analyzing a business’s finan-
cial ratios, the underwriter can determine whether a business will continue to exist
and be able to pay premiums.
Solvency
Solvency is a company’s ability to meet its financial obligations on time. For an
insurer, solvency is the ability to maintain capital and surplus above the minimum
standard of capital and surplus required by law. Generally, solvency analysis com-
pares the amount of a company’s financial obligations with its resources available
to meet those obligations. A business that is unable to maintain sufficient funds to
pay its debts is not a sound candidate for business insurance.
One measure of solvency is a debt-to-equity ratio, also known as a debt ratio,
which is calculated by dividing a company’s total long-term debt by its owners’
equity:
Total Long-Term Debt
Debt-to-Equity Ratio =
Owners’ Equity

The greater the owners’ equity in relation to total long-term debt, the more
resources the company has to pay its debts. In general, the lower the proportion of
debt to owners’ equity, the more confident an underwriter should be with a com-
pany’s financial position.
For example, suppose a company’s owners’ equity is $4.75 million and total
long-term debt is $4.5 million. When we divide the total long-term debt by own-
ers’ equity, the result is 0.947:
$4,500,000
Debt-to-Equity Ratio = $4,750,000 = 0.947
Based on this company’s industry, an underwriter determines that the value of

the company’s debt-to-equity ratio should be less than 1. In this example, the value
of the debt-to-equity ratio is less than 1, so the company is technically solvent.
However, if the amount of total long-term debt was increased to $5.5 million and
owner’s equity remained $4.75 million, the value of the ratio would be greater than
1, indicating insolvency:
$5,500,000
Debt-to-Equity Ratio = $4,750,000 = 1.158

Liquidity
Liquidity is a company’s ability to easily convert its assets to cash for an approxi-
mation of their true value. While a company’s solvency indicates its ability to stay
in business over the long term, a company’s liquidity indicates its ability to meet
short-term needs for cash. To determine a company’s liquidity, many insurers use
a current ratio, which is calculated by dividing current assets by current liabilities:
Current Assets
Current Ratio =
Current Liabilities
Current assets are assets that can be readily converted to cash within one year.
Examples include cash, cash equivalents such as money market accounts, and
inventory. If a current appraisal of asset values is available, the underwriter uses
it. If such information is not available, the underwriter estimates the market values
of the business’s assets. Current liabilities are debts expected to be paid within
the following 12 months. Examples of current liabilities include salaries payable
and interest payable.
Although the minimum acceptable value for the current ratio varies greatly
among industries, underwriters generally require at least $2 in current assets for
every $1 in current liabilities. That is, current assets should be at least two times
as great as current liabilities.
Underwriters also sometimes assess a company’s liquidity by examining its
ability to pay its debts immediately. Immediate debt payment depends on cash or
its equivalent rather than proceeds from selling such assets as inventory, which
may sell slowly, at a lower-than-expected price, or not at all. A company’s ability
to liquidate debt immediately can be measured using a quick ratio, also called a
quick liquidity ratio or an acid-test ratio. The quick ratio is calculated by dividing
a company’s most liquid current assets—consisting of cash, liquid investments,
and accounts receivable—by the company’s current liabilities:
Liquid Assets
Quick Ratio =
Current Liabilities
The range of acceptable values for the quick ratio varies greatly by industry;
generally, the greater the excess of liquid assets over current liabilities, the more
liquid a company would be. Compared to the current ratio, the quick ratio provides
a more realistic view of a company’s debt-paying ability because the quick ratio
eliminates any reliance on noncash assets that are not immediately available to
meet emergency needs for cash.
Profitability
A company’s profitability is the overall degree of success a business has in gener-
ating positive returns for its owners, including the company’s ability to generate
profits and increase the value of the company. Profitability measures the produc-
tivity of the company’s assets and the return on the owners’ investment in the
company.

One ratio for evaluating profitability is the return-on-equity (ROE) ratio,

which measures the return to a company’s owners by relating profits to owners’
equity. Insurers typically define profits as net income, so the ROE ratio is deter-
mined by dividing net income by owners’ equity:
Net Income
Return-on-Equity (ROE) Ratio =
Owners’ Equity
Acceptable return on equity varies with the risk involved in a business. It can
also vary with the general state of the economy. Typically, underwriters expect
companies operating in higher-risk businesses to produce a higher ROE ratio than
companies operating in lower-risk businesses.
Figure 6.4 summarizes the use of financial ratios for analyzing businesses.
Note that the desired values provided in the figure are generalizations. The actual
value ranges that underwriters use often vary by industry.
Figure 6.4. Summary of Financial Ratio Analysis
Ratio Name Ratio Type Ratio Equation Desired Value Ratio Analysis
Debt-to-Equity Solvency Total Long-Term < 1; lower is Indicates the ability

Ratio Debt / Owners’ better of a business to pay
Equity debts over longer
period of time
( > 1 year)
Current Ratio Liquidity Current Assets / > 2; higher is Indicates the ability
Current Liabilities better of a business to pay
debts over shorter
period of time
( < 1 year)
Quick Ratio Liquidity Liquid Assets / > 1; higher is Indicates the ability
Current Liabilities better of a business to pay
debts immediately
Return-on-Equity Profitability Net Income / > 0.15; higher Indicates the ability of
Ratio Owners’ Equity is better a business to generate
profits on the owners’
investments
Underwriting Considerations for Types of

Business Life Insurance
For the most part, underwriting a business life insurance policy is similar to
underwriting a personal life insurance policy. However, each type of business life
insurance coverage has slightly different underwriting considerations.

Buy-Sell Agreements
When life insurance coverage is requested to fund a buy-sell agreement, the
underwriter
Evaluates the proposed insured’s medical, personal, and financial factors
Estimates the business’s value and the proposed insured’s financial interest in
the business
Confirms that the insurance is being purchased to continue the business
Verifies the ability of the prospective purchaser to run the business

Life insurance can be used to fund buy-sell agreements for (1) sole proprietor-
ships, (2) partnerships, and (3) small corporations.
A sole proprietorship is a business owned and operated by one person—or,
in some jurisdictions, by a husband and wife. The owner of a sole proprietorship
may enter into a buy-sell agreement with another person—usually a longtime or
trusted employee—who agrees to purchase the business from the sole proprietor’s
estate when the sole proprietor dies. This predetermined buyer then might pur-
chase life insurance coverage on the sole proprietor’s life. The individual purchas-
ing the policy has an insurable interest in the life of the sole proprietor if the policy
proceeds will be used to fund the buy-sell agreement. The underwriter typically
determines the amount of insurance to issue based on the value of the business.
A partnership is a type of company that is owned and operated by two or more
people (the partners), who jointly earn all company profits and are responsible
for all company debts. Although a partnership usually dissolves upon the death
of a partner, partners often plan for the continuation of a business after the death
of a partner by entering into a buy-sell agreement. The buy-sell agreement sets
out the terms under which a deceased partner’s interest in the partnership will
be purchased. Two kinds of buy-sell agreements can accomplish this purpose—a
cross-purchase agreement and an entity agreement.
A cross-purchase agreement is a type of buy-sell agreement in which each
partner agrees to purchase a share of a deceased partner’s interest in the partner-
ship by funding the agreement with an insurance policy on the life of each of the
other partners. Thus, each partner owns, pays the premiums on, and is the named
beneficiary of a policy on the life of each of the other partners. If one partner dies,
each surviving partner will receive the proceeds of a life insurance policy and can
use those proceeds to purchase a share of the deceased partner’s ownership inter-
est in the partnership from the deceased’s estate.
Example:
Two partners—Luis and Taj—own a business with a value of $100,000.
Luis’s share is worth $60,000 and Taj’s share is worth $40,000. Luis and Taj
enter into a cross-purchase agreement to protect the longevity of their
business.
Since Luis’s share is $60,000, Taj buys a policy of $60,000 on Luis’s life.
Since Taj’s share is $40,000, Luis buys a policy of $40,000 on Taj’s life.
If either partner dies, the other can use the death benefit to buy the
deceased’s share of the business

To determine the amount of insurance to approve, the underwriter needs to

know the value of the partnership and the value of the proposed insured’s owner-
ship interest. The insurance coverage of a proposed insured’s share is split pro-
portionally among the other partners according to the other partners’ ownership
share of the company. Added together, the policies insuring each partner should
total the amount of that partner’s ownership share. For instance, assume that three
partners—A, B, and C—own equal shares of a business valued at $150,000. To
maintain the business if one partner dies, each partner’s life is insured for $50,000
($150,000 ÷ 3). This means that partner B and partner C each buy a $25,000 policy
on partner A’s life. The combined face amounts of the policies that partner B and
partner C buy on partner A’s life add up to $50,000.
Because each partner must buy a life insurance policy on the lives of all other
partners, the total number of policies needed to cover the partnership can add up
quickly. For that reason, a cross-purchase agreement is typically used by small
partnerships with no more than four partners.
An entity agreement is a type of buy-sell agreement under which the partner-
ship—rather than the individual partners—agrees to purchase the share of any
partner who dies and to distribute a proportionate share of that ownership interest
to each of the surviving partners. The partnership purchases an insurance policy
on the life of each of the partners, pays the premiums, and is the named beneficiary
of each policy. If a partner dies, the partnership uses the life insurance policy pro-
ceeds to purchase the deceased partner’s share in the business from the deceased’s
estate.
To avoid antiselection with either the cross-purchase or the entity method of
funding a buy-sell agreement, all partners’ lives should be insured unless a strong
reason exists not to do so. Each partner is considered to have an insurable interest
in the lives of the other partners.
To determine the amount of insurance to approve, the underwriter needs to
know the value of the partnership and the value of the proposed insured’s interest
in the partnership. The underwriter typically uses a financial questionnaire that
focuses on the partnership to obtain initial figures on these values, as well as other
information about the partnership and partners.
A corporation is a legal entity, separate from its owners, that is created by the
authority of a government and that continues beyond the death of any or all of its
owners. Stockholders of a small corporation may enter into a buy-sell agreement
using either funding method described in the preceding section on partnerships.
However, in a corporate setting, the entity method of funding a buy-sell agree-
ment is known as a stock redemption agreement; the insurance coverage provides
the remaining stockholders of a company with money to buy back the stock of a
deceased stockholder rather than redistributing the shares to the surviving stock-
holders.
Stockholders of a small corporation each have an insurable interest in the lives
of the other stockholders, and a small corporation has an insurable interest in its
stockholders. To guard against antiselection, the underwriter makes sure that the
lives of all major stockholders are covered by insurance.
In deciding the appropriate amount of insurance coverage to issue in con-
nection with a buy-sell agreement involving a small corporation, an underwriter
determines the present and projected value of the stock and the business’s net

worth. Another underwriting concern for stock repurchase insurance is the pro-
portion of the total amount of stock owned by a proposed insured. If the proposed
insured’s stock holdings represent a significant portion of the company’s equity,
a need for the coverage exists. However, no real need for the coverage may exist
if the proposed insured’s stock holdings represent an insignificant portion of the
company’s equity.
Key-Person Life Insurance

Sometimes, a business’s insurable interest in the life of a key person is obvious, such
as when a business’s top salesperson is responsible for a large percentage of the busi-
ness’s sales. Other situations may require the underwriter to look more closely for
insurable interest. For example, additional information may be needed if
The proposed insured is nearing retirement age and has not been insured by
that business previously. The underwriter may inquire as to why that person
has suddenly become important to the company.
A company applies for a large amount of coverage on a proposed insured who
holds what appears to be only a moderately important position in the company.
The underwriter may investigate if the proposed insured is important enough
to warrant coverage.
A business appears to have other equally valuable employees who are not
being proposed for key-person coverage. The underwriter may question why
the business is singling out the proposed insured.
The size of a business is another factor in determining the business’s need for
key-person coverage. Generally, as a business grows larger and has more employ-
ees, the loss of one person is less likely to produce a significant loss to the business.
In evaluating the appropriate amount of insurance necessary to cover a key
person, the underwriter determines the proposed insured’s monetary value to the
company. Generally, this value is based on the amount of the proposed insured’s
compensation multiplied by a factor that represents the cost to recruit and train a
replacement and to recover from the loss of the key person’s skills, special knowl-
edge, and other benefits to the business. The monetary value of the proposed
insured is usually 5-10 times the proposed insured’s current annual salary, but
the underwriter also may include the dollar value of other compensation, whether
in cash (such as bonuses) or in fringe benefits (such as employer-provided health
insurance or use of a company car). Underwriters also need to consider the value
of the business to avoid insuring a key person for more than the business is worth.
Underwriters pay particular attention to applications for insurance for key peo-
ple working in multinational companies—businesses that operate in two or more
countries. An underwriter may need to review financial documents that are writ-
ten in another language, abridged, or unaudited, or that use accounting terms with
different meanings from those in the underwriter’s country.

Split-Dollar Life Insurance Plans

The individual life insurance policies that are part of split-dollar plans are under-
written in basically the same manner as any personal individual life insurance
policy. The underwriter takes into account medical, personal, and financial factors
in assessing the risk that a proposed insured represents. Also, the underwriter
analyzes the employer’s financial condition, but the extent of the analysis depends
on the employer’s ownership interest in the policy and the amount of coverage
requested.
Creditor Insurance
In underwriting creditor insurance, an underwriter considers the following
questions:
Does the borrower have any means other than life insurance to repay the
debt? An underwriter might investigate whether the loan was used to pur-
chase something that can serve as collateral for the loan, and, if so, whether
the collateral will continue to produce income that could be used to pay off the
loan. If it seems likely that the borrower will need to rely on the life insurance
proceeds to pay off the loan, then the underwriter may suspect antiselection
and decline the case.
When will the loan be repaid? An underwriter may want to see the debt
repayment schedule to determine how long the borrower will have the loan.
Generally, issuing creditor insurance for short-term loans is not in an insurer’s
best interest because a short-term creditor policy may lapse before the insurer
can recover the costs of underwriting, issuing, and administering the policy.
How long has the loan been in existence? If a company applies for creditor
insurance a significant amount of time after a loan was granted, an underwriter
would consider the possibility of antiselection. Perhaps the debtor company’s
financial condition or the health of the proposed insured has deteriorated since
the loan was granted. The underwriter verifies that loan payments have been
made in a timely fashion, the debtor’s financial condition is sound, and the
proposed insured is healthy.
Is there any overlap between creditor insurance and key-person insur-
ance? As one example, a creditor might insert a clause in a loan agreement
requiring immediate repayment of the debt if a key person dies since that
person’s death could present a loss so severe that the debtor business may
not survive. Meanwhile, the business may purchase key-person life insurance
on the same person for an amount of coverage sufficient to both pay off the
loan and compensate the business in other ways for the key person’s death. If
one of these types of business life insurance coverages already exists on an
individual, the underwriter checks to ensure that the total amount of coverage
does not exceed the total need for coverage.

Underwriting Policy Replacements

Over time, circumstances can cause a policyowner’s personal or business insur-
ance needs to change. As a result, the policyowner may want to replace her exist-
ing policy with another policy. Typically, applicants replace a policy to get (1) the
same face amount for a lower premium, (2) a higher face amount for the same pre-
mium, or (3) to obtain new features, such as a higher interest rate on the policy’s
cash value.
Policy replacement can occur internally or externally. In an internal
replacement, the new policy is purchased from the same insurer that issued the
original policy. In an external replacement, the new policy is purchased from
an insurer other than the insurer that issued the original policy. Most internal
and external replacements are underwritten in accordance with the current under-
writing guidelines of the replacing insurer. However, sometimes insurers reduce
underwriting requirements for replacements of policies issued relatively recently.
One of the primary factors an underwriter considers when evaluating an appli-
cation for a policy replacement is the possibility that antiselection is the motive
for the replacement, particularly when the proposed insured is of an advanced
age. For example, a proposed insured has recently developed a serious illness and
wants to replace his current face amount with a higher face amount. If this is the
case, the underwriter needs to ensure the new policy’s premium rate reflects the
insured’s increased mortality risk.
The underwriter also considers whether the replacement request is a result of
inappropriate sales practices such as twisting or churning. Twisting is a prohib-
ited practice that occurs when a financial professional misrepresents the features
of a policy to induce a client to replace an existing policy, often to the client’s
disadvantage. Churning is an unfair sales practice that occurs when a financial
professional induces a client to replace one policy after another, multiple times,
so that the financial professional can earn a series of first-year commissions on
the replacements. An underwriter must be alert to the possibility of twisting or
churning if the financial professional does a high volume of replacement business.
To help prevent unethical policy replacements, most states have adopted some
version of the NAIC’s Replacement of Life Insurance and Annuities Model
Regulation. The Model Regulation was designed to ensure that insurers and
financial professionals follow certain procedures and provide consumers with fair
and accurate information about policies so that consumers can make replacement
decisions that are in their own best interests. Under this regulation, replacement of
policies is generally permissible if the replacing insurer provides full and fair dis-
closure and no deceptive practices are involved. Financial professionals have cer-
tain duties under these replacement regulations; often, underwriters must verify
that the financial professionals have fulfilled these duties. Figure 6.5 describes the
replacement-related duties of financial professionals.
Many states require the replacing insurer to send written notification to the
original insurer along with information about the new policy for which the appli-
cant has applied. The original insurer may contact the applicant—its current cus-
tomer—to offer additional information about the existing policy and to attempt to
conserve the policyowner’s existing business.

Figure 6.5. U.S. State Replacement Requirements
U.S. state regulations typically provide that in the

issuance of any new policy, the financial professional
must submit to the issuing insurer a replacement state-
ment signed by the applicant and the financial profes-
sional indicating whether the new policy will replace
an in-force policy. If no policy is to be replaced, the
financial professional’s duties are fulfilled. If a policy
will be replaced, the financial professional has the fol-
lowing additional duties:
•• Provide the applicant with a Notice to Applicants
Regarding Replacement, which provides general information about the potential effects of a
replacement and advises the applicant to receive all the relevant facts before making a replace-
ment.
•• Obtain a list of all existing life insurance policies that will be replaced and ensure those policies
are listed on the notice regarding replacement. For each such policy, the notice must identify
the name of the original insurer, the name of the insured, and the policy number or other iden-
tifying number.
•• Submit to the replacing insurer the completed and signed notice regarding replacement along
with the application and provide the applicant a copy of the completed notice.
•• Leave with the applicant copies of all sales materials that the financial professional showed the
applicant and provide the replacing insurer with a list of all such materials.
Section 1035 Exchanges

A policyowner who wishes to replace a permanent life insurance policy has two
basic options. The first option is to surrender the existing policy and receive the pol-
icy’s cash surrender value. However, any portion of the policy’s surrender value that
is greater than its cost basis is considered a gain and is taxable as ordinary income.
The cost basis represents the amount invested in the policy and is equal to the sum
of all premiums paid less withdrawals, dividends, and outstanding policy loans.
The second option is to initiate a Section 1035 exchange as allowed under
Section 1035a of the U.S. Internal Revenue Code. A Section 1035 exchange is a
tax-free replacement of an insurance policy for another policy insuring the same
person and meeting conditions specified in the U.S. tax code. In a 1035 exchange,
the policyowner avoids incurring a taxable gain on the transaction because the
entire cash surrender value of the original policy is used to pay premiums on the
new policy.

Generally, a policy issued as part of a 1035 exchange is underwritten in the

same manner as any other individual life insurance policy. However, if the new
policy is issued with a less desirable rating than the original policy, the applicant
will pay a higher premium rate if the face amount of the new policy remains the
same as the original policy. In this case, the underwriter obtains a signed statement
from the applicant acknowledging that a higher premium rate will be required
for the same coverage amount. Alternatively, the applicant may elect to receive a
lower face amount of coverage rather than pay the higher rate.
Underwriting Supplemental Benefits

Sometimes, applicants for life insurance coverage have needs that are not addressed
by a basic life insurance contract. To accommodate these needs, insurers usually
allow customers to customize their coverage by adding supplemental benefits to
a standard policy contract, with each benefit typically added—at an additional
cost—in the form of a policy rider. Some of these benefits, such as disability ben-
efits and long-term care insurance benefits, can also be offered as separate, stand-
alone products.
If an applicant requests a supplemental benefit, the request is considered during
underwriting for the policy. If a policyowner wants to add supplemental coverage
to an existing policy, the request usually is considered first by the insurer’s poli-
cyowner services staff. Often, when such a request involves only a slight increase
in the insurer’s risk, the policyowner services department can approve the request.
However, if the request results in a moderate or significant increase in risk, poli-
cyowner services forwards the request to the underwriting department for more
detailed consideration.
The most popular of these benefit riders include
Disability benefits
Family benefits
Guaranteed insurability benefits
Accidental death benefits

Accelerated death benefits
Disability Benefits
Three main types of disability supplemental benefits may be added to a life insur-
ance policy: a (1) disability income benefit, (2) waiver of premium for disability
benefit, and (3) waiver of premium for payor benefit.
Disability Income Benefit

A disability income benefit is a supplemental life insurance policy benefit that
provides a monthly income benefit if the insured becomes totally disabled while
the policy is in force. Disability income benefits typically define total disability
as the insured’s inability to perform the essential duties of his own occupation or
any other occupation for which he is reasonably suited by education, training, or
experience.

Usually, the amount of the monthly disability income benefit is a stated per-
centage of the policy’s face amount. Some disability income insurance riders also
state a maximum monthly benefit amount payable, a maximum benefit period, or
both.
Before approving a disability income benefit rider, the underwriter evaluates
a proposed insured’s medical condition along with personal and financial factors.
For example, applicants who are currently disabled or who are recovering from an
illness or injury might be declined for the rider. In addition, insurers may prevent
applicants participating in certain avocations and occupations that are associated
with higher rates of disability from adding the benefit rider to a life insurance
policy.
Waiver of Premium for Disability Benefit

A waiver of premium for disability (WP) benefit is a supplemental life insur-
ance policy benefit under which the insurer promises to give up its right to collect
premiums that become due while the insured is disabled according to the policy
or rider’s definition of disability. Most WP benefit riders define total disability in
the same way as the disability income benefit. The WP benefit is designed for a
policy issued to a policyowner who also is the policy’s insured. The WP benefit
reduces the possibility of the insured canceling her policy when she experiences a
loss of income from disability. The insurer pays the premiums waived by the WP
benefit rider.
When underwriting the WP benefit rider, an underwriter considers medical
and personal factors, but rarely financial factors. Because the risk of disability
increases with age, the WP benefit rider is normally available to proposed insureds
below age 55 or 60, and usually covers only disabilities that begin before the
insured reaches a specified age, such as age 65.
If a proposed insured’s mortality rating is standard, an underwriter will usually
approve the WP benefit rider. In some situations, however, the insured’s avocation
or occupation may present enough of a disability hazard that a higher-than-usual
premium rate will be required for the WP benefit or the underwriter may decline
to approve the rider.
Waiver of Premium for Payor Benefit

In contrast to the WP benefit, which waives the premium if the insured becomes
totally disabled, the waiver of premium for payor benefit waives the insurer’s
right to collect a policy’s renewal premiums if the payor—the person who pays
the policy premiums—dies or becomes totally disabled. The waiver of premium
for payor rider is most commonly found in third-party policies, where the payor is
not the insured.
The payor, who is typically the policyowner, generally must provide satisfac-
tory evidence of his own insurability before the underwriter will add this benefit
rider to a life insurance policy.

Family Benefits
A family benefit is a supplemental term life insurance benefit that can be added to
an individual cash value life insurance policy to insure the lives of the insured’s
spouse and children. Some insurers also offer separate riders to cover just the
insured’s spouse or just the insured’s children.
After a policy with a family benefit is issued, children who are born or adopted
into the family, or who become part of the family by marriage, usually are covered
when they reach the age of 15 days (or whatever minimum age the rider specifies).
A family benefit usually covers a child from a previous relationship but generally
does not cover foster children.
To underwrite family benefit coverage, the underwriter requires insurability
information for all family members; usually, the basic information on the appli-
cation fills this need. An underwriter generally accepts a spouse and children,
including those with slight impairments, as standard risks if the mortality rating of
each family member is no higher than 200 percent. Underwriters usually decline
to issue family benefit riders for mortality risks higher than 200 percent.
Some insurers establish age requirements for family benefit coverage.
For example, an insurer might require that a spouse be at least 17 years old and no
more than 10 to 15 years younger than the proposed insured. The insurer might
LEARNING AID
also establish an upper age limit for a spouse. To be accepted for coverage, chil-
dren typically must be under 18 years old at the time of policy issue. Furthermore,
unless a child has a physical disability and is a dependent, coverage on the child
ends when the child reaches age 21 or 25, depending on the insurer.
Guaranteed Insurability Benefits

A guaranteed insurability (GI) benefit is a supplemental life insurance policy
benefit that gives the policyowner the right to purchase additional insurance of the
same type as the basic life insurance policy—for an additional premium amount—
on specified option dates (typically every three years) during the life of the policy
without supplying evidence of the insured’s insurability. If the policyowner does
not exercise the option under the GI benefit to buy additional insurance at the time
specified, that opportunity is lost; the policyowner cannot purchase the amount of
insurance available under those circumstances at a subsequent option date. Addi-
tionally, some GI riders limit the benefit by permitting the policyowner to exercise
the option only until the insured reaches age 40. For the insurer, the purpose of
limiting the window to exercise options is to avoid antiselection.
If a GI benefit provision is not included in the basic policy when the policy is
issued, a policyowner may usually add a GI rider up to 60 days after issue. The
underwriter’s main concern is to determine the probability of a change in insur-
ability during the 60-day postissue period. Some insurers allow the addition of the
GI rider more than 60 days after issue if the insured presents acceptable evidence
of insurability.
An important underwriting factor for the GI benefit is age. Usually, the maxi-
mum age for issuing a GI rider is 40 or 45. Aside from age, the risk selection factors
involved in underwriting a GI benefit are typically the same as those considered in
underwriting the basic life insurance policy. The additional coverage provided by
the GI rider has the same risk class rating as the policy. Insurers typically do not
add a GI rider to a basic policy that was issued on a substandard basis.

Accidental Death Benefits

An accidental death benefit (ADB) is a supplemental life insurance policy benefit
that requires the insurer to pay a specified amount of money in addition to the
policy’s basic death benefit if an insured dies as a result of an accident (subject to
exclusions such as suicide or accidents resulting from the insured’s commission
of a crime). This additional amount can be a multiple of the amount of the basic
life coverage or an unrelated amount. For example, a policy might provide a death
benefit of $100,000 and a supplemental accidental death benefit of $100,000. If the
insured dies as a result of an accident while the coverage is in force, the benefi-
ciary would receive a total benefit of $200,000.
The amount of ADB coverage approved usually depends on the amount of life
insurance in force and the amount of coverage requested. When the ADB is equal
to the face amount of a life insurance policy, the ADB is often referred to as a
double indemnity benefit.
In underwriting ADB coverage, the underwriter usually adheres to the same
principles used in underwriting basic personal life insurance. In certain business
life insurance cases, the ADB may not be justified. For example, if a business
needs $100,000 to fund a buy-sell agreement, the amount is fixed and specific.
The business has no reason to receive a multiple of that amount simply because
the insured’s death is accidental. However, personal insurance needs—as well as
some business insurance needs, such as key-person coverage—are not fixed and
specific and are not as easily measured. Accidental death benefit coverage may be
an appropriate supplement to life insurance to cover the beneficiary’s increased
economic loss that results from an accidental death.
Age is an important factor considered in underwriting ADB coverage because
as people age, they are prone to more accidents. Insurers rarely issue such cover-
age to insureds over age 55 or 60, and most ADB riders expire when the insured
reaches age 65 or 70.
Rather than trying to assess each case individually, most insurers establish
underwriting guidelines that specify a mortality rating range in which the under-
writer can accept proposed insureds for coverage. For example, underwriting
guidelines may state that the accidental death benefit rider may be issued at stan-
dard rates to proposed insureds rated at 200 percent mortality or below, but will be
rated or denied for those who exceed 200 percent mortality.
ADB riders are usually not available to proposed insureds rated for alcohol or
substance abuse. In addition, proposed insureds with certain hazardous occupa-
tions or avocations may have to pay an extra premium for ADB coverage, or the
underwriter may deny the coverage.
Accelerated Death Benefits

In the United States, many life insurance policies offer policyowners the option
of taking an a ccelerated death benefit, also known as a living benefit, which is a
supplemental life insurance policy benefit that provides that a policyowner may
elect to receive all or part of the policy’s death benefit before the insured’s death if
certain conditions are met. When the insured dies, the amount of the death benefit
payable to the named beneficiary is reduced by the amount of the accelerated death
benefit that was paid out to the policyowner.

The four most common types of accelerated death benefits are the (1) terminal
illness benefit, (2) critical illness benefit, (3) long-term care insurance benefit, and
(4) chronic illness benefit.
Terminal Illness Benefit

A terminal illness (TI) benefit is an accelerated death benefit under which the
insurer pays a portion of the policy’s death benefit to a policyowner if the insured
suffers from a terminal illness and has a physician-certified life expectancy of less
than a stated time, generally 12 or 24 months. The amount of the TI benefit that is
payable varies from insurer to insurer. Generally, the maximum TI benefit payable
is a stated percentage—usually between 25 and 75 percent—of the policy’s face
amount up to a stated maximum amount. The remainder of the death benefit is
paid to the beneficiary following the insured’s death.
Underwriters do not have special considerations for the TI benefit. Therefore,
the benefit’s underwriting is based on the same risk factors as basic life insur-
ance underwriting. Because separate underwriting is not necessary, many insurers
attach the TI rider to a new life insurance policy without charging an additional
premium.
Critical Illness Benefit

A critical illness benefit, also known as a dread disease (DD) benefit, is an accel-
erated death benefit under which the insurer agrees to pay a portion of the policy’s
death benefit to a policyowner if the insured suffers from one of a number of
specified diseases. Any benefits paid out for treatment of the critical illness are
subtracted from the death benefit payable to the policy’s beneficiary.
An insured becomes eligible for critical illness benefits when she has a certain
disease or event or undergoes certain medical procedures specified in the policy
rider. The specified diseases or conditions usually include
Life-threatening cancer
AIDS
End-stage renal (kidney) failure
Myocardial infarction (heart attack)
Stroke
Coronary bypass surgery
Major organ transplant

Most insurers issue this coverage only to insureds who are under the age of 70
and who have no serious health problems. An underwriter will note the proposed
insured’s age and health status at the time of the application before approving the
addition of the benefit.

Long-Term Care Insurance Benefit

A long-term care (LTC) insurance benefit is an accelerated death benefit under
which the insurer agrees to pay monthly benefits to a life insurance policyowner
if the insured requires constant care—in his own home or a qualified facility—for
a specified medical condition. The types of care given and the medical conditions
that qualify for the LTC insurance benefit are specified in the LTC policy rider.
The amount of each monthly LTC benefit payable is generally equal to a stated
percentage of the policy’s face amount. Most LTC benefit riders impose a waiting
period—typically 90 days—before the benefits are payable. The insurer usually
pays monthly benefits until a specified percentage of the policy’s face amount has
been paid out. Any remaining death benefit is paid to the beneficiary after the
insured’s death.
Insurers do not issue LTC benefit riders to applicants who already suffer from
cognitive or physical impairments. In addition to examining medical histories,
underwriters may require applicants to undergo a face-to-face or telephone inter-
view to assess cognitive abilities before adding the benefit to the policy.
Chronic Illness Benefit

A chronic illness benefit is an accelerated death benefit under which the insurer
pays a portion of the policy’s death benefit to a policyowner if the insured perma-
nently cannot perform at least two of the six activities of daily living, has a perma-
nent severe cognitive impairment, or both. The six activities of daily living (ADL),
which are activities that healthcare professionals use to measure the functional
status of a person, are generally defined as1
Bathing: the ability to get into and out of a tub or shower, to clean oneself,
and to perform personal hygiene.
Dressing: the ability to get dressed by oneself without struggling with
buttons and zippers.
Transferring: the ability to walk and to move oneself into or out of a bed,
chair or wheelchair.
Toileting: the ability to get on and off the toilet and to use the toilet
independently.
Continence: the ability to control one’s bladder and bowel functions.
Eating: the ability to feed oneself.
Although the chronic illness benefit may seem similar to the long-term care
insurance benefit, there are key differences that cause insurers to market the rid-
ers separately. For example, the chronic illness benefit applies only if the insured’s
inability to perform a specified number of ADLs is permanent. The LTC insurance
benefit is payable for temporary or permanent conditions requiring constant care.
To add a chronic illness rider, an insurer may require an application supplement
to inquire about a proposed insured’s cognitive skills and ADL status. An under-
writer might decline the rider for a policy with a substandard rating or request
additional examination for a proposed insured over the age of 70.2 Figure 6.6 pro-
vides a review of the primary types of supplemental life insurance benefits.

Figure 6.6. Supplemental Life Insurance Benefits Review
Benefit Name Benefit Provided Underwriting Considerations

Disability Insurer pays monthly income •• Proposed insured’s current state of
income benefit if insured becomes health
benefit totally disabled while the policy •• Any avocations and occupations usually
is in force associated with higher rates of disability
Waiver of Insurer waives right to collect •• Proposed insured’s age, with
premium for premiums that become due typical maximum age of 60
disability while insured is disabled •• Proposed insured’s mortality
(WP) benefit rating, avocations, occupation
Waiver of Insurer waives right to collect •• Payor must provide evidence of own
premium for premiums if payor dies or insurability and proposed insured’s
payor benefit becomes disabled insurability
Family Insures lives of the insured’s •• Insurability of all of insured’s family
benefit spouse and children through members
term benefit added to insured’s •• Age requirements for spouse, children
whole life policy
Guaranteed Policyowner has option to buy •• Proposed insured’s age, with typical
insurability additional insurance on specified maximum age of 45
(GI) benefit dates without providing evidence •• Proposed insured’s mortality rating
of insured’s insurability
Accidental Insurer pays benefit in •• Proposed insured’s age, with typical
death benefit addition to the policy’s basic maximum age of 60
(ADB) death benefit if an insured dies •• Proposed insured’s mortality rating,
due to accident avocations, occupation
Terminal Insurer pays portion of policy’s •• Same risk factors as basic life insurance
illness (TI) death benefit to policyowner if underwriting
benefit insured suffers from a terminal
illness and has life expectancy of
less than 12-24 months
Critical illness Insurer pays portion of policy’s •• Proposed insured’s age, with
benefit death benefit to policyowner if typical maximum age of 70
the insured suffers from one of a •• Proposed insured’s current state of
number of specified diseases health
Long-term Insurer pays monthly benefits •• Proposed insured’s medical history and
care (LTC) to policyowner if the insured current impairments
insurance requires constant care for a •• Proposed insured’s cognitive
benefit specified medical condition abilities, as assessed by
face-to-face or telephone interview
Chronic illness Insurer pays portion of policy’s •• Proposed insured’s current
benefit death benefit to policyowner if cognitive skills and ADL status
insured permanently cannot per- •• Proposed insured’s mortality
form at least two of the six ADLs, rating and age, with typical
has permanent severe cognitive maximum age of 70
impairment, or both

Key Terms
supplemental benefit sole proprietorship
multi-life policy partnership
joint life insurance policy cross-purchase agreement
last survivor life insurance policy entity agreement
juvenile insurance policy corporation
waiver of premium for payor benefit stock redemption agreement
direct-to-consumer (D2C) sales internal replacement
guaranteed-issue basis external replacement
graded benefit twisting
business insurance churning
business continuation insurance plan Replacement of Life Insurance and
buy-sell agreement Annuities Model Regulation
key person cost basis
key-person life insurance Section 1035 exchange
employee benefit plan disability income benefit
split-dollar life insurance plan waiver of premium for disability (WP)
creditor insurance benefit
business financial supplement waiver of premium for payor benefit
ratio family benefit
financial ratio analysis guaranteed insurability (GI) benefit
solvency accidental death benefit (ADB)
debt-to-equity ratio double indemnity benefit
liquidity accelerated death benefit
current ratio terminal illness (TI) benefit
current asset critical illness benefit
current liability long-term care (LTC) insurance benefit
quick ratio chronic illness benefit
profitability activities of daily living (ADL)
return-on-equity (ROE) ratio
Endnotes
1. ElderLawAnswers, Activities of Daily Living Measure the Need for Long-Term Care Assistance,
http://www. elderlawanswers. com/activities-of -daily-living-measure-the-need-for-long-term-care-
assistance-15395, accessed 18 April 2017.
2. Carl Friedrich et al., “Report on Life and Annuity Living Benefit Riders: Considerations for Insurers
and Reinsurers,” Society of Actuaries, April 2015.

Insurance Administration Chapter 7: Underwriting Group Life Insurance 7.1
Chapter 7
Underwriting Group
Life Insurance
Objectives
7A Describe the steps in the group underwriting process and the
underwriting documents typically used during this process
7B Compare the process for contributory and noncontributory plans and
identify the required level of participation for each type of plan
7C List the risk factors that pertain to a group prospect and describe their
effect on the risk presented by the group
7D Describe how the design and administration of a group plan can affect
the group coverage
7E Distinguish among manual rating, experience rating, and blended rating
and calculate a premium using blended rating
7F Describe how an insurer minimizes the risk associated with late
enrollees
7G Explain renewal underwriting

7.2 Chapter 7: Underwriting Group Life Insurance Insurance Administration
Outline
The Group Underwriting Process Rating Methods for Group Cases
 Requesting Coverage 
Calculating Premium Rates for
 Creating a Proposal for Insurance Large Groups
 Completing the Master Application 
Calculating Premium Rates for
 Delivering the Master Group Small Groups
Insurance Contract
Post-issue Underwriting
Risk Factors for Group Underwriting 
Underwriting of Late Enrollees
 The Group Prospect 
Renewal Underwriting
 The Proposed Coverage
S
o far in this text, the focus has been on individual life insurance products
and the activities involved in administering those products. In this chapter,
you’ll learn about underwriting for group insurance products purchased by
a business or other organization (the group policyholder) to provide benefits to
employees or other group members (the group insureds).
The Group Underwriting Process

Insurers that offer group life insurance products market those products through
group representatives, who are salaried insurance company employees specifi-
cally trained in the techniques of marketing and servicing group products. In some
cases, a group representative initiates the sale of an employer-sponsored group
life insurance plan and is the only contact between the group policyholder and
the insurer. In other cases, a financial professional, such as a sales intermediary
or broker, initiates contact with the group policyholder and then calls on a group
representative to assist in selling and implementing the plan.
The group underwriting process varies depending on whether the group is
(1) purchasing insurance for the first time, (2) replacing existing coverage, or
(3) changing or adding coverage with the same insurer. Employers or other groups
that have purchased insurance products from a particular insurer in the past often
contact that company’s group representative when changing their existing cover-
age or adding new coverage. In this case, the underwriting process is straightfor-
ward and may only involve updating information about existing group insureds
and adding information about new group members.
The process for underwriting coverage for employers or groups purchasing
group life insurance for the first time or replacing their existing coverage is more
complex and usually involves four primary steps:
Requesting coverage. The employer or group sponsor—typically called the
group prospect at this point in the process—works with a group representa-
tive or other sales intermediary to create and distribute a request for proposal
(RFP), which, for group insurance, is a document that provides details about
the requested coverage and requests a bid from one or more insurers for pro-
viding that coverage.
Submitting a proposal for insurance. Each insurer who chooses to respond
to the RFP creates a proposal for insurance, which, for group insurance, is
a document that details the specific provisions of a group insurance plan pro-
posed by an insurer for a group prospect. Obtaining proposals from multiple
insurers allows the prospect to compare the costs and benefits of various plans
before making a decision.
Developing a master application. After a prospect approves a proposal for

insurance, the prospect works with a financial professional or group represen-
tative to complete and submit a master application, which is an application for
group insurance that contains the specific provisions of the requested plan of
insurance and is signed by an authorized officer of the proposed policyholder.
Delivering a master group insurance contract. Underwriters at the selected
insurance company examine the master application to ensure that all informa-
tion is complete and consistent with the coverage agreed to in the proposal for
insurance. If the coverage is approved, information from the master applica-
tion is used to develop the master group insurance contract, also known as a
group insurance policy, which is a legal document that certifies the relation-
ship between an insurer and a group policyholder and specifies the benefits
provided by the contract to the insured group members. The group contract is
also known as the group insurance policy or group plan.
Figure 7.1 describes the purpose and content of each of the documents involved
in the underwriting process.
Figure 7.1. Sequence of Group Underwriting Documents
Prepared By Purpose Information Included
Request for Group prospect, To provide general •• Requested coverage

Proposal with help of sales information about the •• Insurance history
(RFP) intermediary or group prospect and
group representative desired coverage •• Current benefits
and request a bid •• Census
for providing the
•• Sales intermediary letter
coverage
•• List of current claimants
Proposal for Underwriter To propose a plan •• Benefit schedule

Insurance for group coverage •• Premium rates
that may or may not
match the coverage
or premium rates
requested in the RFP
Master Sales intermediary or To provide detailed •• Name of plan administrator

Application group representative information about
the group prospect
and the coverage
requested
Master Group Underwriter To certify the •• Terms of coverage

Insurance relationship between •• Benefits
Contract the insurer and the
group policyholder •• Enrollment card for each
and to specify the group member
benefits provided and
the terms of coverage

Requesting Coverage
Sometimes a group that has a long-term relationship with an insurance company
will contact that insurer directly when requesting life insurance coverage for
group members. Groups planning to offer group life insurance coverage to their
members for the first time usually send an RFP to multiple insurance companies
before making a purchase decision.
All RFPs provide basic information about the applicant, including the group
prospect’s
Name and address.
Size, including the number or classes of group members eligible for coverage.
In this context, a class is a grouping of people categorized according to some
nondiscriminatory characteristic for purposes of determining eligibility for
insurance coverage and benefit levels.
Previous insurance history, including premium rates paid, claim experience,
and duration of coverage.
Current benefit programs, if different from those applied for in the RFP.
Requirements for participation in the group plan, current or expected partici-

pation level, and policyholder contributions to the plan, if any.
The RFP also includes questions about a potential insurance provider’s
Qualifications. How long has the insurer been in business? How many group
plans does the insurer currently administer? How many clients have changed
their coverage to another provider over a specified period and why?
Service options. Will the insurer create enrollment materials, participant
statements, and other customized participant communications? Will the
insurer process payroll deductions? Will the insurer generate and distribute
customized participant communications?
Fees and charges. How much will the insurer charge for plan setup, adminis-
tration, claim processing, and future plan changes?
Finally, an RFP provides information related to specific aspects of the requested
coverage or about the group prospect in the form of attachments, sales intermedi-
ary letters, or ERISA documents.
Attachments
RFPs often include attachments that provide details about the coverage requested.
For example, most RFPs for group insurance coverage include a benefit transmittal
that provides details about the insurance benefits being requested, the effective
LEARNING AID date of coverage, how premium billing and claims will be administered, and
other information about the requested group insurance plan. The benefit transmit-
tal also indicates whether the proposed plan is contributory or noncontributory.
A contributory plan is a group insurance plan under which insured group mem-
bers must pay part or all of the premium for their coverage. Under a contributory

plan, the group insureds may choose whether they will participate in the plan. A
group member who chooses not to participate in a contributory plan signs a state-
ment to that effect. A noncontributory plan is a group insurance plan for which
the group insureds are not required to pay any part of the premium for the cover-
age; the premiums are paid entirely by the policyholder, and all eligible group
members are provided with coverage automatically. The choice of a contributory
or noncontributory plan often impacts the insurer’s underwriting requirements
because participation in a contributory plan is often difficult to predict over time,
whereas participation in a noncontributory plan is relatively consistent.
The benefit transmittal may also describe the group prospect’s insurance his-
tory and current benefits. For example, if a group prospect has been insured by
another insurer in the past, the prospect may provide a copy of its previous insur-
ance contract and any reports provided by the previous insurer regarding the
group’s claim experience.
Another common attachment to an RFP is a census, which is a document that
lists demographic information about the group prospect as a unit and about indi-
vidual members within the group, such as the
Total number of individuals in the group.
Total number of group members eligible for each type of coverage requested.
Date of birth, sex, salary, and job classification of each eligible group member.
Dependents that will be covered under the plan. For the purposes of estab-
lishing eligibility for group insurance coverage, a dependent is (1) a spouse,
(2) an unmarried child under a specified upper age limit, or (3) a disabled child
of any age who relies on the group member for financial support and mainte-
nance. Figure 7.2 shows a portion of a typical employee census.
Figure 7.2. Portion of a Typical Employee Census
Date of Birth M/F Salary Date of Hire Dependents Amount of

Life Insurance
05/67 F $33,900 03/1990 Yes $68,000
01/77 M $40,000 04/1999 No $80,000
10/75 M $43,000 01/2004 Yes $87,000
09/70 F $45,000 11/1998 Yes $90,000
03/60 M $90,000 09/1995 Yes $180,000
11/71 M $55,000 03/1993 No $110,000
02/68 F $88,000 10/1999 Yes $196,000

An RFP for a plan that provides disability benefits usually also includes a list
of open claimants who are group insureds currently receiving short- or long-term
disability income benefits, and basic information about those insureds, such as
name, date of birth, date of disability, expected duration of disability, and benefit
amount. Because of privacy regulations, the list usually doesn’t reveal the nature
of existing disabilities. Although companies responding to an RFP often use open
claimant information to determine their response to the RFP, the applicant’s cur-
rent insurer retains responsibility for paying benefits to current open claimants.
Sales Intermediaries’ Letters

Sometimes the financial professional or group representative working with a group
prospect submits a letter that includes observations or recommendations about the
appropriateness of the requested coverage. Figure 7.3 shows the type of informa-
tion included in a sales intermediary’s letter.
Figure 7.3. Sample Sales Intermediary Letter
The ABC company has been in business for 47 years

manufacturing and assembling movable windows.
Its annual net profit has increased during the
past 5 years from $1.3 million to $4.4 million.
The current carrier has been underwriting
coverage for 7 years; the anniversary date is
June 1, 2018. Major claims over $10,000 in the
past 24 months have been nonexistent. I feel that the
strength of the business and the stability of the group,
coupled with its moderate claim experience,
make it a prime candidate for coverage
under our policy.
Underwriters consider sales intermediary letters an important source of infor-

mation, especially if the sales intermediary has extensive experience selling the
proposed type of insurance and has consistently submitted sound business to the
insurer.

The sales intermediary may also give the insurer a letter from the group pros-
pect indicating that the group prospect has authorized the intermediary to obtain
proposals for insurance on its behalf.
ERISA Documents
The Employee Retirement Income Security Act (ERISA) is a United States fed-
eral law designed to protect covered employees by ensuring that employee benefit
plans meet specific requirements related to plan creation and maintenance. ERISA
requires sponsors of most employee benefit plans—including employer-sponsored
group life insurance plans—to file an annual report with the federal government.
Some small employee benefit plans are exempt from this requirement.
Underwriters often use the information in ERISA-mandated reports to assess
the risk presented by a group that currently has a self-insured group plan but is
now requesting coverage under a fully insured group plan. A self-insured group
plan is a plan for which the group sponsor—usually an employer—takes complete
responsibility for paying all claims and related expenses. As an alternative to self-
insuring a group plan, some group sponsors enter into an administrative services
only (ASO) arrangement with an outside vendor under which the group spon-
sor funds its own employee benefit plan but hires an outside provider to perform
specific administrative services. For example, an employer might use an outside
vendor to evaluate and process claims, but maintain responsibility for paying the
claims in-house. In contrast, a fully insured group plan is a group insurance plan
under which an insurer is financially responsible for all incurred claims.
Creating a Proposal for Insurance

When an insurer receives an RFP, underwriters use the information provided by
the group prospect to make an initial assessment of the risk associated with pro-
viding coverage and determine whether the group meets the insurer’s underwrit-
ing requirements for the requested coverage. If underwriters decide that the group
represents an acceptable risk, they develop a proposal for insurance for the sales
intermediary or group representative to present to the buyer. If the insurer cannot
offer the requested coverage, the underwriter can propose changes in the coverage
or decline to respond to the RFP.
Although proposals submitted in response to an RFP can take a variety of
forms, all proposals for insurance include four key elements:
A description of the underwriting principles and assumptions used to deter-
mine the proposed coverage
A benefit schedule, which is a table or schedule included in a group insurance
policy that specifies the amount of coverage provided for each class of group
insureds
A list of the premium rates required for each type of coverage proposed
Details of plan administration, including the responsibilities of the group poli-
cyholder and the insurer

Because the group insurance market is highly competitive, group underwrit-

ers typically work closely with the sales intermediary or group representative in
charge of the account to design a plan that is acceptable to both the insurer and the
group prospect.
The group prospect reviews all submitted proposals and compares them in
terms of costs and benefits. If the prospect is purchasing coverage for the first time,
or if the prospect receives similar proposals from several insurers, the prospect
usually invites a small number of potential provider companies to present their
proposal in person before making a decision. The prospect may accept or reject an
insurer’s proposal or ask the insurer to modify some terms in the proposal.
Completing the Master Application

When the client company makes a final decision, the selected insurer’s sales inter-
mediary or group representative prepares a master application for group insurance
coverage. The master application typically provides the underwriter with the fol-
lowing information:
Basic information about the group prospect, including the group’s name, orga-
nizational form, and nature of business.
Total number of group members—and dependents, if any—who are eligible
for coverage under the plan.
A definition of the probationary period, also known as a waiting period,
which is the length of time—typically from one to six months—that a new
group member must wait before becoming eligible to enroll in a group insur-
ance plan.
A schedule of benefits provided under the plan.
The percentage of the premium the group policyholder will pay for the
requested coverage. This percentage varies depending on whether the plan is
a noncontributory plan or a contributory plan.
Information about how the plan will be administered and the name of the plan
administrator. Under ERISA, a plan administrator is the individual or organi-
zation responsible for handling the administrative aspects of a retirement plan
or other employee benefit plan and ensuring that the plan complies with appli-
cable regulatory requirements. In employer-sponsored plans, the plan admin-
istrator is often a member of the company’s human resources department.
The specific provisions of the plan of insurance.
Underwriters review the completed master application to ensure that the infor-
mation is complete and accurate and that the risk represented by the group is
acceptable. If the underwriters approve the coverage, information from the master
application is used to develop the master group insurance contract.

Delivering the Master Group Insurance Contract

The group policyholder and the insurer are parties to the contract, but group mem-
bers enrolled in the plan are not. The insurer sends a copy of the finalized master
group insurance contract to the group policyholder along with paper or electronic
enrollment cards that must be completed by all group members participating in the
plan. These enrollment cards provide personal data about participants in the plan
and provide evidence that those participants acknowledge and accept the terms
of their coverage under the plan and agree to pay their portion of the premium, if
required. As an alternative to enrollment cards, some insurers allow companies
to provide information about participants by expanding the census to include per-
sonal information or to enter enrollment data through an insurer’s online portal.
Risk Factors for Group Underwriting

Group life insurance underwriters typically don’t consider the insurability of indi-
vidual group members when underwriting group life insurance contracts unless
The group is small.
Group members enroll after the enrollment deadline.
Excess coverage is requested. Most insurers describe excess coverage as cov-

erage a group member is eligible for but that exceeds the insurer’s normal
maximum coverage available without evidence of insurability.
Example:
The Blackwell Corporation offers group life insurance coverage to its
employees in an amount equal to two times their salary, up to a maximum
of $75,000. Janet Elmore, who earns $35,000 per year, and David Cline, who
earns $45,000 per year, both enrolled for coverage under the plan.
Analysis:
Because two times Janet’s salary ($35,000 × 2 = $70,000) is less than the
specified limit, she can obtain coverage under the plan without providing
evidence of her insurability. Two times David’s salary ($45,000 × 2 = $90,000)
is above the established limit. He can receive $75,000 of coverage without
providing evidence of insurability, but he must provide whatever evidence
the insurer requires to obtain the extra $15,000 of coverage.
Insurance company underwriters generally do consider characteristics of the

group prospect and characteristics of the proposed coverage that affect the insur-
er’s level of risk. Figure 7.4 lists some of the risk factors included in each of these
categories.

Figure 7.4. Risk Assessment Factors for Group Insurance
CHARACTERISTICS OF THE GROUP PROSPECT
•• Reason for existence

•• Type of group
•• Size
•• Nature of business
•• Geographic location(s)
•• Age distribution
•• Turnover of group membership
•• Participation in the plan
•• Classes
•• Expected persistency
•• Prior coverage and claim experience
CHARACTERISTICS OF THE PROPOSED COVERAGE
•• Plan of insurance
•• Plan administration
The Group Prospect

An insurance company’s goal in underwriting group coverage is to ensure that the
company accepts only those groups that meet the insurer’s guidelines for the prod-
uct and whose expected claims are reasonably predictable. Insurers have identified
several characteristics of group prospects that help underwriters distinguish good
prospects from poor prospects.
Reason for Existence

Most insurers adhere to the principle that, to be eligible for group insurance cover-
age, a group must have been formed for a purpose other than purchasing insurance
coverage. This requirement protects insurers from antiselection that would result
if a number of people, most of whom are poor insurance risks, joined together for
the purpose of obtaining insurance.
Type of Group
Regulators in most jurisdictions specify the types of groups that are eligible for
group life insurance coverage. Eligible groups fall into four broad categories:

Single-employer groups, also known as employer-employee groups, are groups

that consist of the employees of one employer. The single-employer group is the
most common type of group covered by group life insurance plans.
Multiple-employer groups are groups that consist of the employees of (1) two
or more employers in the same industry, (2) two or more labor unions, or
(3) one or more employers and one or more labor unions. Examples of multiple-
employer groups include trade associations formed by employers in the same
industry and multiple-employer welfare arrangements (MEWAs) formed
by two or more small employers—usually in the same industry—to provide
group insurance benefits to their employees. MEWAs differ from other mul-
tiple-employer groups in that each MEWA is sponsored by an insurer or a
third party, and the policy is issued to the trustees of a trust established for the
purpose of purchasing the coverage.
Association groups are groups that consist of the members of an associa-
tion, which is an organization of employers or individuals formed for a pur-
pose other than to obtain insurance. Association groups include professional
association groups and affinity groups. A professional association group is
an association of individuals who share a common occupation, such as an
association of medical doctors, attorneys, or engineers. An affinity group is a
group of people who share a common bond, background, or interest and who
belong to an association group. An example of an affinity group is a college
alumni association.
Debtor-creditor groups are groups that consist of lending institutions—such
as banks, credit unions, savings and loan associations, finance companies,
retail merchants, and credit card companies—and their debtors.
Group Size
The size of a particular group prospect is often an accurate predictor of the group’s
expected claim experience, with large groups being more likely than small groups
to have an actual claim experience that is the same or nearly the same as the
expected claim experience. When group insurance was introduced, insurers LEARNING AID
offered coverage only to groups with at least 50—or in some cases 100—mem-
bers. Because of the increased amount of information about mortality experience
available today, the minimum group size has been reduced. In fact, insurers today
are often willing to underwrite groups with as few as two members.
Each insurer establishes its own (1) standards for the size of the group it is
willing to insure and (2) procedures for underwriting different sizes of groups.
Underwriting guidelines for small groups, however, are typically more stringent
than those for large groups. For example, underwriters typically require mem-
bers of small groups to provide evidence of insurability. That evidence can range
from a simple health questionnaire completed by each group member to a formal
attending physician’s statement (APS) or medical examination. Although under-
writers typically do not rate or place impairment riders on individual group mem-
bers based on collected evidence, they can decline coverage for an individual who
doesn’t meet the insurer’s underwriting requirements.

Nature of Business
The type of work group members perform often affects the amount of risk the
group as a whole represents. As a result, insurers often look carefully during the
underwriting process at existing claim experience data for similar groups in the
same industry.
Underwriters also consider the economic strength or weakness of the industry
in which a group prospect operates. For example, because market trends often
cause businesses in certain industries to slow production or lay off workers, under-
writers carefully evaluate the ability of group prospects in those industries to pay
premiums over time.
A high percentage of new businesses fail, so underwriters consider the finan-
cial strength of the group prospect, which is often an indicator of a company’s
potential longevity. Usually, insurers require a group prospect to provide evidence
that it has been operating on a sound financial basis for at least two years before
they will issue coverage.
Geographic Location
The geographic location of a group can affect its mortality rate. For example,
individuals in a particular location may be more susceptible to natural disasters
or specific diseases. Poor economic conditions and limited access to effective and
affordable healthcare can increase mortality rates.
Geographic location can also affect the laws and regulations that govern insur-
ers. In addition, if a group has members in more than one location, underwriters
must consider environmental, economic, and social conditions in all locations.
Age and Sex Distribution

Because mortality rates tend to increase with age, a group composed primarily
of older members is likely to present a higher degree of risk than a group com-
posed primarily of younger members. Mortality also varies according to sex, so
underwriters consider the ratio of males and females in a given group. All other
factors being equal, a group that is predominantly female is likely to experience
fewer claims for life insurance benefits during a given period than a group that is
predominantly male. Underwriters, however, cannot decline a group based solely
on sex distribution.
Membership Turnover
In employee groups with low turnover rates, the average age of group members tends
to increase because existing group members, who age from year to year, are not being
replaced by younger employees. As a result, groups with low turnover rates usu-
ally produce relatively high claims costs. If the flow of new members into a group is
not adequate to compensate for the aging of current members, the underwriter may
increase the proposed premium rate to reflect the additional risk. For a group with an
exceptionally low turnover rate, underwriters may even decline the risk.

In groups with high turnover rates, the average age of group members often
decreases as existing employees, many of whom are older, are replaced by new,
and often younger, employees. Although high turnover can reduce mortality risks,
it often increases administrative costs. It can also indicate problems within the
organization, such as management issues or low employee morale. Insurers often
address the problems associated with high turnover rates by extending the pro-
bationary period for new employees entering the plan. This longer probationary
period reduces the administrative costs associated with initiating and terminating
coverage on employees who leave employment soon after hire.
Participation Level
Most group insurance plans specify a minimum participation level a group must
maintain to keep its insurance coverage in force. For noncontributory plans, the
minimum participation level must be 100 percent. For contributory plans, insur-
ers typically require participation rates between 75 percent and 100 percent. The
following table illustrates minimum participation requirements for different sized
plans. Generally, minimum participation requirements for contributory plans are
higher for smaller plans with fewer eligible employees than for larger plans with
more eligible employees.
Number of Eligible Employees Minimum Participation Requirement

Less than 250 75 percent
250–499 65 percent
500–749 60 percent
750–999 55 percent
1,000 or more Case-by-case evaluation
Classes
To prevent antiselection, group underwriting guidelines require that the level of
benefits provided to each group insured be determined automatically by the terms
of the group contract and not by individual group members. If group members
were allowed to select their own levels of benefits, members with a higher-than-
average degree of risk would typically choose higher benefit levels. In addition, to
ensure that benefit levels are determined fairly for all group insureds, the group
policyholder is not permitted to determine benefit levels for specific individuals.
Insurers usually manage potential antiselection by requiring group prospects to
divide group members into classes according to nondiscriminatory characteristics
such as the ones shown in Figure 7.5 for employer-sponsored groups. To provide
protection against unfair discrimination, laws in some jurisdictions specifically
prevent insurers and employers from using discriminatory characteristics such as
marital status, sex, or age to classify employees.

Figure 7.5. Typical Nondiscriminatory Classes for Group Insurance
CLASSES BASED ON SALARY
•• All employees earning up to $100,000 per year

•• All employees earning more than $100,000 per year
CLASSES BASED ON RANK
•• All officers
•• All managers who are not officers
•• All other employees
CLASSES BASED ON HOURS WORKED
•• All employees working 30 hours or more a week

•• All employees working less than 30 hours a week
CLASSES BASED ON LENGTH OF SERVICE
•• All employees with five or more years of service

•• All employees with fewer than five years of service
Expected Persistency
Underwriters evaluate expected persistency because persistency directly affects
the insurer’s profit level. Most group life insurance contracts are issued for a one-
year term and are automatically renewed at the end of the term unless the group
policyholder elects to cancel or change the coverage. During the first year of a
group insurance contract, the insurer incurs significant expenses in the form of
commission payments and administrative costs. Such costs greatly reduce or even
eliminate the insurer’s profit on the policy during that year.
If a group policyholder continues coverage under a plan for multiple years, the
insurer can usually recoup those costs. However, if the policyholder cancels the
coverage soon after the policy is issued, the insurer is likely to suffer a loss. To
provide some protection against such a loss, insurers usually decline coverage for
or charge extra premiums to a group that has a history of poor persistency.
Prior Coverage and Claims Experience

Unless a company is applying for group insurance for the first time, underwriters
generally review a group prospect’s previous insurance coverage to determine the
types of benefits provided, premium rates charged, annual premiums paid, and
claim amounts incurred. In most cases, underwriters require group applicants to

provide at least three years of documentation of prior coverage. Underwriters can

often find this information in an employer’s employee handbook or another docu-
ment that describes the group prospect’s current benefit plan. As we mentioned
earlier, if a contract includes disability coverage, underwriters may also require a
list of open claimants.
The Proposed Coverage

When underwriters assess the coverage requested by a group prospect, they con-
sider certain aspects of plan design and plan administration.
Plan Design
When evaluating plan design, underwriters usually focus on how the plan defines
eligibility for coverage. Each group policy identifies the members—and in some
cases, the members’ dependents—who are eligible for coverage. Policies issued to
association groups typically specify that only association members are eligible for
coverage. Policies issued to a creditor specify that certain debtors are eligible for
coverage.
Most employer-employee life insurance policies specify that employees are eli-
gible for coverage if they satisfy requirements related to
Hours of service. The Internal Revenue Service (IRS) defines full-time
employment as an average of at least 30 hours of service per week or 130 hours
of service per month. Most employers set requirements slightly higher—at 40
hours per week or 160 hours per month. In most cases, hours of service include
time allocated to vacations, holidays, sickness or disability, jury duty, military
duty, or approved leave of absence.
Eligibility. Group insurance plans often include a probationary period that
defines the amount of time an individual must be employed before becom-
ing eligible for coverage under the group plan. For noncontributory plans,
employees who meet eligibility requirements are automatically enrolled in the
plan at the end of the probationary period. In contributory plans, the proba-
tionary period is usually followed by an eligibility period, also known as an
enrollment period, which is the period of time, usually 31 days, during which
eligible group members may enroll for the contributory insurance coverage
without having to provide evidence of insurability.
Work status. Most group plans include an actively at work provision, which
is a group insurance policy provision that requires an employee to be actively
at work—rather than ill or on leave—on the day coverage takes effect in order
to be eligible for coverage. If an employee is not actively at work, the employee
is not eligible to enroll until he returns to work.
Group plans that provide coverage to dependents of covered group members
include definitions of the types of dependents who qualify for coverage. Most plans
include spouses and children as dependents. Spouses typically include husbands
or wives of insured group members, but may also include unmarried or same-sex
partners. The definition of “children” in most plans includes an employee’s natural
children as well as adopted children, foster children, and stepchildren.

Plan Administration
Administration of a group life insurance plan typically involves
Promoting the plan to group members and encouraging all eligible members
to enroll
Certifying the eligibility of each group member who will be covered by the
plan
Collecting and keeping accurate records of each group member’s contribu-
tions to the plan
Maintaining accurate and complete records of costs and claims
Recording additions, terminations, and participant status changes—such as
changes in marital status, employment class, or earnings—accurately and
promptly
Assisting with claim submissions
Effective plan administration is critical to controlling plan costs and ensur-
ing the satisfaction of the group policyholder and insureds. Under an insurer-
administered plan, the insurer handles most of the administration. More often,
insurers require the policyholder to participate in plan management and admin-
istration activities. A self-administered plan is a group insurance plan in which
the group policyholder handles most of the administration. Participating in plan
administration typically reduces costs for group policyholders. In general, the
more administrative activities the policyholder performs, the lower the premium
the group will pay for coverage.
A third option for insurers and policyholders is to turn plan administration
activities over to a third-party administrator (TPA)—in the context of group
insurance, an organization that is not affiliated with an insurer and that pro-
vides various administrative services to insurers and group policyholders. Before
approving coverage under a self-administered or TPA plan, however, underwrit-
ers need to verify that the policyholder or TPA is willing and qualified to assume
responsibility for plan administration.
For insurers, involving group policyholders in plan administration is often
a way to ensure policyholder and group insured satisfaction and increase plan
persistency.
Rating Methods for Group Cases

Insurers that offer group life insurance coverage establish premium rates on a
case-by-case basis and recalculate those rates each year to ensure that the current
premium rate is
Adequate to cover the insurer’s costs of paying claims, administering the
group insurance plan, and paying commissions and other expenses associated
with the plan
Equitable so that each insured group pays a premium amount that fairly
reflects the amount of risk the group represents
Competitive enough to attract group prospects

Once the annual premium rate is set, it remains the same from month to month.
The actual monthly premium amount the insurer receives, however, varies with
changes in the number of members covered under the plan. Figure 7.6 illustrates
how an insurer might determine a group’s monthly premium amount.
Figure 7.6. Example of a Monthly Premium Calculation
The Hendrix Corporation provides each of its employees with $50,000 of term life insurance
coverage. The premium rate Hendrix pays for this coverage is $0.20 per month per $1,000 unit of
coverage. In January, Hendrix’s group policy covered 100 employees. In February, 5 new employees
enrolled in the plan.
The monthly premium amount for Hendrix’s plan is calculated as:

$0.20 Premium rate per $1,000 unit of coverage
× 50 Number of units of coverage per employee per month ($50,000 ÷ 1,000)
$10 Monthly premium amount per employee
× --- Number of covered employees
$ --- Total monthly premium amount for all covered employees
In January, Hendrix had 100 employees, so the the total monthly premium for January was equal
to $1,000 ($10 premium per employee × 100 employees = $1,000). In February, Hendrix had
5 new employees, so the total monthly premium for February increased to $1,050 ($10 premium
per employee × 105 employees = $1,050).
Most insurers today use computerized rating systems to determine group

premium rates, unless the underwriter has information about a case that is not
reflected in the computerized rates. For example, if the financial professional or
group representative submitting a case has a long history of submitting quality
business to the insurer, the underwriter may decide to charge the group a lower
rate than the computer-generated rate.
Calculating Premium Rates for Large Groups

When calculating group premium rates for large groups, group life insurance
underwriters typically use manual rating, experience rating, or blended rating.
Manual Rating
Manual rating is a method of establishing group insurance premium rates in
which the insurer divides group insureds into broad classes based on the com-
pany’s own experience and on information collected by various governmental
and trade associations and then establishes a premium rate for each class. For
example, insurers often divide group insureds according to their annual salary or

their tenure with the company. Insurers typically use manual rating to determine
the initial premium to charge a small group prospect or to calculate the initial pre-
mium for a large group prospect that has no recorded or reliable claim experience.
Experience Rating
Experience rating is a method of setting group insurance premium rates under
which the insurer considers the particular group’s prior claims and expense expe-
rience. An important assumption underlying experience rating is that a group’s
claim experience is likely to remain relatively constant from year to year. When
using experience rating, the underwriter usually examines the group prospect’s
claim experience for the past five years.
Underwriters typically use experience rating to calculate (1) initial premium
rates for large groups that have been previously insured and have credible past and
expected claim experience and (2) renewal premium rates for currently insured
groups that have credible experience. A group’s expected claim experience is the
monetary amount of claims an insurer estimates the proposed group will submit
during the upcoming policy year.
Underwriters also consider factors that are likely to affect a group’s expected
claim experience, including changes in the
Number of group insureds
Group’s average age or predominant sex
Group’s benefit schedules
Group’s employee mix, such as shifts from mostly clerical workers to mostly
workers engaged in manual labor
Job duties employees perform, especially if new job duties pose significant
additional hazards
Industry or business segment in which the group operates
Economic environment that affect the financial strength of the group policy-
holders
A group insurance policy may allow an experience refund, also known as
a premium refund, which is the portion of a group insurance premium that is
returned to a group policyholder if the group’s claim experience during the year
was more favorable than expected when the premium was calculated.
All experience refunds are payable to the group policyholder, even if the plan
is contributory. If the amount of the refund to the policyholder of a contributory
plan is greater than the portion of the group premium paid by the policyholder,
then the excess must be used for the benefit of the group insureds. For example, an
employer who receives an experience refund can apply the refund to pay a portion
of the employees’ contributions during the next policy year or to pay for additional
benefits for employees enrolled in the plan.

Blended Rating
Sometimes groups are too large for an insurer to rely totally on manual rating, but
they do not have enough claim experience information for the insurer to rely on
experience rating. To resolve this problem, insurers often use blended rating, which
is a method of calculating group insurance premium rates that combines manual rat-
ing and experience rating. When an insurer uses blended rating, underwriters assign
a credibility factor to the group’s experience. In group insurance, a credibility factor
is a percentage that represents the amount of weight given to a group’s actual claim
experience for premium rate calculation purposes. For example, an underwriter who
assigns a 25 percent credibility factor to a group’s claim experience assumes that
25 percent of the group’s expected claim experience will be based on the group’s
prior experience. The remaining 75 percent of the expected claim experience will be
based on the insurer’s manual rating for the group.
Underwriters typically determine the blended rate by (1) multiplying the pre-
mium calculated using experience rating by the credibility factor assigned to the
rating, (2) multiplying the premium calculated using manual rating by the remain-
ing percentage of the group’s expected future claims, and (3) adding the two
resulting numbers.
Example:
James Little, an underwriter at Forthright Insurance Company, used blended
rating to determine the premium to charge a mid-sized group for life
insurance coverage. James determined that the group’s
Premium using experience rating = $250
Credibility factor for experience rating = 15 percent
Premium using manual rating = $300
Factor for manual rating = 85 percent (100 percent – 15 percent)
Analysis:
With this information, James was able to calculate a blended premium for the
group that was equal to
Premium (experience rating) = $37.50 ($250 × 0.15)
+ +
Premium (manual rating) = $255 ($300 × 0.85)
Blended premium = $292.50 ($37.50 + $255)
Calculating Premium Rates for Small Groups

Developing equitable rates for small groups is complicated because the impor-
tance of each individual insured’s age, health, and other risk factors increases in
importance as the size of the group decreases. For example, in a group of eight
individuals, one person who represents a high level of risk will have a significant
effect on the risk level for the group as a whole. That same high-risk person would
have a much smaller effect on the risk level for a group of 500 people.

Traditionally, underwriters used manual rating to determine premium rates

for small groups. Today, underwriters can also calculate equitable premium rates
using pooling or step rates. Pooling is a method used in determining group insur-
ance premium rates in which an insurer combines several small groups into one
large group, or pool, and then underwrites the pool as if it were one group. Because
pooling bases premium rates on a single but relatively large group of individuals
rather than on several separate small groups, it often results in a more accurate
estimate of the entire group’s expected claim costs.
Step rating is a method of determining group insurance premium rates in
which an insurer’s accumulated claim experience is used to create rate tables that
are divided into a series of age-graded—and sometimes sex-specific—steps, each
of which is assigned a specific premium amount. The amount an individual group
member (or the group policyholder) pays depends on the step to which the individ-
ual is assigned. To determine the composite monthly premium rate for the group,
the underwriter (1) adds all applicable step rates to determine the total monthly
cost of coverage for all employees and (2) divides the total monthly cost by the
number of group members. Figure 7.7 illustrates these calculations. Insurers gen-
erally use step rates when a group insurance policy covers a limited number of
employees and offers a limited amount of coverage.
Figure 7.7. Sample Step-Rate Table and Calculation of Small Group

Composite Premium
The Crandall Company applied for a group life insurance policy that would provide $50,000 of
coverage for each of its five full-time employees. The name, age, and monthly step rate for each
employee are shown in the table below.
Name Age Step Rate (per month)
Paula Stenson 26 $107
David Morris 29 $115
Brent Prescott 32 $120
Claire Tidwell 43 $130
Aaron Clark 51 $145
To calculate the group’s composite premium rate, the underwriter

1. Adds the step rates for all employees to determine the total monthly cost of coverage.
($107 + $115 + $120 + $130 + $145) = $617.00
2. Divides the total monthly cost by the number of group members to determine the composite
monthly premium for each employee in the group.
$617.00 ÷ 5 = $123.40

Post-issue Underwriting
In the past, underwriting of individual life insurance policies ended at policy issue.
Today, with the increased use of simplified issue and accelerated underwriting
programs, underwriting often continues after policy issue. Post-issue underwrit-
ing is even more prevalent in group insurance policies as new employees enroll in
group plans and employers make changes to plans at contract renewal.
Underwriting of Late Enrollees

Under a noncontributory group insurance plan, all group members are enrolled
automatically in the plan. Under a contributory plan, group members who com-
plete an enrollment card during the established eligibility period can obtain cover-
age under the plan without providing evidence of insurability. The same is true for
group members who enroll eligible dependents in the plan during the eligibility
period.
A group member can add a new dependent, such as a natural child or adopted
child, after the eligibility period without providing evidence of insurability as long
as the dependent is added within 31 days of becoming eligible.
Group members and eligible dependents who are not enrolled when cover-
age is first offered but decide to enroll in the plan after the end of the eligibility
period are late enrollees and are required to provide evidence of their insurability
before being allowed to enroll. An eligible group member who withdraws from a
plan and later applies to reenroll in the plan usually also must provide evidence
of insurability. The evidence of insurability requirement is designed to protect
the insurer against the possibility of antiselection. For example, a group member
who enrolls late may be seeking coverage only after discovering the presence of
a health problem.
The type and amount of evidence underwriters require from late enrollees var-
ies from insurer to insurer and from plan to plan. For example, most insurers
require late enrollees to complete a health questionnaire. Some insurers may also
require a medical examination and documentation of medical treatments received.
As a rule, the more extensive the benefits a plan provides, the more detailed the
evidence must be. Insurers have the right to deny coverage under the group plan if
late enrollees do not provide satisfactory evidence of insurability.
Renewal Underwriting
Unlike individual policies, group life insurance policies must be renewed at the
end of each contract term, which usually is every one to two years. If premiums
have been paid as specified in the group contract and the group policyholder does
not specifically request an underwriting review, a group life insurance contract is
often renewed without additional underwriting. However, if indicated, the insurer
can choose to conduct renewal underwriting, which is a type of underwriting in
which an underwriter reviews all the risk assessment factors considered when the
group was originally underwritten and determines whether the characteristics of
the group have changed in ways that affect the degree of risk the group presents.
For example, an insurer might conduct renewal underwriting if the employee turn-
over was especially high or the insurer had received an exceptionally high number

of claims during the previous coverage period. The underwriter also assesses how
efficiently the policyholder has administered the plan during the previous year.
In general, if a group’s claim experience and administrative costs are within
acceptable limits, the underwriter renews the coverage without changing the
premium rate. When a group’s claim experience has been significantly less than
expected, and other factors are equal, the underwriter may approve the renewal
and reduce the premium rate.
However, if the underwriter identifies administrative problems, he reports
those problems to the group policyholder along with suggestions for corrective
action. Depending on the policyholder’s response, the underwriter may decline to
renew coverage, increase the premium rate, or require changes in the plan design.
The underwriter may also increase premium rates at renewal if a group’s claim
experience has exceeded projected costs or if the group’s demographics have
changed. Before proposing a higher premium rate, however, the underwriter first
tries to determine the reasons for the excessive costs and factors those reasons into
new rate calculations.
A group policyholder may decide not to renew a group policy if the premium
rate increases significantly. In this case, the underwriter usually suggests alterna-
tives such as
Changing the benefit design by reducing benefits
Requiring a larger premium contribution from group insureds, thus passing

some or all of the premium rate increase along to group insureds
Pooling a small group’s experience with other small groups’ experience,
thereby creating a more acceptable level of overall risk
Investigating the cause of the plan’s poor experience and taking measures to
eliminate it

Key Terms
group representative multiple-employer group
request for proposal (RFP) trade association
proposal for insurance multiple-employer welfare
master application arrangement (MEWA)
master group insurance contract association group
class professional association group
benefit transmittal affinity group
contributory plan debtor-creditor group
noncontributory plan eligibility period
census actively at work provision
dependent insurer-administered plan
open claimant self-administered plan
Employee Retirement Income third-party administrator (TPA)
Security Act (ERISA) manual rating
self-insured group plan experience rating
administrative services only (ASO) expected claim experience
arrangement experience refund
fully-insured group plan blended rating
benefit schedule credibility factor
probationary period pooling
plan administrator step rating
enrollment cards late enrollee
single-employer group renewal underwriting

Insurance Administration Chapter 8: Reinsurance: Insurance for Insurers 8.1
Chapter 8
Reinsurance:
Insurance for Insurers
Objectives
8A Identify the roles that insurance companies can take in a reinsurance
transaction
8B Describe the characteristics of assumption reinsurance and traditional
indemnity reinsurance
8C Describe several benefits—in addition to spreading the risk—that
indemnity reinsurance can provide for direct writers
8D Identify the rights and obligations of the direct writer and the reinsurer
when reinsurance is ceded on an automatic, facultative, or facultative-
obligatory basis
8E Describe how risk is shared under a proportional reinsurance
arrangement and under a nonproportional reinsurance arrangement
8F Explain the roles of reinsurance analysts and other insurance company
staff in reinsurance administration
8G Explain the preplacement of reinsurance, the process for reserving
capacity for requested coverage, and the placement of reinsurance
8H Describe the in-force administration procedures followed to change
reinsurance coverage, process billing statements, and record policy
reserves
8I Describe the steps the direct writer and reinsurer take to administer
terminations of reinsurance

8.2 Chapter 8: Reinsurance: Insurance for Insurers Insurance Administration
Outline
Overview of Reinsurance Reinsurance Administration
 Roles of Insurance Companies  Reinsurance Staffing and Systems
in Reinsurance Arrangements  Administering New Business
 Purposes of Reinsurance  Administering In-Force Business
 Benefits of Indemnity Reinsurance  Administering Terminations of
for the Direct Writer Reinsurance
 Cession Arrangements
 Risk-Sharing Arrangements
T
he accumulated risk posed by a collection of in-force life insurance poli-
cies exposes an insurer to potential financial loss. The insurer can transfer
some of that risk to another insurer through the use of reinsurance. In this
chapter, you will learn about (1) how reinsurance insures insurers, (2) the differ-
ent types of arrangements for reinsurance, and (3) the reinsurance administration
process.
Overview of Reinsurance
An insurance company agrees to provide reinsurance to another insurance com-
pany through a reinsurance arrangement, which is a business deal that two com-
panies make for the transfer of risk from one company to the other. A reinsurance
arrangement may involve one policy, a group of policies, a block of business, a line
of business, or any combination of policies, policy groups, or blocks or lines of
business. A block of business is a number of similar insurance policies. A single
policy or group of policies involved in a reinsurance arrangement is also referred
to as a case.
A reinsurance arrangement becomes legally binding to the parties involved
through a reinsurance agreement. A reinsurance agreement, also called a rein-
surance treaty, is a document that contains the terms of the reinsurance business
to be conducted, including the nature of the risk transfer, reinsurance information
procedures, information exchanges, and the rights and duties of each party under
the arrangement.
The transfer of risk by insurance companies is very important in today’s
global economy. In general, any insurance company can enter into reinsurance
arrangements and do business with any properly licensed or authorized reinsurer,
regardless of where each company is located. Major reinsurers maintain offices on
multiple continents and actively seek to disperse risk among their subsidiaries and
business partners in various geographic regions.
Reinsurance is available for many insurance business lines, including life,
health, property, and liability. Because this text concentrates on life insurance,
we discuss reinsuring individual and group life insurance policies.

Roles of Insurance Companies in

Reinsurance Arrangements
An insurer that enters into a reinsurance arrangement can act as a buyer of reinsur-
ance in one transaction and a seller of reinsurance in another transaction. Within any
given arrangement, each participating company takes on one of the following roles:
A direct writer, also known as a ceding company, is the insurance company
that purchases reinsurance to transfer—or cede—all or part of the risks on
insurance policies the company issued.
A reinsurer, also called a reinsurance company or an assuming company, is
an insurer that provides reinsurance coverage by accepting—or assuming—
insurance risk from a direct writer.
A reinsurer can transfer some of the risks it has assumed under a reinsurance
agreement by obtaining reinsurance from a third insurance company. In such
a situation, the reinsurer is acting as a ceding company and the third insurer is
a retrocessionaire, which is a reinsurer that accepts risks from—and provides
reinsurance to—another reinsurer. A reinsurer that transfers risk to a retroces-
sionaire is called a retrocedent.
Figure 8.1 illustrates the roles of reinsurance buyers and sellers.
Figure 8.1. Roles of Reinsurance Buyers and Sellers
Policy
$7 million
Spotlight Insurance—the direct

writer—issues a $7 million life
insurance policy to Joyce Picard.
Spotlight Battery Battery Lithium

Insurance Reinsurance Reinsurance Reinsurance
Policy Policy
$3 million $1 million
Spotlight retains $4 million of the Battery Re retains $2 million and

risk and cedes $3 million of risk to retrocedes the remaining $1 million of
Battery Re—the reinsurer in this risk to Lithium Re—the retrocessionaire
transaction. in this transaction.

Whether operating in the role of a direct writer or a reinsurer, an insurance

company involved in a reinsurance agreement is regulated both by the laws that
govern all insurance companies and by specific laws that apply to reinsurance
activities. Because the parties to a reinsurance agreement are business entities that
are expected to be able to protect themselves legally, reinsurance regulation is less
extensive and less detailed than regulation involving contracts between insurance
companies and individuals or groups. For example, market conduct laws that apply
to direct writers are less applicable to reinsurers, which generally do not interact
directly with insureds.
The regulation of reinsurance primarily focuses on solvency issues. Solvency
laws are designed to ensure that insurance companies are financially able to
meet their debts and to pay policy benefits when they come due. To protect its
financial stability, an insurance company involved in reinsurance must meet
requirements for licensing, financial condition and reporting, and policy reserves.
A policy reserve, also known as a contractual reserve, is a liability that identifies the
amount that, together with future premiums and investment earnings, represents the
expected amount of future benefits payable on an insurer’s in-force business.
Purposes of Reinsurance
Reinsurance can be divided into two broad categories: assumption reinsurance
and indemnity reinsurance. Although assumption reinsurance plays an important
role in the insurance industry, this chapter primarily focuses on indemnity rein-
LEARNING AID surance arrangements.
Assumption Reinsurance
Assumption reinsurance, also known as portfolio reinsurance, is reinsurance
designed to permanently and entirely transfer blocks of existing insurance busi-
ness from one company to another. In effect, the reinsurer assumes the ceding
company’s entire legal obligation for the ceded business. Life insurance compa-
nies often use assumption reinsurance to
Exit a line of business by ceding the business to a reinsurer
Enter a new line of business or expand its participation in an existing line of
business by assuming a line of business from another insurer
Complete the purchase and sale of an entire insurance company
Insurance regulators can also use assumption reinsurance to transfer the busi-
ness of a failed insurer to other insurers, thus providing continuing coverage to the
failed company’s policyowners.
As part of the assumption process, the reinsurer issues new insurance cer-
tificates—known as assumption certificates—to all affected policyowners.
An assumption certificate is an insurance certificate issued on an existing insur-
ance policy by a reinsurer that has assumed the risk of the policy as a result of
an assumption reinsurance transaction. These assumption certificates show poli-
cyowners that the assuming insurer has taken responsibility for all risk under their

i nsurance policies. Under an assumption reinsurance arrangement, the direct writer,

the reinsurer, and the policyowners are parties to the reinsurance transaction.
Indemnity Reinsurance
Under indemnity reinsurance, a direct writer transfers a stated portion of its
accepted risk to a reinsurer, and the reinsurer is obligated to reimburse the direct
writer only after the direct writer pays benefits for reinsured policies. The rein-
surer agrees to pay part of the direct writer’s claim obligations in exchange for a
reinsurance premium, which is the periodic payment made by a direct writer to a
reinsurer as compensation for the reinsurance coverage.
Indemnity reinsurance is the type of reinsurance most commonly used to trans-
fer risk. Technically, indemnity reinsurance takes one of two forms: finite reinsur-
ance and traditional indemnity reinsurance. However, because the complex struc-
ture of finite reinsurance is beyond the scope of this text, this chapter focuses on
traditional indemnity reinsurance.
Traditional Indemnity Reinsurance

Traditional indemnity reinsurance is a form of indemnity reinsurance that is
used to transfer a portion of a direct writer’s accepted risk on an ongoing basis and
that is intended to be a permanent transfer. Traditional indemnity reinsurance typ-
ically transfers risk on a direct writer’s new business rather than its in-force busi-
ness. Direct writers sometimes cede blocks of business using traditional indem-
nity reinsurance to enter or exit a particular product market. However, traditional
indemnity reinsurance arrangements typically create an ongoing contractual
relationship between the parties to the arrangement. The parties to a traditional
indemnity reinsurance arrangement—the direct writer and the reinsurer—negoti-
ate the terms of the agreement to meet the specific needs of both parties.
Unlike assumption reinsurance transactions, a traditional indemnity reinsur-
ance arrangement is not disclosed to the direct writer’s customers, because they
are not parties to the agreement. Under traditional indemnity reinsurance, the
direct writer retains the entire legal liability to its customers whose policies are
reinsured.
Although the parties to a traditional indemnity reinsurance arrangement intend
for the risk transfer to be permanent, traditional indemnity reinsurance arrange-
ments generally allow the direct writer and reinsurer to end or otherwise modify
the arrangement. For example, traditional indemnity reinsurance arrangements
usually allow the direct writer to take back—or recapture—specified reinsurance
risks or for the reinsurer to return—or commute—specified reinsured risks. Tradi-
tional indemnity reinsurance arrangements also allow for termination of the entire
arrangement either (1) through mutual agreement or (2) automatically if one of the
parties fails to meet its financial obligations on time.
Figure 8.2 summarizes the primary characteristics of assumption and tra-
ditional indemnity reinsurance arrangements. The remainder of this chapter
focuses on traditional indemnity reinsurance; going forward, the term indemnity
reinsurance or simply reinsurance will refer to traditional indemnity reinsurance.

Figure 8.2. Characteristics of Assumption and Traditional Indemnity

Reinsurance
Traditional Indemnity
Assumption Reinsurance
Reinsurance
Is the arrangement Permanent Permanent
intended to be temporary
or permanent?
Is recapture permitted? No Yes
Does the reinsurer become Yes No

a party to the underlying
reinsured policies?
Is the arrangement In-force New (typically)

primarily used to reinsure
new business or in-force
business?
What are the primary Total risk transfer Share or transfer risks
purposes of the reinsurance
arrangement?
Who administers the Reinsurer Direct writer, reinsurer, or both

reinsured insurance
policies?
Benefits of Indemnity Reinsurance for the

Direct Writer
For a direct writer, the primary benefit of indemnity reinsurance is that it offers
a way to transfer or share the risk represented by the insurance policies the direct
writer has issued. Reinsurance also benefits the direct writer by helping to
Manage capacity
Ease surplus strain
Reduce fluctuations in claim payments
Obtain information and expertise
Managing Capacity
Many direct writers use reinsurance to strengthen their financial positions. Every
insurance company has a limit on (1) the amount of coverage it can approve or
afford to pay on a single risk and (2) the total amount of risk it can accept. Gen-
erally, a direct writer’s underwriting capacity, or risk-taking capability, is the

aximum monetary amount of risk that the company will accept on an i ndividual
m
insured so that unusual fluctuations in claims will not damage the ongoing sol-
vency of the company. Underwriting capacity includes (1) the amount of risk a
direct writer transfers to reinsurers plus (2) the direct writer’s retention limit.
A retention limit is a specified maximum amount of insurance per life that an
insurer is willing to carry at its own risk without transferring some of the risk to a
reinsurer. A retention limit can be expressed as an amount per policy, an amount
per life, or an overall maximum amount. Direct writers and reinsurers both have
retention limits.
An insurer’s financial capacity is the total monetary amount of risk the com-
pany can accept based on the investable funds it has available to write new busi-
ness. Reinsurance allows a direct writer to free up financial capacity. For instance,
if the marketing efforts of a direct writing company cause the company to sell
larger policies or more total insurance coverage than its financial position can sup-
port, the direct writing company can transfer the excess risk to a reinsurer.
Easing Surplus Strain

In the early years of an insurance policy, the premium payments often are not
adequate to cover the expenses associated with selling and issuing the policy and
maintaining the required policy reserves. To establish the required reserves for
the policy, the direct writer must use some of its surplus. For an insurer, surplus
is the amount of assets the company has over and above its policy reserves and
other financial obligations. Laws in many countries establish minimum surplus
standards that insurers must maintain to conduct business. The use of surplus to
establish policy reserves can cause a direct writer’s surplus level to fall close to
the minimum level.
The decrease in surplus caused by the high initial costs and reserve require-
ments associated with issuing new insurance policies is called surplus strain, or
new business strain. The direct writer may be able to reduce surplus strain by rein-
suring some of its business. In general, when the reinsurer assumes a portion of
the direct writer’s risk, the reinsurer establishes reserves for the reinsured portion
of the risk, thus reducing the amount of reserves the direct writer must maintain.
A decrease in potential surplus strain—which is known as surplus relief—
strengthens an insurer’s financial position. Surplus relief also enables the direct
writer to issue more policies.
Reducing Fluctuations in Claim Payments

The timing and amount of insurance claims received by an insurer can fluctuate
greatly. This volatility can cause financial stress for the insurer. For example, a
direct writer that receives a large number of claims in a short period may not have
sufficient resources available to pay all of the claims at that time. Other possible
sources of financial stress are unexpectedly large claims or claims that occur ear-
lier than anticipated after policy issuance.
Reinsurance cannot control the frequency of claims, but it can smooth the
impact of extreme fluctuations. The reinsurer pays a portion of the policy benefits,
enabling the direct writer to experience more predictable earnings and more stable
cash flows.

Obtaining Information and Expertise

Because reinsurers work with multiple direct writers, they are exposed to a vari-
ety of different policies and procedures for product development, marketing, under-
writing, claim, and reinsurance administration. Reinsurers also develop extensive
databases of mortality and morbidity statistics based on the collective experience
of their direct writer clients and their own reinsurance cases. As a result, reinsurers
are aware of challenges that direct writers face and have a great deal of information
and expertise they can share with direct writers to help them meet those challenges.
A reinsurer can provide expertise on establishing sound policies and practices
for many areas—notably product development, underwriting, reinsurance admin-
istration, and claim administration. Although the need to protect client confiden-
tiality and proprietary information prevents a reinsurer from sharing the specific
details of any direct writer’s business practices, the reinsurer can offer general
advice to a direct writer about administrative systems, workflows, control mecha-
nisms, best practices, and procedures.
Direct writers often obtain a reinsurer’s advice in developing underwriting
and claim administration manuals and systems, determining premium rates, and
wording policy provisions. Many reinsurers also maintain underwriting manuals
that direct writers can use to guide their underwriting decisions. A reinsurer can
assess the strength of a direct writer’s proposed new product by evaluating the
product’s underwriting standards, administration method, system requirements,
pricing assumptions, premium rate structure, commission plan, and marketing
approach. However, reinsurers cannot share specific financial design information
obtained from one direct writer with other direct writers.
Reinsurers’ statistics on impairments—such as heart disease, hypertension, and
diabetes—can help direct writers more accurately underwrite proposed insureds
with these impairments. Typically, if a direct writer requests advice on a particular
underwriting or claims case, the reinsurer reviews the case and gives an opinion
on the underwriting or claim issue.
Cession Arrangements
A cession is the unit of insurance risk that a direct writer transfers to a reinsurer.
Transfers of cessions are managed through a cession arrangement, which identifies
(1) the direct writer’s obligations and rights to cede risks, and (2) the reinsurer’s
obligations to accept risk as well as its rights to reject risk. Through a cession
arrangement, a direct writer can cede reinsurance risk on an automatic, a faculta-
tive, or a facultative-obligatory (fac-ob) basis.
Automatic Reinsurance
Automatic reinsurance, also called obligatory reinsurance, is a reinsurance ces-
sion arrangement in which the direct writer agrees in advance to cede all risks that
meet the specifications in the reinsurance agreement and the reinsurer agrees in
advance to assume these risks. The direct writer typically retains a portion of the
risk under an automatic arrangement.
Automatic reinsurance is the only cession arrangement in which the direct
writer must cede and the reinsurer must assume a qualifying case based only on
the direct writer’s underwriting evaluation. If a risk meets the requirements for
automatic cession, then the direct writer generally must reinsure the risk and the
reinsurer must accept the case, without question.
Example:
Telbaum Insurance Company is a direct writer that has an automatic
reinsurance agreement with Divisial Re. Under the terms of the agreement,
Telbaum must cede to Divisial any whole life insurance cases with face
amounts between $200,000 and $500,000 that Telbaum has underwritten
and rated as preferred or standard risks. Telbaum recently approved Teresa
Gutierrez for a $350,000 whole life insurance policy and rated her as a
standard risk.
Analysis:
Because Teresa’s policy met the terms of the automatic reinsurance
agreement, Telbaum ceded the case and Divisial automatically accepted
the case without reviewing it.
Automatic reinsurance arrangements may limit cessions based on factors such

as the plan of insurance, the age of the insured, the policy issue date, and the
underwriting class (preferred, standard, or substandard). Direct writers and rein-
surers also have financial limits for automatic cessions. Figure 8.3 lists several
types of financial limits for automatic cessions.
The reinsurance agreement states the premium rates for automatic reinsurance.
Thus, for a given case under an automatic arrangement, the direct writer and the
reinsurer can independently calculate the amount of reinsurance premium payable.
Figure 8.3. Types of Financial Limits for Automatic Cessions

•• A retention limit is a specified maximum monetary amount of insurance
per life that an insurer is willing to carry at its own risk without transferring
some of the risk to a reinsurer.
•• An automatic binding limit represents the maximum monetary
amount of risk the reinsurer will accept automatically on a given
life without making an independent underwriting assessment.
The automatic binding limit applies across all reinsurance agreements
between the reinsurer and a particular direct writer. The reinsurer must
accept the entire ceded risk on all policies when that risk does not exceed the automatic
binding limit and all other specifications are met.
•• A minimum cession is the smallest monetary amount of risk a direct writer will cede or
that a reinsurer will accept in an automatic cession. Having a minimum cession allows a
direct writer and a reinsurer to avoid obligations to accept risks that are relatively small in
comparison to the administrative costs associated with the risk amounts. An example of a
commonly used minimum cession is $25,000.
•• A jumbo limit is the maximum allowable monetary amount of total insurance—both in
force and applied for—with all companies on any one life that qualifies for automatic
cession. Many companies vary the basic definition of a jumbo limit by specifying whether
the allowable amount includes replacement of existing coverage. A jumbo limit on life
reinsurance protects a reinsurer from excessive risk resulting from the accumulation of
several policies on the same life. Only automatic reinsurance arrangements for life insurance
or critical illness coverage are subject to jumbo limits.

Facultative Reinsurance
Facultative reinsurance is a reinsurance cession arrangement in which the direct
writer chooses whether to cede a risk and the reinsurer chooses whether to accept
that risk. Under facultative reinsurance, the direct writer has the option to cede a
portion of the risk or the entire risk.
Facultative reinsurance is the only cession arrangement in which the reinsurer
performs an independent underwriting evaluation and has the option to reject risks
on the basis of its underwriting. For a facultative case, a reinsurer underwrites the
case, assigns the case a risk classification, and can quote a reinsurance price based
on its own underwriting guidelines and terms. A reinsurer has no obligation to
submit a quote for a case submitted on a facultative basis. Similarly, a direct writer
is under no obligation to accept a quote from a reinsurer on a facultative case.
Many direct writers choose facultative reinsurance for complex cases for which
they would benefit from the reinsurer’s underwriting judgment before issuing the
policy. For example, reinsurers often develop expertise in specific impairments,
and direct writers encountering those impairments in an application may use fac-
ultative reinsurance to offer the case to such a reinsurer.
Many automatic reinsurance agreements include a facultative provision that
allows a direct writer to submit a case that does not qualify for automatic cession.
The reinsurer evaluates the submitted case on a facultative basis. If the reinsurer
accepts the case, the reinsurer uses the premium rate from the automatic reinsur-
ance agreement.
In general, the cost of facultative reinsurance to direct writers is higher than
the cost of automatic reinsurance. Because facultative arrangements often cover
larger cases or more difficult cases involving multiple risk factors, the reinsurer’s
premium rates under facultative-only arrangements include the higher costs to
underwrite, evaluate, and provide coverage. Direct writers may shop for the best
underwriting decision by submitting facultative cases to several reinsurers simul-
taneously to obtain several price quotes.
Example:
Nightsable Insurance Company is a direct writer that wants to reinsure a life
insurance policy with a face amount of $2,500,000. Nightsable’s objective is
to reinsure as much of the policy’s face amount as possible while only ceding
to one reinsurer. Nightsable has facultative reinsurance arrangements with
Lamphill Re, Deepzee Re, and Wickapple Re. Nightsable submits the case to
the three reinsurers to obtain three quotes.
Lamphill Re underwrites the case and determines that the insured is a
substandard risk with a Table 6 rating. Lamphill does not reinsure substandard
risks over Table 4 and declines to submit a quote for the case.
Deepzee Re underwrites the case and determines that the insured is a
substandard risk. Deepzee offers to reinsure $1 million. Based on the
facultative reinsurance agreement, the calculated annual reinsurance
premium equals $7,500.
Wickapple Re underwrites the case and determines that the insured is a
standard risk. Wickapple offers to reinsure $1,500,000. Based on the facultative
reinsurance agreement, the calculated annual reinsurance premium equals
$10,000.

Analysis:
Although Wickapple’s quote includes a higher reinsurance premium than
Deepzee’s, the higher face amount coverage meets Nightsable’s objective.
Therefore, Nightsable reinsures the case with Wickapple.
Facultative-Obligatory Reinsurance
Facultative-obligatory (fac-ob) reinsurance is a reinsurance cession arrange-
ment in which (1) the direct writer may choose to submit specific cases to the
reinsurer and (2) the reinsurer must accept the cases based on the direct writer’s
underwriting—up to a stated maximum amount—if the reinsurer has available
financial capacity. The direct writer typically retains a portion of the risk.
In a fac-ob arrangement, the reinsurer has the same rights and obligations as
in an automatic arrangement, and has the additional right to reject the case if the
reinsurer lacks financial capacity. For a submitted case, the reinsurer determines
whether the requested coverage exceeds the reinsurer’s capacity. If the reinsurer
lacks capacity to cover the case, the reinsurer may be able to cede the excess risk
to other reinsurers.
Example:
Echotail Insurance Company is a direct writer that has a facultative-obligatory
reinsurance arrangement with Greenrind Re. Under the terms of the
agreement, Greenrind must accept any ceded cases up to a face amount of
$5 million as long as Greenrind has the financial capacity to do so. Echotail
decides to reinsure an individual life insurance policy with a face amount of
$2 million and notifies Greenrind.
Analysis:
Greenrind Re currently has enough financial capacity to accept up to $3
million of risk. Since Greenrind has the capacity to take on the risk that
Echotail wishes to cede, Greenrind must accept the case.
If the reinsurer lacks financial capacity and therefore cannot accept the risk,
it immediately notifies the direct writer. If the reinsurer fails to notify the direct
writer within the period specified in the reinsurance agreement, the reinsurer is
automatically bound to the risk within the agreed-upon acceptance limits.
Figure 8.4 compares the rights and obligations for direct writers and reinsurers
under the three types of cession arrangements.
Risk-Sharing Arrangements
In addition to the various types of cession arrangements, reinsurance arrange-
ments can use different methods for sharing monetary risks between the direct
writer and the reinsurer. Risk-sharing arrangements generally can be classified as
either proportional or nonproportional.

Figure 8.4. Risk Assessment Factors for Group Insurance
Direct Writer Reinsurer
Automatic •• Performs an underwriting evaluation •• Must assume all qualifying cases

•• Must cede all qualifying cases •• Does not perform any underwriting
evaluation before assuming the risk
•• Typically retains a portion of the risk
Facultative •• Has the option to cede or retain •• Performs an underwriting

qualifying cases evaluation before accepting a risk
•• May cede the entire risk •• Has the option to reject cases
Fac-Ob •• Has the option to cede or retain •• Must assume all qualifying cases if
qualifying cases financial capacity is available
•• Typically retains a portion of the risk •• May reject qualifying cases if
financial capacity is not available
Proportional Reinsurance
Proportional reinsurance is a type of reinsurance arrangement in which the direct
writer and reinsurer agree in advance to share premiums and claim obligations
according to a specified amount or percentage. In addition, the direct writer and
reinsurer share the policy reserve proportionately.
Proportional reinsurance typically is used for life insurance because the liabil-
ity for a life insurance policy generally is known at the outset. Some proportional
arrangements express the reinsurer’s share as a percentage or ratio of the face
amount of life insurance issued.
Example:
The Abledor Insurance Company is a direct writer that has a proportional
reinsurance arrangement with Thredmore Re and Wintall Re. Under the
terms of the agreement, Abledor agrees to retain 20 percent of each risk,
Thredmore agrees to assume 30 percent of each risk, and Wintall agrees to
assume 50 percent of each risk.
Abledor recently received a claim on a policy with a face amount of $500,000.
Under the terms of the reinsurance arrangement, the parties divide the future
claim liability as shown below:
Abledor Thredmore Wintall
$100,000 retained $150,000 assumed $250,000 assumed

(0.20 × $500,000) (0.30 × $500,000) (0.50 × $500,000)
$400,000 ceded to
reinsurers

Nonproportional Reinsurance
Nonproportional reinsurance is a type of reinsurance arrangement in which nei-
ther the reinsurer nor the direct writer knows in advance what share of a risk the
reinsurer will ultimately assume. The reinsurer’s liability depends on the actual
claims the direct writer pays. Once the direct writer’s monetary losses reach a
specified maximum limit—called the attachment point—within a specified
period, the reinsurer begins to share in expenses for future claims.
Although nonproportional reinsurance typically is used when reinsuring non-
life types of insurance coverage, one common type of nonproportional reinsurance
that can apply to life insurance coverage is catastrophe coverage. Catastrophe
coverage, also known as cat cover, is designed to partially protect direct writers
from (1) a single catastrophic event resulting in multiple claims or (2) an annual
total of claims in a catastrophic amount. Examples of single catastrophic events
involving multiple life insurance claims include
Building fires
Earthquakes
Volcanic eruptions
Commercial airplane crashes
Environmental accidents
Epidemics
Terrorist attacks
Nuclear and biochemical risks
Tsunamis
Catastrophe coverage usually requires the reinsurer to reimburse the direct
writer for claims when the direct writer’s total claims exceed a stated amount
within a specified period, subject to (1) a minimum number of qualified claims or
minimum amount of claim benefits and (2) a maximum total reinsurance payout.
Example:
Sturdy Insurance Company, a direct writer of life insurance policies, has
catastrophe coverage with Xample Re that will take effect once Sturdy has
paid out claims of at least $75 million due to a single catastrophic event. Last
year, a major earthquake occurred, resulting in the deaths of a high number
of Sturdy’s insureds. The subsequent claims totaled $130 million.
Total claims paid by Sturdy $130 million
Sturdy’s maximum limit before $75 million

triggering catastrophe coverage
Amount that Xample Re reimburses $55 million ($130 million –

Sturdy for qualifying claims $75 million)

Reinsurance Administration
From the time a direct writer decides to seek reinsurance to the time that all rein-
surance coverage under a reinsurance arrangement is ended, employees of the
direct writer and the reinsurer perform a wide variety of reinsurance-related activ-
ities. These activities include
Selecting a reinsurance partner
Negotiating a reinsurance agreement
Ceding or assuming specific risks
Administering in-force reinsurance
Terminating the reinsurance agreement

Many of these activities can be classified as reinsurance administration, which
includes all of the day-to-day activities conducted by the direct writer and the rein-
surer to process and manage each risk that the direct writer cedes automatically or
submits for facultative or facultative-obligatory consideration.
Under some reinsurance agreements, the direct writer accepts primary respon-
sibility for administration. Under other agreements, the reinsurer accepts primary
responsibility, or the reinsurance parties share administrative duties. Generally,
the company that is primarily responsible for administering the reinsurance car-
ries out the following tasks:
Determining the amount of reinsurance coverage
Interpreting and complying with the requirements of existing reinsurance

agreements
Handling reinsurance premium billing and payment
Administering policy changes and policy terminations
Administering reinsurance claims
Maintaining comprehensive records and developing reports
Ensuring quality control and timeliness of all reinsurance administration

activities
Administering reinsurance agreement terminations
Reinsurance Staffing and Systems

Most reinsurers establish separate functional areas or staff groups to handle
reinsurance administration, but not every direct writer is organized in the same
way. Some direct writers have a separate reinsurance department or reinsurance
administration unit, but others do not. In addition, reinsurance staff can report to
the actuarial, new business, underwriting, or financial reporting departments.

Reinsurance Analysts
A reinsurance analyst is any direct writer or reinsurer employee—except the
person holding top leadership responsibility—who is involved in any phase of
reinsurance administration. Some insurers refer to reinsurance analysts by other
titles, such as client administrators or reinsurance specialists.
Reinsurance analysts are responsible for handling many of the activities
required to conduct reinsurance transactions between reinsurers and direct writ-
ers. However, a reinsurance analyst’s job duties may vary from company to com-
pany and may depend on the reinsurance analyst’s level of experience. Reinsur-
ance analysts typically perform some or all of the activities listed in Figure 8.5,
using administration systems to automatically complete some of these tasks.
Figure 8.5. Typical Activities of Reinsurance Analysts
•• Verifying that the correct

reinsurance agreement is used to
guide administration
of a specified risk
•• Verifying that administrative
activities for a given risk meet
agreement requirements
•• Administering changes to
reinsurance agreements and the
reinsurance coverage on individual
policies or blocks of business
•• Ensuring that facultative coverage
is ceded based on the reinsurer’s
underwriting decision
•• Calculating the portion of each risk that is retained and the portion that is ceded
•• Calculating and generating payments for funds due to or from the reinsurance parties
•• Reconciling reinsurance billing statements and payments with company records
•• Recordkeeping and preparing detailed reports regarding reinsured policies
•• Meeting financial and regulatory reporting requirements
•• Collaborating with other company staff and outside organizations as necessary
•• Analyzing data for trends and alerting management to unusual patterns
Other Staff Involved in Reinsurance Activities

In addition to the reinsurance administration unit, other operational areas of
direct writers and reinsurers—including marketing, actuarial, underwriting,
legal and compliance, accounting, auditing, and claim administration—perform
reinsurance-related activities.

Marketing
Some reinsurers use reinsurance marketing officers to help them establish reinsur-
ance arrangements. A reinsurance marketing officer, also known as a reinsurance
account executive, is a reinsurer’s employee who sells reinsurance and coordinates
the marketing process for the reinsurer. Such employees visit the home offices of
current and potential clients—usually direct writing companies and other rein-
surers. Reinsurance marketing officers gather information about new reinsurance
arrangements that clients need or adjustments that clients would like to make to
existing arrangements.
Although not required to be licensed as financial professionals, most reinsur-
ance marketing officers have extensive experience in the insurance industry. Typi-
cally, direct writers consider reinsurance marketing officers to be valuable sources
of information and advice concerning developments in the insurance and reinsur-
ance markets.
Actuarial
Actuaries who deal with reinsurance calculate appropriate pricing structures and
policy reserves for reinsurance ceded and assumed. They also project liabilities,
such as the monetary amounts needed to pay future claims. In addition, actuaries
assist direct writers and reinsurers in setting retention limits.
Direct writers’ actuaries submit requests for proposals for new reinsurance
arrangements, evaluate the proposals that reinsurers submit, and—with input from
employees working in other functional areas of the company—select reinsurers
and negotiate reinsurance agreements. Direct writers’ actuaries also evaluate new
reinsurance products and services.
Reinsurers’ actuaries calculate policy reserves for multiple products from mul-
tiple direct writers. Like direct writers’ actuaries, reinsurers’ actuaries negoti-
ate reinsurance agreements and assist with the preparation of periodic financial
reports for insurance regulators.
Underwriting
Underwriting plays an important role in reinsurance for both direct writers and
reinsurers. The direct writer’s underwriters evaluate the risk presented by each
policy application, regardless of whether the risks will be reinsured. The rein-
surer’s underwriters:
Evaluate risks for facultative submissions
Review the direct writer’s underwriting guidelines
Perform underwriting audits to ensure that direct writers follow any under-
writing guidelines specified in reinsurance arrangements
May underwrite additional risks at the request of the direct writer
If changes occur to ceded or assumed risks, or if a direct writer wishes to
modify ceded coverage, underwriters for either reinsurance partner may need to
underwrite the changes in risk. Underwriters also may participate in negotiating
reinsurance agreements.

Legal and Compliance

The legal department typically helps develop and interpret reinsurance agreements
and provides advice when reinsurance agreement negotiations become particu-
larly complex. Many reinsurers and retrocessionaires have separate departments
that develop and negotiate reinsurance agreements.
The compliance unit’s responsibilities related to reinsurance typically include
Studying current and proposed laws to determine their effects on the com-
pany’s business
Educating company employees about applicable regulatory requirements and
company compliance policies
Monitoring the conduct of employees and marketers affiliated with the insurer
to ensure that they are complying with applicable regulatory requirements and
company compliance policies
Overseeing internal control procedures
Working with insurance regulators when they conduct examinations of the
company
Accounting
Reinsurance accounting involves maintaining accurate records of the numerous
financial transactions associated with administering reinsurance, such as the pay-
ment of reinsurance premiums to reinsurers and the payment of reinsurance claim
benefits to direct writers. Accounting employees also prepare financial statements,
summarize the company’s reinsurance-related accounts, and work with reinsur-
ance analysts to identify the appropriate accounting entries for reinsurance-related
transactions.
Each insurer’s accounting unit provides advice to other units within the com-
pany about accounting requirements and assists those units in setting up proce-
dures to fulfill the requirements. The accounting requirements may vary by the
company’s role—direct writer or reinsurer—in a particular reinsurance agree-
ment and by the type of reinsurance arrangement.
Auditing
During a reinsurance audit, auditors examine the company’s reinsurance records
and procedures and recommend improvements to those procedures. Reinsurance
audits typically focus on underwriting, claim administration, and reinsurance
administration.
Typically, direct writers and reinsurers both conduct internal audits of their own
staff’s work and their own processes. In addition, reinsurers conduct external audits
of most direct writers with which they do business. A direct writer that does busi-
ness with more than one reinsurer is subject to a separate audit by each reinsurer.
Claim Administration
When the direct writer receives a claim under a reinsured policy, its claim staff
notifies its reinsurance administration staff. Typically, the claim department settles
the claim without consulting the reinsurer for a recommendation or an approval
on the claim. However, in certain circumstances—such as anticipated denials of

claims or large contestable claims—the reinsurance agreement may require the

direct writer to send the claim documentation to the reinsurer for a claim recom-
mendation prior to settling a claim.
Once the claim has been paid, the claim staff passes the information about the
settlement on to a reinsurance analyst. The reinsurance analyst prepares reports
of claims submitted and paid and sends the reports to the reinsurer to obtain reim-
bursement for all or a portion of each paid claim.
Reinsurers’ claim staff typically have experience with claims submitted under
a wide variety of products and complex circumstances. Therefore, the direct writ-
er’s claim department may contact the reinsurer’s claim department for advice on
any large or unusual claims. The reinsurer’s claim staff also may assist the direct
writer with claim investigations and contests of claim denials.
Figure 8.6 summarizes the contributions of staff members from functional
areas to reinsurance administration.
Reinsurance Intermediaries
A reinsurance intermediary is a third party that is not employed by a direct writer
or reinsurer but that acts on behalf of a direct writer or reinsurer to place reinsur-
ance. A reinsurance intermediary is required to be licensed in each state in which
the intermediary has an office.
A reinsurance intermediary is typically used when the direct writer lacks rein-
surance experience in a particular area. For instance, intermediaries occasion-
ally handle life reinsurance for cases involving very high face amounts, unusual
underwriting characteristics, or complex product designs.
Acting as independent parties, reinsurance intermediaries sometimes assist in
resolving problems or disagreements between direct writers and reinsurers regard-
ing reinsurance arrangements.
Reinsurance Information Systems

Because of the high volume of reinsurance business and the global nature of the
reinsurance industry, computer-based information systems are essential to the
efficient, effective administration of reinsurance activities. Examples of reinsur-
ance activities involving information systems include
Negotiating reinsurance agreements
Requesting facultative coverage
Sending underwriting advice and information
Checking agreements for details of implementation
Calculating the amount of risk to be ceded or assumed on a particular case or

a group of cases
Calculating premium and claim amounts due and paid
Transferring payments
Producing numerous reports on all sorts of administrative transactions
Checking the quality of every aspect of reinsurance operations

Figure 8.6. Staff Involved in Reinsurance Activities
For direct writers:

•• Provides information about market
Marketing developments
For reinsurers:
•• Helps reinsurers establish arrangements
For direct writers and reinsurers:

•• Calculates policy reserves and projects
Actuarial future liabilities
•• Helps set retention limits
•• Negotiates reinsurance agreements
For direct writers:

•• Evaluates risk of each policy application
Underwriting For reinsurers:
•• Evaluates risks for facultative submissions
•• Evaluates underwriting guidelines and practices
of direct writers

•• Reviews reinsurance agreements and helps develop
Legal &
and negotiate agreements as needed
Compliance
•• Monitors operations to ensure compliance with
reinsurance policies and regulations

•• Maintains records of reinsurance financial
Accounting
transactions
•• Prepares financial statements

•• Examines company records and procedures
Auditing
For reinsurers:
•• Performs audits of direct writers
For direct writers:

•• Settles claims and contacts reinsurer for
Claim reimbursement
Administration For reinsurers:
•• Assists direct writer with complex claims and
claim investigations

These activities demand rapid, accurate information in a form that can be col-
lected, organized, corrected, modified, and communicated to those who need it.
Information system technologies—such as spreadsheet software and database
management systems—allow reinsurance analysts to organize, analyze, and
report information in almost any configuration desired. Reinsurers have a strong
need for flexible, sophisticated systems to analyze and report data related to a vari-
ety of products provided by a large number of direct writers, each of which has its
own information system.
Direct writers and reinsurers maintain a continuous flow of information to
relevant parties via business-to-business e-commerce. Electronic commerce
(e-commerce) is a company’s use of the Internet and computer networks to deliver
information, perform business transactions, and facilitate the delivery of products
and services to customers. Business-to-business (B2B) e-commerce is the elec-
tronic transmission of data or information between organizations to perform or
facilitate business transactions. B2B e-commerce for reinsurance often involves
communications with
Parties to a reinsurance agreement
Reinsurance intermediaries
Vendors, such as consumer reporting agencies
Financial institutions, such as banks
Regulatory bodies
Some companies also use computer systems for reinsurance decision making
and strategic planning. For example, a reinsurance information system for auto-
matic reinsurance can check the direct writer’s retained risk and cede excess risk
to the appropriate reinsurer according to the terms of the reinsurance agreement.
Administering New Business

Reinsurance administration starts when the direct writer seeks reinsurance for a
risk and lasts until the reinsurance is no longer in force. Reinsurance administra-
tion can involve three or all four of the following stages:
Preplacement (new business)
Placement (new business)
In-force
Termination
Figure 8.7 outlines the typical progression of a reinsurance case.
Generally, preplacement is required only for facultative and fac-ob cases. Pre-
placement typically is not necessary for automatic cases because the direct writer
and reinsurer have agreed in advance that the direct writer will place certain types
of risk with the reinsurer. Thus, administration of automatic reinsurance generally
begins at the placement stage.

Figure 8.7. Life Cycle of a Reinsurance Case
Preplacement
Reinsurer evaluates case and either offers or declines coverage.
Placement
Reinsurer and direct writer activate reinsurance.
In-Force
Direct writer pays reinsurance premiums; direct writer and/or reinsurer make adjustments to
reinsurance; and reinsurer administers claims on reinsured policies.
Termination
Direct writer notifies reinsurer when a reinsured policy has been terminated, and
reinsurer manages the termination of reinsurance.
Because reinsurance administration can vary greatly from one reinsur-

ance arrangement to another and from one company to another, the procedures
described in the following sections may be somewhat different from the proce-
dures that any particular company uses.
Preplacement of Reinsurance
Preplacement is the process by which a reinsurer
Reviews the direct writer’s request for coverage and either offers to reinsure
the risk or declines it.
Establishes appropriate records and reserves capacity for the case. Reserved
capacity is the portion of a reinsurer’s financial capacity that the reinsurer sets
aside to provide coverage of the risk under the anticipated new business.
Follows up on reserved capacity that has been inactive for a specified period
of time.
Preplacement continues until the (1) reinsurance coverage begins, (2) reinsurer
denies the direct writer’s request for coverage, or (3) direct writer withdraws its
request for coverage.

Reviewing a Request for Coverage

Under facultative and fac-ob reinsurance arrangements, the direct writer requests
reinsurance coverage on a particular insured or group of insureds by sending the
reinsurer a document known as a request for coverage, or facultative applica-
tion. Underwriters work closely with reinsurance analysts to identify facultative
preplacements so that premiums and claims ultimately are paid promptly and
accurately.
For each preplaced case, the direct writer maintains a file that includes a copy
of the request for coverage, reinsurers’ requests for additional information on the
case, and any offers received. The direct writer’s reinsurance analyst responds to
any questions or requests from reinsurers about the request for coverage. Upon
receiving a request for coverage, with all of the required information, the reinsurer
establishes the appropriate records and reserves the necessary capacity.
For facultative cases, sending a request for coverage to a reinsurer does not
guarantee that the direct writer will cede the case to that reinsurer. The direct
writer may be shopping—that is, submitting cases facultatively to several reinsur-
ers. Direct writers sometimes shop cases to obtain the best reinsurance coverage
for the most competitive price. Thus, sometimes a reinsurer performs preplace-
ment for a case that the direct writer eventually places with another reinsurer.
Reinsurance agreements sometimes include time limits to protect a direct
writer from the risk resulting from a reinsurer’s failure to respond to a request for
coverage in a timely manner. Recall that a fac-ob reinsurance agreement may state
that, if the reinsurer does not respond to a request for coverage within a specified
time limit, then the direct writer can assume that reinsurance on the policy will
take effect.
Establishing Records and Reserving Capacity

A reinsurer establishes a case file for each submitted case in the reinsurer’s admin-
istration system. Reinsurers use status codes to enable them to track the current
status of each case. The status code terminology varies from one reinsurer to
another. Some of the status codes—such as replaced, claim, paid, and termi-
nated—apply to in-force business rather than to new business. Figure 8.8 lists
several common status codes.
When a reinsurer makes an offer on a facultative case, the reinsurer codes
the case’s status as pending. If the direct writer subsequently sends a cession, the
reinsurer updates the case’s status to placed, showing that the reinsurance is in
force. Alternatively, if the direct writer places the case with another reinsurer, the
reinsurer changes the case file’s status from pending to withdrawn.
In the process of establishing case files and reserving capacity, the reinsurer’s
employees perform the following activities, which may not always occur in the
sequence shown:
Comparing the request for coverage to the reinsurance agreement.
The reinsurance analyst verifies that the direct writer and reinsurer have a
reinsurance agreement for the type of coverage requested and that the agree-
ment is in effect for new business. The reinsurance analyst then determines
the types and amounts of reinsurance, if any, it is obligated to provide to the
direct writer under that agreement. The analyst also evaluates whether the
request for coverage meets all of the agreement’s requirements for risks to

be reinsured. Examples of requirements found in the reinsurance agreement

include (1) age limits and residency requirements for the insured, (2) the
amount of coverage to be ceded, and (3) the underwriting classification of the
insured. Some administration systems automatically perform coverage com-
parisons for reinsurance analysts.
Verifying the reinsurer’s retention and financial capacity. The reinsurance
analyst checks the amount of its current retention on the insured and the rein-
surer’s financial capacity to confirm that the reinsurer can provide the requested
coverage. The analyst also identifies cases that may require the reinsurer to cede
all or part of the risk to a retrocessionaire. Some reinsurance administration
systems automatically perform these calculations for the reinsurer.
Assessing the risk. Facultative cases typically require underwriting approval
from the reinsurer. Therefore, for each case submitted on a facultative basis,
the reinsurer’s underwriters evaluate the underwriting documents that the
direct writer sends with the request for coverage and decide whether to make
an offer, decline the case, or ask the direct writer to provide additional informa-
tion. This evaluation and decision-making process usually is called facultative
reinsurance underwriting.
Figure 8.8. Sample Status Codes for Reinsurers
•• Reserved—The reinsurer has set aside reinsurance capacity.

•• Waiting—The reinsurer has requested additional information from
the direct writer. Also known as pending underwriting or outstanding
requirements.
•• Pending—The reinsurer has made an offer on a facultative case and is
waiting for a response from the direct writer.
•• Placed—The direct writer has ceded the case to the reinsurer. Also known
as active, premium paying, or in-force.
•• Declined—The reinsurer has declined the facultative case.
•• Withdrawn—The direct writer has not accepted the reinsurer’s facultative
offer. Also known as not taken.
•• Replaced—The policyowner has replaced the original policy with—or
converted the original policy to—a different policy.
•• Claim—The direct writer has notified the reinsurer of a claim filed under
the reinsured policy.
•• Paid—The reinsurer has paid a claim under the reinsured coverage.
•• Terminated—The policy has lapsed, been surrendered, or otherwise
ceased being reinsured.

The process for facultative reinsurance underwriting is very similar to

primary underwriting, which is the underwriting process performed by a
direct writer. However, reinsurance underwriters tend to work more often
with unusual or problematic cases—such as those involving very large face
amounts, complicated medical factors, unusual avocations, or celebrities—
than do underwriters at direct writing companies.
A reinsurance analyst may be responsible for collecting the required under-
writing documents and information, organizing those documents appropri-
ately in a case file, and referring the file to the reinsurer’s underwriters. Typi-
cally, a case file includes underwriting-related information (1) received from
the direct writer and (2) generated by the reinsurer’s administration system.
Arranging retrocession as needed. Most reinsurers have established mul-
tiple automatic or fac-ob retrocession arrangements with retrocessionaires or
other reinsurers. If the amount that the reinsurer needs to retrocede exceeds
the amount covered by the reinsurer’s established retrocession arrangements,
the reinsurer generally has four options:
1. Pursue retrocession coverage with a retrocessionaire outside the rein-

surer’s established retrocession arrangements
2. Ask retrocessionaires to increase the amount they are willing to accept

facultatively
3. Accept a smaller amount of the risk and notify the direct writer to
seek additional reinsurance (for facultative and fac-ob cases only)
4. Decline to reinsure the case (for facultative and fac-ob cases only)
Placing the reservation of capacity. If the reinsurer offers to reinsure the

case, the reinsurance analyst updates the reinsurance administration system
and codes the status of the file as reserved. This reserved status holds the
required capacity for a specified period. The reinsurer assigns the reservation
a date of expiry—the date on which the reinsurer will cancel the reservation
of reinsurance capacity if the reinsurer does not receive a cession or other
placement information from the direct writer. Typically, the date of expiry
falls between 90 and 120 days after the date the reservation was made.
Following Up on Reserved Capacity

To keep the maximum capacity available at all times, reinsurers follow up on
reserved capacity. Most reinsurance administration systems generate lists of out-
standing cases for which (1) the date of expiry is near and (2) the direct writer has
not sent a cession, a drop notice, or an extension request. A drop notice, or close
notice, is a notification from a direct writer to a reinsurer stating that the direct
writer no longer needs reinsurance that it previously requested and requesting
the reinsurer to cancel the reservation. An extension request is a request from a
direct writer to a reinsurer to extend the direct writer’s reservation of capacity for
a specified period so that the direct writer can gather all information needed to
move the case from reserved to placed status.

To follow up on reserved capacity, the reinsurer sends a notice of expiry, which

is a document the reinsurer uses to notify the direct writer that an offer to reinsure
is due to expire and to request additional information, a cession, a drop notice, or
an extension request from the direct writer. Depending on the reinsurer, the notice
of expiry is sent electronically or as a physical document.
If the direct writer no longer requires reinsurance, the reinsurer can release the
reserved capacity to make it available for other cases. Alternatively, if the direct
writer wants to keep the file open and maintain the reservation of capacity, an
underwriter must approve the extension of the expiry date.
Placement of Reinsurance
Placement, sometimes called the submission stage, is a process in which the direct
writer and reinsurer activate reinsurance coverage for a new automatic, faculta-
tive, or fac-ob cession. To begin placement, the direct writer verifies which rein-
surer should receive the cession and provides specified information about the risk
to the reinsurer.
After receiving a new business cession, the reinsurer’s reinsurance analyst
marks the case status as placed and updates the reinsurance administration sys-
tem. Some reinsurers send confirmation in the form of a reinsurance certificate,
which is a document that notifies the direct writer that reinsurance is officially in
force. A reinsurance certificate includes information about the insured, the rein-
sured policy, and the terms of the applicable reinsurance agreement. Reinsurers
generally send reinsurance certificates only for facultative or fac-ob reinsurance
on individual policies.
Administering In-Force Business

The following actions take place during the in-force stage of reinsurance admin-
istration
The direct writer pays the reinsurance premiums to the reinsurer to keep the
coverage in force.
The reinsurance parties make adjustments to the reinsurance coverage as
changes are made to the reinsured policies.
The reinsurer receives claim notices from the direct writer, examines the
claims, approves or rejects the claims, and settles valid claims.
Because the payment of a death claim results in the termination of the policy
and the termination of the reinsurance on that policy, some direct writers and rein-
surers view claim administration as part of the termination stage.
The reporting party—the party administering the reinsurance records and
reports—provides the information needed for in-force administration through
a variety of reports. Frequently, the reporting party is the direct writer, and the
information is provided electronically to its reinsurance partners. The reinsurance
parties use the provided information to
Verify that reinsurance transactions comply with the terms of the applicable
reinsurance agreement

Prepare accounting statements and reports
Produce policy reserve reports for various regulatory and accounting bodies
Study lapse experience
Detect unusual trends involving data accuracy and consistency
Conduct profitability and mortality studies
Maintain historical data to use for future pricing

To provide information related to changes in risk, revenue, expenses, and pol-
icy reserves, the reporting party typically prepares five types of reports: in-force
policy report, policy exhibit, policy change report, billing statement, and reserve
listing.
In-Force Policy Report

An in-force policy report is a reinsurance report that lists all in-force reinsured
policies as of a given date and provides detailed information about each policy.
The in-force policy report allows the direct writer and reinsurer to verify that they
are keeping accurate, parallel records.
Figure 8.9 lists the information usually included on an in-force policy report for
individual and group life insurance policies.
Figure 8.9. In-Force Policy Report Information
Individual Policies Group Policies

Policy number Policy number
Insured's name, gender, date of birth Group name
Effective date Effective date
Policy date Policy date
Plan of insurance Plan of insurance
Underwriting rating or risk class,
Number of group members
tobacco use status
Amount of coverage for each
Policy face amount
member subgroup
Type of cession arrangement Total insurance coverage provided
by the policy
Amount or proportion of risk reinsured Amount or proportion of risk reinsured
Amount of reinsurance in force Amount of reinsurance in force

Policy Exhibit
A policy exhibit is a reinsurance report that summarizes and reconciles the changes
that have occurred in reinsured policies during the reporting period. Such changes
may include new business, increases and decreases in policy face amounts, con-
versions, lapses, deaths, terminations, and reinstatements. The policy exhibit
usually presents a beginning total cession count and reinsured risk amount, any
increases or decreases in the cession count and reinsured risk amount, and a final
total cession count and reinsured risk amount for that reporting period.
Policy Change Report

A policy change report, also known as a transaction report, is a reinsurance report
that shows details for all policies that, during the reporting period, have changed
in a way that affects the amount of the reinsurance coverage, the reinsurance pre-
mium, or the allowance. An allowance, also known as an expense allowance or a
ceding commission, is an amount that the reinsurer reimburses to the direct writer
and that is designed to recognize the direct writer’s acquisition, maintenance, and
other expenses related to the ceded business. In general, allowances—which can
be further divided into first-year allowances and renewal allowances—are larger
in early policy years than in later policy years.
Examples of changes typically listed on a policy change report include
(1) terminations due to death or policy lapse, (2) increases or decreases in the face
amount, and (3) reinstatements.
Billing Statement
A billing statement is a reinsurance report that lists the amounts owed by and
due to each party to the reinsurance agreement. The billing statement usually
separates the amounts owed and due into categories such as first-year and renewal
premiums and first-year and renewal allowances.
The billing statement also includes information about
Refunds of any unearned reinsurance premiums
Policy dividends, which are shares of an insurer’s divisible surplus payable to

the owners of participating life insurance policies at the end of a policy year
or on the policy anniversary
Cash surrender value reimbursements
Policy dividends and cash surrender value reimbursements are included in a
billing statement when they are part of the reinsurance agreement. Some reinsur-
ance agreements require the reinsurer to reimburse the direct writer for policy
dividend payments on reinsured policies and/or reinsured permanent life insur-
ance policies surrendered in exchange for cash values.
If the reporting party owes money to the other reinsurance party, the reporting
party usually sends payment of the amount owed along with the billing statement.
If the nonreporting party owes money to the reporting party, the billing statement
notifies the nonreporting party of the amount that it owes. The reinsurance agree-
ment usually specifies the period in which the payment must be made, such as
30 days.

Reserve Listing
A reserve listing is a reinsurance report that shows all policies reinsured and the
reserve held for each policy. The reserve listing helps the parties determine the
appropriate amount of reserves to maintain for the reinsured portion of each policy
in force at the end of the reporting period.
Processing Changes in Reinsurance Coverage

Certain changes to a reinsured policy or a block of reinsurance business can
increase or decrease the amount of risk assumed by the reinsurer. Examples of
such changes include
New business
Renewals
Recapture
Increases or decreases in the face amount
Claims
Surrenders
Lapses
Changes in classification
Reinstatements
Conversions
Maturity
Other changes—such as corrections to an insured’s name or other identification
information—may not affect the amount at risk under a reinsured policy, but the
changes still require reinsurance administration.
Reinsurance analysts may need an underwriter’s approval before recording
certain types of risk changes to policies reinsured on a facultative basis. Examples
of such changes needing underwriter approval are reinstatements and changes in
risk classification. Because automatic reinsurance agreements typically provide
instructions for changes, a direct writer is allowed to make changes to a reinsured
policy without obtaining the reinsurer’s consent, as long as the changes fall within
the parameters of the automatic agreement.
The direct writer’s reinsurance analyst generally is responsible for updating
reinsurance administration records to reflect changes to a reinsured policy and
for notifying the appropriate staff at both the direct writer and the reinsurer of the
changes.
The reinsurer’s reinsurance analyst may need to verify that the agreement pro-
vides for certain types of changes, such as recaptures, policy reductions, and con-
versions. For an increase in the face amount of a reinsured policy, the reinsurance
analyst checks the reinsurer’s retention to determine if the reinsurer needs to ret-
rocede some or all of the additional risk.

Processing Billing Statements

Billing statements usually involve the receipt or payment of funds. The reporting
party—either the direct writer or the reinsurer—produces billing statements for
processing by the nonreporting party. Direct writers and reinsurers typically use
administration systems to produce and process billing statements.
If a payment accompanies a billing statement and the payment amount does
not match the statement amount, the reinsurance administration system will flag
the discrepancy so that the reinsurance analyst can investigate. If the nonreporting
party owes money, the analyst (1) verifies that the amount requested by the report-
ing party is accurate and (2) arranges for payment to the reporting party.
Recording Policy Reserves

When a reinsurer’s actuaries calculate reserves for business that the reinsurer
administers, the reinsurance analyst is responsible for updating the information in
the reinsurance administration records. The analyst first verifies that the amount
reported on the reserve statement seems reasonable in comparison to the existing
amount of policy reserves. If the amount seems unreasonable, the analyst inves-
tigates the discrepancy. If the amount seems reasonable, the reinsurance analyst
updates the reinsurer’s records by replacing the prior period’s reserve information
with the new information. The reinsurer periodically updates the reserve changes
reported on the reserve listing.
Administering Terminations of Reinsurance

In the termination stage, the direct writer notifies the reinsurer of any terminations
of reinsured policies, and the reinsurer processes the termination of reinsurance on
each case. Reinsurance coverage can be terminated because of (1) recapture of the
ceded risk by the direct writer; (2) lapse, surrender, or expiration of the reinsured
policy; or (3) the death of the insured.
During the termination process, the reinsurer verifies the
Effective date for the termination of reinsurance
Policies included in the termination
Current net amount at risk (NAR), which is the difference between the face
amount of a life insurance policy—other than a universal life policy—and the
policy reserve (or cash value) at the end of any given policy year
Reinsurance premium refund that may be applicable
Allowances, policy dividends, or cash value for specific cases

For all types of terminations, (1) the direct writer must pay outstanding reinsur-
ance premiums and submit information due, and (2) the reinsurer must process all
statements from the direct writer. In addition, the direct writer’s current in-force
listing must match the reinsurer’s records. The reinsurer then terminates the rein-
surance administration records for the affected policies, refunds any unearned
reinsurance premium to the direct writer, and deletes any in-force policy reserve
amounts that remain in the records.

A direct writer terminating coverage due to recapture sends notification to the

reinsurer. If a reinsurer receives notice that a direct writer wishes to recapture part
or all of a reinsured risk, the reinsurance analyst must verify that the reinsurance
agreement allows recapture at that time and that all of the conditions for recapture
have been met. If the agreement does not allow the recapture, the reinsurance ana-
lyst can either (1) notify the direct writer that the recapture request is invalid under
the terms of the agreement or (2) arrange for approval of the request for recapture
before terminating the reinsurance on the reinsurance administration records.
Key Terms
reinsurance arrangement facultative-obligatory
block of business (fac-ob) reinsurance
case proportional reinsurance
reinsurance agreement nonproportional reinsurance
direct writer catastrophe coverage
cede reinsurance administration
reinsurer reinsurance analyst
retrocessionaire reinsurance marketing officer
solvency law reinsurance intermediary
policy reserve electronic commerce (e-commerce)
assumption reinsurance business-to-business (B2B) e-commerce
assumption certificate preplacement
indemnity reinsurance reserved capacity
reinsurance premium request for coverage
traditional indemnity reinsurance date of expiry
underwriting capacity drop notice
retention limit extension request
financial capacity notice of expiry
surplus placement
surplus strain reinsurance certificate
surplus relief in-force policy report
cession policy exhibit
cession arrangement policy change report
automatic reinsurance allowance
automatic binding limit billing statement
minimum cession policy dividend
jumbo limit reserve listing
facultative reinsurance net amount at risk (NAR)

Insurance Administration Chapter 9: Effective Customer Service 9.1
Chapter 9
Effective Customer Service
Objectives
9A Describe the responsibilities of customer service representatives and the
skills and attributes they need to be successful
9B List and describe some of the benefits of high-quality customer service
and some ways that insurance companies use customer service to
enhance the customer experience
9C List and describe some common types of work teams for customer
service representatives
9D Identify and describe several different ways that insurance companies
can organize the customer service function
9E List and explain some types of communication technology used to
facilitate customer interactions
9F Explain the difference between multichannel service and omnichannel
service
9G Explain some of the ways that insurance companies can use data
analysis to improve customer service
9H Describe how complaint management and privacy regulations affect
customer service

9.2 Chapter 9: Effective Customer Service Insurance Administration
Outline
Customer Service for Insurance Technology for Effective Customer
Companies Service Administration
 Customer Service Providers 
Technology for Sharing Customer
 Benefits of High-Quality Customer Service Information
Service 
Technology for Customer Service
 Customer Service and the Customer Interactions
Experience 
Data Analysis in Customer Service
The Customer Service Function Legal Issues Affecting Customer
 Staffing Service
 Organization  Complaints
 Privacy
A
s you have already learned, evaluating life insurance applications and
accepting appropriate levels of risk are critical aspects of life insurance
administration. However, once a policy is in force, the work is not done.
To keep policy retention rates high, insurers must provide services that their cus-
tomers find valuable.
In this chapter, you will learn who provides customer service, how companies
structure their customer service functions, and how companies use technology to
share customer information and facilitate effective customer interactions. Finally,
you will learn about important legal considerations for customer service operations.
Customer Service for Insurance Companies

Because many financial services companies are active in the life insurance mar-
ketplace, a single insurer may have trouble standing out and capturing a custom-
er’s attention. In addition, customers often see little difference among the products
offered by competing insurers. As a result, some insurers choose to differentiate
themselves by focusing on the value of their relationships with customers rather
than the types of products and services they sell. Each company assigns specific
employees to provide service that meets the needs of the customer and the insurer.
Customer Service Providers

The insurance company employees who frequently provide service to customers
face-to-face or through communications media are typically known as customer
service representatives (CSRs). Figure 9.1 lists typical service activities that CSRs
perform for customers.
Because of the broad range of activities that CSRs may perform, they need a
variety of skills and attributes, including
Knowledge of products, procedures, and systems
Empathy, which is the ability to understand another person’s emotional state

and imagine how you would feel in a similar situation
A patient, polite, and pleasant demeanor
Research and problem-solving skills
The ability to communicate through a variety of media

Figure 9.1. Typical Service Activities Performed for Customers
•• Changing the owner and/or the beneficiary of a policy

•• Changing addresses
•• Processing coverage changes or adding riders
•• Determining cash values and loan and dividend amounts
•• Changing certain policy features, such as how
dividends are used or how the policyowner wants to
apply the cash value of a life insurance policy if the
policy lapses
•• Sending premium due notices and handling premium
payments
•• Changing billing arrangements and methods of
payment
•• Answering questions on coverage amounts, policy
provisions, and billings
•• Providing information about claim submission, status, or settlement
•• Processing policy disbursement requests such as loans, partial withdrawals, surrenders, and
cancellations
•• Changing fund allocations for variable life insurance policies
•• Processing reinstatements of lapsed policies
CSRs use the skills and attributes listed above to interact with many types
of customers, including prospective buyers, individual policyowners, individual
insureds, group policyholders, group insureds, beneficiaries, and financial profes-
sionals. The table below shows some examples of reasons why customers contact
insurance companies.
Customer Reason for Contacting a CSR
Prospective buyer To ask about the differences between

the company’s life insurance products
Policyowner To change his premium payment

schedule
Beneficiary To elect how she wants to receive

benefit payments
Financial professional To get answers to questions about

compensation

Insurers typically focus on establishing and maintaining productive relation-

ships with the financial professionals who sell their products. For many policy-
owners, the financial professional is their link to the insurer, and they communi-
cate directly with the financial professional when they have questions or problems.
CSRs often provide information about products and procedures to help financial
professionals provide service directly to policyowners. For example, CSRs some-
times explain which application form a financial professional should use for a
particular proposed insured and what additional information the financial pro-
fessional should submit with the application. By helping financial professionals
submit complete applications, CSRs can increase the probability that underwriters
can promptly evaluate those applications.
Although CSRs are the most visible point of contact for an insurance com-
pany’s customers, all staff members play a role in providing excellent customer
service. For example, an IT staffer might design a more effective company web-
site, or an underwriter might suggest process improvements that keep applicants
better informed of the progress on their applications. CSRs, employees in other
functional areas, and financial professionals often work together to provide a coor-
dinated response to customer needs. When everyone comes together to provide
outstanding service to customers, the results are beneficial to all involved.
Benefits of High-Quality Customer Service

Maintaining high-quality customer service helps insurers
Attract new customers. Customers are more willing to purchase from com-
panies with an earned reputation for excellent customer service.
Retain existing customers. Customers who are satisfied with an insurer’s
service are more likely to (1) renew and increase their current coverage and
(2) buy new products. As a bonus, satisfied customers also may recommend
the insurer to friends and family members, leading to new business.
Boost profitability. Retaining customers increases an insurer’s profit margin
because the cost of keeping existing customers is less than the cost of acquir-
ing new customers. The savings in time and resources allow the insurer to
invest more resources into building its business. In addition, better customer
service typically results in greater productivity for employees because they
spend less time trying to correct problems caused by poor service.
Attract and retain successful financial professionals. In many instances,
financial professionals work with multiple insurers. The quality of the service
received from each insurer may influence a financial professional’s decision
on which company will receive his new business.
Enhance the work environment. Working for a company with an excellent
customer service reputation is a source of pride for CSRs and other company
employees. Taking pride in the company’s reputation can motivate staff to
maintain high customer service standards.

Customer Service and the Customer Experience

Traditionally, customer service was primarily about fulfilling the transactional
needs of a company’s customers. Today, customer service also entails anticipating
customer needs at various stages of the policy life cycle. Thus, customer service is
an important means of enhancing the customer experience.
Companies such as Amazon, Zappos, and Apple are renowned for nurturing
customer relationships and evolving to meet the changing wants and needs of their
customers. As customers have grown accustomed to building strong, ongoing rela-
tionships with companies in other industries, they are applying the same expec-
tations for service standards to the insurance industry. Increasingly, insurance
customers expect immediacy, personalization, and convenience.1 For example,
customers are likely to expect life insurance companies to provide
Numerous self-service options
Online tools and resources

Fast response times and 24/7 availability
Opportunities to customize services, such as adding riders to policies
Support for multiple communication channels, which are mediums that send-
ers use to transmit or deliver messages to intended audiences
Historically, the insurance industry has generally been slower than other indus-
tries in adapting to changing customer needs and expectations. However, insur-
ance companies recognize the necessity of enriching the customer experience in
many aspects of their operations, including customer service. Therefore, insur-
ers may develop customer service guidelines to bolster their customer experience
management efforts. Some examples of guidelines for customer service interac-
tions include
Treating all customers as valued individuals
Approaching every customer interaction with empathy for the customer’s situ-
ation
Treating each customer interaction as an opportunity to build a relationship,
not just to process a transaction
Ensuring that customers receive accurate and timely responses
Implementing technologies and processes to make conducting insurance busi-

ness easier for customers
The Customer Service Function

The structure of the customer service function may differ among insurance com-
panies, depending on each insurer’s decisions regarding staffing and organization.

Staffing
Many new customer service employees have very limited experience with the
insurance industry, customer service practices, or both. As a result, training for
new CSRs can be extensive and typically includes instruction on (1) the company’s
life insurance products, operations, and administration systems; (2) processes for
basic transactions and customer requests; and (3) communication skills.
Typically, new CSRs handle routine inquiries and service requests—such as
address changes—that present few difficulties or unusual circumstances. A senior
CSR or customer service supervisor usually reviews a new CSR’s work. As CSRs
develop their abilities and gain experience, they receive increasing amounts of
decision-making authority and more challenging assignments.
To qualify for promotion to the senior CSR level, CSRs must demonstrate speci-
fied levels of accuracy and productivity as well as the ability to work effectively
with customers and establish relationships that enhance customer loyalty and reten-
tion. Senior CSRs must be able to complete all customer service activities, including
handling complicated questions, processes, and customer interactions. In addition,
senior staff duties may include contacting new customers to answer questions.
In many companies, customer service supervisors are responsible for train-
ing and mentoring new staff members. In addition, customer service supervisors
usually handle service requests that require more extensive contract knowledge,
investigation, or consideration.
Advances in information technology have greatly reduced the amount of time
required to complete administrative tasks typically performed by CSRs. The
increased efficiency in transaction processing allows CSRs at some companies
to take on a broader range of customers’ insurance-related needs. These CSRs
are trained to understand the full range of company products and services and
to recognize other insurance-related customer needs that the company can fill.
For example, a CSR might go beyond the customer’s current request and identify
life events—such as birth, marriage, or retirement—that would suggest changing
insurance needs. Although CSRs add value by identifying unmet product needs,
they do not sell products unless they are licensed and trained to do so.
Work Teams
Some insurance companies divide customer service representatives into sepa-
rate work teams or work groups, which consist of two or more people who work
together on a regular basis and coordinate their activities to accomplish common
goals. Each work team reports to a specified supervisor. Figure 9.2 describes sev-
eral common types of work teams. These types of work teams also may be found
in other departments such as underwriting and claims.
Organization
Many companies employ CSRs in customer contact centers. A customer contact
center is an organizational unit that provides a company’s customers with a vari-
ety of channels—such as telephone, fax, and email—for communicating with the
company.
Insurance companies can organize their customer service functions in multiple
ways. While some insurers establish a single department to deal with every kind

Figure 9.2. Common Types of Work Teams
•• A traditional team is a type of work team in which

the manager or supervisor performs most or all of the
management tasks—such as organizing, planning,
monitoring, and controlling the work—as well as human
resource activities—such as employee hiring, training,
evaluation, and motivation. Meanwhile, other team members
concentrate solely on performing the business functions for
which the team is responsible.
•• A semi-autonomous team is a type of work team in which the manager or supervisor
manages the team, while the other team members—in addition to doing their “regular”
work—provide input into planning, organizing, and monitoring the work.
•• A self-directed team is a type of work team in which the members handle many traditional
management responsibilities, such as planning and monitoring work. Self-directed teams are
sometimes called self-managed teams.
of customer service activity, other insurers divide customer service activities by

product, territory, distribution system, customer, method of communication, or
service request.
Organization by Product
In organizing customer service activities by product, an insurer usually trains
CSRs to handle requests concerning one or two product lines—for example, indi-
vidual term life insurance policies or group life insurance policies. A CSR who
understands all the details of a product can specialize in providing service to own-
ers of that product. For complex products, specialized CSRs can be more effective
in supporting customer needs.
The biggest challenge to organization by product is the fragmentation that
occurs if customers have to contact separate customer service units for support
with different products. The separate units need to coordinate efforts to ensure
customer needs are met.
Example:
Anastasia Mishkin has coverage under a group life insurance policy and an
individual term life insurance policy from the same company. She calls her
insurer to update her home address and reaches the group life customer
service unit.
Analysis:
While updating Anastasia’s address in their administrative system, the group
life customer service unit should reach out to the individual term life customer
service team so that they can update their administrative system as well. If the
separate units do not coordinate efforts, then Anastasia may assume that the
change has been made on all policies that cover her, only to discover later
that the change was only implemented for the group life policy.

Organization by Territory
Multinational insurance companies often establish separate customer contact cen-
ters in each country where they do business to more effectively address differ-
ences in language, culture, products, and regulations. Companies that operate in
a single country may set up customer contact centers in various regions or create
separate units within one contact center to support different territories.
The geographical dispersion of CSRs enables customer contact centers to
become “closer” to customers within their territory by
Supporting customers in different time zones
Developing expertise in unique regulatory requirements within the territory
Becoming familiar with specific types of customers and their needs
Organization by Distribution System

Insurance companies that use multiple methods of product distribution some-
times organize customer service according to the type of distribution systems. For
example, an insurer may assign one group of CSRs to provide service on policies
sold through financial professionals and another group of CSRs to provide service
on policies sold through direct-to-consumer sales. By assigning CSRs to specific
distribution systems, the CSRs become skilled at working with the financial pro-
fessionals within those systems and can handle related cases more effectively.
Organization by Customer
Another way to organize customer service activities is according to the type of
customer served. For instance, some CSRs handle inquiries only from group poli-
cyowners and other CSRs handle inquiries only from individual policyowners.
The customer categories can be divided further by criteria such as geographic
region, size of the group, and type of financial professional.
Assigning CSRs to manage service for specific types of customers can be effi-
cient because the CSRs have gained an understanding of the customers’ particu-
lar needs. Knowledge of specific customers enables CSRs to respond to issues
promptly and accurately.
Organization by Method of Communication

Although face-to-face communication with a customer can be highly effective,
most customer service communication is provided remotely. As a result, insur-
ers may assign CSRs to support customers using one or more of the following
channels:
Telephone. Despite the emergence of newer communication methods, many
customers continue to use the telephone to obtain customer service—particu-
larly for more complex requests. Consequently, many companies operate call
centers, which are organizational units that receive and/or place telephone
calls to customers.

Paper correspondence. Paper correspondence is a traditional communication

channel that still accounts for a substantial number of customer contacts in
many companies. Customers send documents by mail or fax to provide infor-
mation, submit complaints, and request transactions, such as payments, with-
drawals, changes of address, policy loans, and reinstatements. Upon receipt,
paper correspondence is routed to the appropriate CSR for processing.
Email. Many companies use an automated email response system that auto-
matically replies to customers to acknowledge receipt of emails and to indicate
an expected response time, which is often 24 to 48 hours. For basic, predict-
able requests, some firms use systems that generate automated responses trig-
gered by certain key words in the customer’s email. In other companies, email
messages go into a queue to await handling and are routed to available CSRs,
who attempt to resolve the customer’s concern and keep response times to a
minimum.
Websites. Most insurers maintain an online presence that provides customers
with product information and answers to frequently asked questions (FAQs).
In addition, insurers offer self-help capabilities on their websites, enabling cus-
tomers to check premiums due, change personal information, process transac-
tions such as address changes, download forms, and perform other functions.
Many websites allow customers to send an email through a link on the site,
request a live internet chat session with a CSR, or request a telephone callback.
Organization by Type of Service Request

Some insurers assign certain CSRs to respond to certain types of service requests,
such as address or beneficiary changes and requests for policy loans. In dividing
customer service activities by service request, insurers typically establish such
divisions as premium billing, loans, and cancellations and surrenders. Although
organizing by service request develops a CSR’s knowledge about a particular
request, this organization style can result in a customer with multiple requests
having to interact with multiple CSRs to address all of his needs.
Technology for Effective Customer Service

Administration
Technological advances have increased the speed and effectiveness of customer
service. In addition, applying technology to support customer service helps insur-
ers respond to changing customer preferences. For example, as customers have
increased their mobile device usage, insurers have increased the customer service
features available to mobile devices.
CSRs can also benefit from the increased efficiency that technology can bring.
For example, using technology to automate transaction processing can improve
CSRs’ job satisfaction and engagement. According to a 2017 survey, CSRs
reported that 70 to 80 percent of the calls they receive each day consist of inqui-
ries that require minimal effort to address.2 Freeing CSRs from spending time on
basic, repetitive tasks that can be automated empowers them to spend more time
on handling complex tasks and building customer relationships.

Within the customer service function, insurers use technology to share relevant
customer service information, facilitate customer interactions, and analyze data
related to the customer service function.
Technology for Sharing Customer Service Information

In Chapter 2, you learned about networks, systems, and databases that insurers use
to collect, manage, and share information. Within the customer service function,
CSRs can use the company’s computer networks and other information systems to
Route customer requests, access records, and document actions taken for
requests
Access helpful resources—such as customer service procedures or informa-
tion about an insurer’s products—electronically through a knowledge man-
agement system
Retrieve documents—such as completed applications or account statements—
stored electronically in a document management system
Review the status of transactions—such as changing a billing address or
requesting a policy loan—tracked electronically through an automated work-
flow system
While some insurance company databases are available on an enterprise-wide
basis, others are maintained separately by specific units. For instance, a call center
might maintain its own customer contact system. A customer contact system is a
customer database and work tracking tool that combines a variety of features—
such as data entry and retrieval, history of previous customer contacts, document
management, scripted presentations, and follow-up tools—to provide a framework
for handling and documenting customer contacts. CSRs typically update a cus-
tomer contact system by entering information after each transaction.
Customer Relationship Management Systems

Some insurers use customer relationship management systems to help them
understand, satisfy, and retain customers. A customer relationship management
(CRM) system is a technology platform that allows a company to collect, main-
tain, share, and analyze customer transaction information from various channels.
CRM systems and customer contact systems share some features, but CRM sys-
tems typically include additional capabilities that support sales, marketing, and
customer service efforts.
CRM systems help users manage customer information and record customer
support activities by providing a common platform for tracking customer data.
Examples of information that a CRM system collects and manages include
Customer contact information
The customer’s preferred method of communication
Sales activities and pending business
Notes on customer interactions

Customers, financial professionals, and contact centers have different levels of

access to a CRM system’s centralized customer files. Insurers set different levels
of access to (1) protect customer privacy and (2) uphold compliance and security
regulations.
By using CRM systems, insurers can more easily identify customers’ potential
needs for additional or different insurance coverage. CRM systems also facilitate
insurers’ use of social media and mobile technologies. By incorporating data col-
lected through these channels, CRM systems enable insurers to gain additional
insights into customer needs and preferences.
Technology for Customer Service Interactions

Technology allows insurers to provide customers with choices so that each cus-
tomer can interact using her preferred channel of communication. Figure 9.3 dis-
plays some of the communication channels available to customers.
Figure 9.3. Channels for Communication with Customers
Customers Want Choice of Channel

Channel—Method by which customers and companies interact with each other
Face-to-Face
Email
Phone
Insurance
Insurance
Customer Company
Company
Text Messaging
Social Media
Mail
Web Chat
Mobile Apps
Source: LOMA, Insurance Immersion Workbook (Atlanta, GA: LL Global, Inc. © 2018). Used with permission; all rights reserved.

Computer Telephony Integration

The customer service function employs technology to (1) route telephone calls
from customers and (2) quickly provide CSRs with relevant information that makes
calls more efficient. Insurers support call-related customer service by investing in
computer telephony integration (CTI), which refers to the hardware, software,
and programming that integrate computers and telecommunications technol-
ogy—particularly telephones—to enhance the service and information provided
to customers.
When customers contact an insurer’s call center, a routing system is responsi-
ble for directing the calls appropriately through intelligent call routing. Intelligent
call routing (ICR) refers to any automated process of analyzing and directing
inbound telephone calls. ICR uses information about the caller, the call, and/or
employees to determine which employees or work teams will receive which calls
and when. Managers can specify in advance the people or work teams to whom
calls will be routed or the order in which calls will be answered.
Many insurers use automatic call distributors to route inbound customer con-
tacts. An automatic call distributor (ACD) is a CTI device that, at the most basic
level, answers telephone calls and directs them to a specified employee or work
team or to a recorded message. Insurers program ACDs to route customer calls
using various methods. For example, calls may be routed based on a predeter-
mined order among CSRs or to available CSRs who have gone the longest time
without receiving a call.
Another type of technology that is commonly used for routing calls is the
interactive voice response (IVR) system, which is a computer-based technology
that answers telephone calls, greets callers with a recorded or digitized message,
and prompts them to enter information or make requests by voice or telephone
keypad. In many financial services firms, IVR systems and ACDs are linked to
allow callers to either (1) obtain information or services from a menu of prere-
corded options or (2) transfer to the appropriate person or unit for assistance.
Example:
Callista Kouris called her insurer to get information about nonforfeiture
options for her life insurance policy. The insurer’s IVR system gave Callista a
menu of options, including the option to speak to a CSR for help. She selected
the live-help option, and then selected the option for the life insurance
policyowner services work team. The ACD routed her call to the first available
CSR on the team, Hector, who explained the nonforfeiture options for her
policy.
In addition to basic IVR systems, many companies use speech recognition

t echnology, also called voice recognition technology or natural language
technology, which enables a computer to recognize spoken words by
converting human speech into a string of text or program commands.
Within an IVR system, speech recognition technology provides callers with
another input option besides keypad entry. Some IVR systems allow callers to
state the nature of their call in a phrase or sentence, which the system interprets
and routes accordingly.

Besides routing customer calls, CTI applications support customer service effi-
ciency by providing pertinent information to CSRs receiving calls. One commonly
used CTI application is screen pop, which delivers a customer’s account informa-
tion and relevant data to a CSR’s computer at the same time the CSR receives a call
from that customer. In other words, the customer’s account record automatically
“pops up” on the CSR’s computer screen when the call is transferred to the CSR.
The screen pop process begins with automatic number identification (ANI),
which is a technology that identifies an inbound telephone call by the caller’s tele-
phone number or some other type of personal identifier. If a caller’s number or
identifier matches a number in a customer database, then the call is sent to a call
team or a CSR’s telephone, and the customer record is sent via screen pop to the
CSR’s computer at the same time.
Self-Service Options
Advances in technology have made it easier for insurers to provide self-service
options to customers. Self-service options provide convenience for the customer and
increase the insurer’s efficiency in delivering customer service. Self-service options
Grant customers access to company resources immediately and at any time—
including outside of typical business hours—without needing to wait for a CSR
Reduce the number of routine and repetitive transactions that CSRs have to
handle, such as looking up the amount of premium due for a customer’s policy
In addition to routing customer calls, an IVR system is a commonly used self-
service option that provides information to callers for selected entry options. Cus-
tomers using an insurer’s IVR system can also perform some basic activities over
the telephone, such as paying premiums, checking on the status of applications and
claims, and requesting forms.
Insurers can also offer self-service options to policyholders through a client
portal, which is a secure website where a customer can view, update, and share
private account information with a company. A customer must have a personal
account and password to enter the client portal. Because of increasing security
concerns, many client portals also require the customer to provide additional evi-
dence—such as the correct response to a security question or a temporary code
that was sent to the customer’s registered mobile device—that confirms the cus-
tomer’s identity before granting access to the portal.
Client portals allow customers to conduct some or all of the following activities
without assistance:
Complete and submit paperless applications and claims
Check on the status of initiated transactions
Update contact and account information
View bills and submit premium payments
Review details of their in-force policies
Make some types of changes to their policies
Use interactive services—such as online calculators—to determine their

financial needs
Many insurers also offer self-service options to financial professionals through

portals specifically designed to allow them to
Obtain information about the company’s products and procedures
Print copies of marketing materials
Download interactive software that aids them in preparing sales presentations
View information about compensation
Obtain information, complete forms, and submit changes on behalf of their
customers
Check the status of transactions they have submitted
Review records of policyowner correspondence
View information regarding claims and policy transactions processed on poli-
cies belonging to their customers
Other Channels for Customer Service Interactions

Some customers prefer going online to communicate with companies and to com-
plete transactions. To accommodate these customers, insurers utilize technologies
such as video conferencing, mobile technology, and social media.
Video Conferencing
For customers who want immediate feedback, some insurer websites allow for interac-
tive video conferencing. Video conferencing is a method of electronic communication
in which participants can see and hear one another. Video conferencing enables face-
to-face communication between participants who are geographically dispersed.
Mobile Technology
Many prospective buyers, policyowners, and financial professionals use mobile
devices to gather information and conduct transactions. Insurers enhance the ser-
vices they provide to customers by offering mobile applications (apps), which are
software applications specifically designed to increase customer access to a com-
pany through the use of smartphones, tablet computers, and other mobile devices.
By downloading a mobile app to a mobile device, an individual gains access to
features optimized for that device. App developers simplify the functions avail-
able to make their mobile apps quick and easy to use.
Insurers can also take advantage of mobile technology by programming their
systems to send notifications and alerts to customers through mobile apps or text
messages. Because many people check their phones and other mobile devices reg-
ularly, sending notifications to a mobile device allows insurers to interact more
quickly and more frequently with customers, which, in turn, promotes higher cus-
tomer engagement.
In 2016, LIMRA surveyed insurance companies to determine the industry
adoption rates of different online and mobile-only features. Figure 9.4 shows the
availability of online and mobile capabilities for customers of life insurance com-
panies. Figure 9.5 shows the accessibility of certain life insurance policyowner
services, both online and via mobile device.

Figure 9.4. Availability of Online and Mobile Capabilities for Customers

of Life Insurance Companies
Available Easily accessible Easily accessible via

at all online via mobile device mobile device
from (as a percent of all (as a percent of
company companies) companies with
the capability)
Obtain company contact information 100% 93% 93%
Get general product information 100 86 86
Use calculators and planning tools 90 72 81
Locate an agent/broker/advisor 83 72 88
Watch educational videos 79 62 78
Access forms (fillable and printable) 79 55 70
Use quoting tools 76 62 82
Purchase online 34 28 80
Chat with customer service 31 21 67
Use interactive games 17 10 60

Number of respondents: 29
Source: LIMRA, Migrating to Mobile: Mobile Access for Life Insurance Stakeholders, Table 5 (Windsor, CT: LL Global, Inc., © 2016).
Figure 9.5. Life Insurance Policyowner Services Accessible Online and

Via Mobile Device
Available Easily accessible Easily accessible
at all online via mobile device via mobile device
from (as a percent of all (ONLY companies
company companies) with online
capability)
View their policy information 90% 81% 89%
Change their address 67 48 71
Pay their premium 57 38 67
Initiate a claim 57 43 75
Change their name 43 29 67
Change their beneficary 43 29 67
Purchase additional products/coverage 29 19 67
Chat with customer service 19 10 50

Number of respondents: 21
Source: LIMRA, Migrating to Mobile: Mobile Access for Life Insurance Stakeholders, Table 6 (Windsor, CT: LL Global, Inc., © 2016).

Social Media
The rise of social media—a form of electronic communication that allows users
connected to a network to share and exchange information and ideas with other
users who are also connected to the network—is a contributing factor in custom-
ers’ increased expectations of connectivity and immediacy. Most insurance com-
panies maintain a presence on popular social media sites such as Facebook, Twit-
ter, LinkedIn, Instagram, and YouTube as a way to
Inform customers of new products or promotions
Educate customers on how available products can meet their needs

Answer questions from customers
Address customer complaints or concerns
Learn what products or features customers want
Reach out to new customers
Create a sense of community
Social media allows an insurer to reach a vast potential audience quickly. More
frequent and faster communication, in turn, often increases engagement and loy-
alty and encourages ongoing relationships with customers.
However, involvement in social media does have potential downsides. For
example, an insurer that initiates conversations with social media users does not
necessarily maintain control of the message after initiation. A misinterpreted mes-
sage can cause confusion or public backlash. Additionally, a negative story about
a company can spread quickly, reaching prospective and current customers before
a company’s public relations team can release a formal response.
To prevent unintended consequences, many companies attempt to centralize
their social media efforts. Typically, the marketing department controls the insur-
er’s social media “voice.” Because employee actions reflect the values and internal
culture of a company, CSRs and other insurance employees must receive training
to emphasize responsible social media use. A social media policy that restricts
who can post comments on the company’s behalf enables the insurer to present a
consistent, unified voice to the public.
Multichannel and Omnichannel Service

Customers want the ability to find information and complete transactions at any
time, from any location, using any device. As use of internet-capable devices—
such as cell phones and tablets—expands, and as increasing numbers of customers
LEARNING AID begin a transaction on one device and finish on another device, CSRs will need to
be capable of interacting with customers through multiple channels while provid-
ing a consistent level of service across all channels of communication.
Example:
Sharon Halvorsen was interested in getting a life insurance policy and
decided to conduct research. While riding the subway, she looked at reviews
of life insurance companies on her cell phone. At home, she used her laptop
to research specific policies and find application forms. She had a question
about the forms used by one company and called their customer contact
center to get the information she wanted.

Although offering multiple channels is an important first step, companies also

need to ensure that the services customers receive are consistent across all chan-
nels. Omnichannel service is a form of customer service that enables personalized
interactions between a company and its customers through multiple, integrated
communication channels.
An omnichannel service is effective if it provides customers with an individu-
alized way to research, purchase, and use products. Customers should be able to
move between channels easily and have a positive experience in every channel
used. Most importantly, there should be no difference in the quality of service
across channels. Providing omnichannel service means that insurers
Communicate through preferred channels. An insurance company needs
to be aware of each customer’s communication channel preferences. One cus-
tomer may prefer email notifications while another may prefer speaking to
CSRs on the phone. Tracking interactions with customers across all channels
helps companies understand specific preferences.
Communicate the right information. Insurers can tailor messages to cus-
tomers of specific products or target certain types of customers for sales of
additional related products. For example, a customer with a life insurance
policy who recently got married might begin to receive information from the
insurer about riders that extend coverage to an insured’s spouse.
Communicate at the right times. Insurance companies can build better rela-
tionships with customers by providing information when customers need it.
For example, a customer who emailed a question about term life insurance is
likely to appreciate an email response received within 48 hours, but may be
annoyed by a response arriving several weeks later in a mailed letter.
To achieve true omnichannel service, IT professionals are increasingly turn-
ing to responsive web design, which creates one version of a website that adapts
content to the device used to view it. In responsive web design, elements of a web
page are fluid; sizes adjust to fit the screen sizes of any viewing device, such as
desktops, laptops, tablets, and cell phones. Responsive web design saves insurers
time and money because a company does not have to create and maintain multiple
versions of its website.
Data Analysis in Customer Service

Insurance companies accumulate massive amounts of valuable data from cus-
tomer interactions. Data analysis helps insurers interpret that data and identify
meaningful trends or patterns. For example, insurers can use data analytics to
group customers into segments based on factors such as behaviors and demo-
graphic categories. Then insurers can track aspects of customer service, such as
personalized care and response time, among their selected customer segments. By
tracking and analyzing customer service metrics, insurers see what is and is not
working with their service delivery.

Example:
Infotipe Insurance Company gathered information about the types of
requests their customer service work teams received during the past 12
months. Infotipe analyzed the data to determine which types of requests
occurred most frequently and which communication channels were most
often used.
Analysis:
Infotipe’s data analysis helps them more effectively assign CSRs—particularly
those skilled in handling certain types of requests—to specific channels, thus
optimizing the insurer’s ability to respond to incoming customer requests.
For instance, Infotipe found that individual policyowners with policy loan
requests overwhelmingly placed their requests by telephone. As a result,
Infotipe assigned more CSRs with policy loan expertise to their call centers.
Many insurers use data analysis to evaluate the quality of their call center inter-
actions. For example, insurers often use insights from customer service surveys to
identify effective and ineffective responses to customer requests. Insurers can also
analyze call center procedures to determine how to route customers to the types of
support most suitable for their needs. In addition, insurers use information gleaned
from data analytics to (1) analyze why they may be losing customers, (2) identify
strategies for increasing customer retention, and (3) determine ways to improve
their customer service training.
Example:
Infotipe Insurance Company used analytics to improve its training of CSRs.
First, the insurer selected certain performance metrics that correlated to
qualities it desires in CSRs. Using the performance metrics as benchmarks,
Infotipe analyzed its CSRs, thereby finding the top-performing CSRs. Next,
the insurer studied the top-performing CSRs to determine if they exhibited a
similar approach to customer service that other CSRs did not display.
Analysis:
By isolating the most effective approaches to service, Infotipe can incorporate
those approaches into its training program, thus raising the overall service
level across the customer service function.
Legal Issues Affecting Customer Service

An insurance policy is a legal contract between the insurer and the policyowner
that describes the customer’s rights under the policy. For example, a life insurance
policy may give the policyowner the right to take policy loans, change the amount
of the death benefit, or add or remove riders. Customer service helps fulfill the
insurer’s contractual obligations by (1) handling requests that pertain to custom-
ers’ rights and (2) processing those requests according to the terms of the contract
and the applicable laws and regulations.
CSRs must be knowledgeable of the company’s processes and procedures to
reduce the risk of

Errors. Mistakes in processing customer transactions can be costly for the

insurer. For example, a CSR processing a policy coverage change may incor-
rectly enter the new face amount into an administrative system. As a result,
the company may bill the customer for the wrong premium amounts and may
incorrectly calculate policy reserves.
Lawsuits. Customers may pursue legal action if they believe that a company
is failing to fulfill its contractual obligations. For example, if a life insurance
policy is set to lapse, CSRs need to follow procedures to notify the policy-
owner. The policyowner may sue the company if he did not receive written
notification before his policy lapsed.
Fraud. CSRs are in a position to identify suspicious activity and take neces-
sary action. For example, if a CSR suspects fraud, she enters the incident into
a company-wide tracking system. Then she gives all applicable information
and documents to her supervisor, who reviews the file and decides whether
to forward the incident to the company’s legal or compliance department for
further investigation.
Two other compliance issues that are important for customer service are com-
plaint management and customer privacy.
Complaints
An insurer’s customer service department helps ensure the insurer’s compliance
with market conduct regulations by maintaining accurate, complete, and current
records of customer interactions. These records include documentation of written
and oral complaints received by the insurer. Some examples of common com-
plaints related to customer service are
Missing or delayed responses to customer inquiries and requests
Issues involving premium notices, premium billing, and/or premium refunds
Unsatisfactory or confusing answers to policy coverage questions

Figure 9.6 lists examples of information typically recorded for complaint
handling.
Insurers submit their complaint documentation annually to state insurance
departments for examination. The state insurance departments generally recon-
cile insurers’ annual reports of complaints with records of complaints submitted
directly to those departments. In jurisdictions that have established specific stan-
dards for handling complaints, state regulators determine whether each insurer
has met such standards and what, if any, actions the insurer has taken to correct
its failure to meet these standards. For example, if a jurisdiction has established
a time limit within which complaints must be resolved, regulators examine an
insurer’s complaint resolution times. If the insurer does not meet the standard on
a consistent basis, the regulator will want to know what steps the insurer is taking
to improve the timeliness of its complaint resolutions.

Figure 9.6. Typical Information Documented for Complaints
•• The name of the person receiving the complaint

•• The date and time the complaint was received
•• The source of the complaint, such as an applicant, a policyowner, a financial professional,
or a state insurance department
•• The name of the complaining party and applicable account or policy numbers
•• The complaint itself and any comments by the receiving CSR
•• The company unit(s) involved in the complaint, such as Marketing, Underwriting, or Claims
•• The nature of the issue that caused the complaint, such as a misrepresentation or misleading
statement, failure to respond to a request, refusal to insure, violation of privacy, or denial
of a claim
•• The company unit(s), work team(s), or employee(s) responsible for resolving the complaint
•• A written acknowledgment of the complaint sent to the complaining party
•• Any referrals of the complaint to the company’s legal or compliance unit for review or
advice
•• Actions taken to investigate the complaint,
including any communications with the
complaining party, a financial professional, or
other involved parties
•• For complaints that have not been resolved, the
status of the complaint-handling process and
any updates provided to the complaining party
•• The company’s decision on resolution of the
complaint
•• The communication to the complaining party of
(1) the company’s decision on resolution of the
complaint and (2) any options available to the
complaining party for appeal of the company’s
decision if he is not satisfied with the resolution
Complaints that could have legal implications usually are referred to the insur-
er’s legal staff. Such complaints might involve customer demands for policy rein-
statement beyond the period allowed, allegations that customer instructions to
the insurer were not followed, or reports of incompetent, negligent, or dishonest
behavior by CSRs or financial professionals. The company’s compliance and audit
units also typically review documentation of complaints and other customer trans-
actions to ensure CSRs are adhering to policies and regulations.

Privacy
Insurance companies have a responsibility to protect the privacy of customers’
personal health and financial information. In most cases, privacy regulations
determine what type of policy information can be released and to whom that infor-
mation can be released. The laws and regulations concerning customer privacy
were introduced in Chapter 2.
Most insurers accept telephone requests from policyowners for many services,
including changing personal information and coverage and requesting policy loans.
However, because only policyowners have the legal right to receive information
about the policy, CSRs require callers to verify identity by providing key personal
information—such as the account number or identifier, date of birth, last four or
five digits of the Social Security or social insurance number, or password—before
processing requests or providing information.
Many common customer service requests—such as changing contact informa-
tion, changing beneficiaries, requesting coverage changes, and handling premium
payments—can be completed online without policyowners having to speak to
CSRs. To ensure that an individual has the authority to make a requested change
online, many insurers require the individual to verify his identity. For example,
a policyowner may need to provide her login username, password, and personal
identification number (PIN) to confirm her identity before proceeding through the
client portal.
After completing a customer service request, an insurer usually sends a con-
firmation email or mails a letter to the policyowner. Providing the policyowner
with transaction information to review helps the insurer verify the validity of the
request.

Key Terms
customer service representative (CSR)
empathy
communication channel
work team
traditional team
semiautonomous team
self-directed team
customer contact center
call center
customer contact system
customer relationship management (CRM) system
computer telephony integration (CTI)
intelligent call routing (ICR)
automatic call distributor (ACD)
interactive voice response (IVR) system
speech recognition technology
screen pop
automatic number identification (ANI)
client portal
video conferencing
mobile application (app)
social media
omnichannel service
responsive web design
Endnotes
1. McKinsey & Company, “The CEO Guide to Customer Experience,” McKinsey Quarterly, August
2016.
2. BusinessWire, “New Customer Service Survey from Aspect Software Shows Harmony, Opportunity
When Chatbots and Agents Work Together,” http ://www. b u s i n e s s w i r e . c o m / n e w s / h o m
e / 20170615005260/en/New-Customer-Service-Survey-Aspect-Software-Shows, accessed 21 June
2017.

Insurance Administration Chapter 10: Customer Service Practices 10.1
Chapter 10
Customer Service Practices
Objectives
10A Give examples of the routine service requests insurance companies
receive from policyowners and describe how customer service
representatives (CSRs) help customers complete those transactions
10B Identify different types of beneficiaries and explain the process for
changing a beneficiary designation
10C Distinguish between an absolute assignment and a collateral
assignment of a life insurance policy and describe the CSR’s role in
completing an assignment
10D Describe the steps CSRs follow to process complex insurance
transactions such as policy conversions, dividend payments, policy
loans, policy terminations, policy reinstatements
10E
Describe the processes CSRs follow to administer variable life
insurance policies
10F Explain how providing excellent customer service helps conservation
10G Distinguish between quantitative and qualitative performance
measures and give examples of how insurers use these measures to
evaluate their policyowner services

10.2 Chapter 10: Customer Service Practices Insurance Administration
Outline
Routine Customer Service Customer Service and Policy
Transactions Conservation
 Providing Information  Policyowner Communications
 Changing Names and  Financial Professional Engagement
Addresses  Management of Unassigned
 Making Policy Changes Policyowners
 Administering Premium Payments  Claims Processing
 Issuing Duplicate Policies
Customer Service Quality Control
 Handling Customer Complaints
 Quantitative Performance Measures
Complex Customer Service  Qualitative Performance Measures
Transactions
 Beneficiary Changes
 Policy Assignments
 Policy Conversions
 Dividend Payments
 Policy Loans
 Policy Terminations
 Policy Reinstatements
 Administration of Variable Products
I
n Chapter 9, you learned about the customer service function in insurance
companies. You also learned about the technologies insurers use to provide
effective service and the legal and regulatory requirements that affect those
services. In this chapter, you’ll learn about some of the specific types of service
insurers offer their policyowners and other customers and the steps they take to
ensure that those services are prompt, complete, convenient, accurate, confiden-
tial, and customer-centered. Understanding how to deliver quality customer ser-
vices is important for all insurance company employees, because quality service is
often the key to conserving business and fostering customer loyalty.
Routine Customer Service Transactions

Every day, insurance companies receive telephone calls, emails, chat requests,
or text messages from individual and group policyowners requesting help with
routine service needs. Responses to most of these requests fit into one of six broad
categories:
Providing information
Changing names and addresses
Making policy changes
Processing premium payments
Providing duplicate copies of policies
Handling customer complaints

Whenever possible, insurers use policy administration systems and other tech-
nology to ensure that these transactions are handled accurately, consistently, and
quickly.

Providing Information
Answering questions is an important part of the sales process for insurance prod-
ucts, but it doesn’t end there. From the time an insurer sells a policy until the
relationship between the insurer and the customer ends, the company continues
to answer questions. Figure 10.1 shows some examples of the questions custom-
ers frequently ask about basic policy features such as premiums, coverage, and
benefits.
Figure 10.1. Common Customer Questions about Policy Features
Policy •• Do I need to pay my entire premium in one

Premiums payment, or can I pay it in monthly installments?
•• Can I change how often I pay premiums?
•• Can I change the date(s) my premiums are due?
•• Can I change the way I pay premiums?
•• What happens if a premium payment is late?
Policy •• Can I increase/decrease the amount of coverage

Coverage my policy provides?
•• Does my coverage end if my beneficiary dies?
•• What happens to my existing coverage if I
remarry?
•• Does my coverage change if I have or adopt a
child?
Policy •• Does my policy pay benefits if I die from an illness,

Benefits accident, or both?
•• If my salary increases, does my policy benefit
increase?
•• Are benefits paid in a lump sum or in installments?
•• Can I change the benefit amount of my policy?
Not all questions, however, are simple and straightforward. In addition, cus-
tomers don’t always know the best way to ask a question to get to the heart of
what they want to know. In these situations, CSRs need to read between the lines
to determine what the customer really needs. The extra work is worth the effort,
though. CSRs who can answer commonly asked questions and know where to find
information that addresses uncommon questions add value for the customer and
for the company.

Changing Names and Addresses

Another routine service request involves changing the name or address of a poli-
cyowner, an insured, or a beneficiary on an individual or a group life insurance
policy.
Changing Names
Sometimes a request for a name change is triggered when a policyowner—or the
insurer—finds that the name of the policyowner, the insured, or the policy benefi-
ciary has been misspelled. A request for a name change can also be triggered by
marriage, divorce, adoption, court order, or naturalization of citizenship. In all of
these situations, insurers need to make changes quickly and accurately to ensure
that one customer’s records aren’t confused with another customer’s records.
Most insurers require individual and group life insurance policyowners who
request name changes to complete and sign a change of name form such as the
one illustrated in Figure 10.2. Although the sample form could be used for chang-
ing the name of an insured, a policyowner, or a policy beneficiary, some insurers
require separate forms for different types of requests.
Figure 10.2. Name Change Form
Current name of the ______ Insured____________________________

______ Owner_____________________________
______ Beneficiary_________________________
Social Security Number _____________________________________________
Change the name of the ______ Insured to_________________________

______ Owner to__________________________
______ Beneficiary to______________________
Because of ______ Marriage

______ Divorce
______ Other
(If the name has been changed for any reason other than marriage,
divorce, or adoption, a certified copy of the legal document authorizing
the change must be submitted.)
_____________________________________ ________________________________
Signature of Owner or Officer with Title Date Signature of Joint Owner (If any) Date
___________________________________________________________
Signature of Witness (Disinterested Party), if required Date

Special circumstances may require additional documentation. For example, if a

name change for an individual life insurance policyowner results from marriage or
divorce, insurers usually require the policyowner to provide a copy of a marriage
license, divorce decree, or other legal documentation verifying the name change.
Changing a name for any other reason, such as personal preference or to properly
reflect gender, usually requires court approval. During a court hearing, the appli-
cant is required to confirm under oath the information in the application and to
provide any required documentation. The judge reviews the facts and makes a rul-
ing. If the request is approved, the court issues a name change decree. The judge
may also require the applicant to publish the name change in a local newspaper at
least once a week for a specified number of weeks.
When an insurer receives a completed name change form and any required
documentation, the new name must be entered into all relevant account docu-
ments, including the master policy, the billing file, the sales intermediary file, and
the customer file. In companies that have integrated administration systems, a
change made in one location—such as customer service—is automatically made
in all other relevant locations. The CSR then sends the policyowner a copy of the
face page of the policy or an endorsement to the policy to verify that the insurer
has made the requested change.
The procedures for making name changes in a group life insurance contract
depend on whether the plan is insurer-administered or self-administered. Under
an insurer-administered contract, the process for making name changes is the
same as the process for individual policies. When the name of a covered employee
changes, the employee must complete a change of name form and send it, along
with any required documentation related to the change, to the insurer. If the name
of a company changes, a company representative must send a completed change
of name form to the insurer. If the name change is the result of a merger or acqui-
sition, the insurer usually also requires the group policyholder to provide legal
documentation of the change.
Under a self-administered group policy, the sponsor company administers the
name change and retains all associated documentation. The insurer verifies names
only when a claim is filed. The sponsor company typically notifies the insurer of
a change in the company’s name to ensure that future communications reach the
right address.
Changing Addresses
Insurers send premium notices, policy updates, checks for policy claims or divi-
dends, and other correspondence to individual policyowners, insureds, or ben-
eficiaries on a regular basis, either electronically or by regular mail. They send
similar information to owners of and participants in insurer-administered group
insurance plans. To ensure delivery, insurers need correct addresses.
Most requests for address changes are initiated by policyowners as a result of
a move to a new location or a change in an email address. However, such requests
can also be initiated by insurers if letters and/or emails sent to policyowners are
returned because of errors in street numbers, postal zip codes, or email addresses
or if an address is no longer valid. If an insurer needs to change an address on an
individual life insurance contract, the change is usually handled by the insurer’s

CSRs. When a home, business, or email address changes, the insurer needs to
update all of its records to ensure that information reaches the intended individual,
group policyowner, or group at the right time and the right place. Insurers also
need to ensure that any address changes are made in all records that relate to a
particular policyowner. To prevent fraudulent changes, some insurers send letters
or emails to a policyowner’s old and new addresses verifying that the requested
changes were made.
The procedures for making address changes in group life insurance contracts
are similar to the procedures for making name changes. In an insurer-administered
group plan, the insurer maintains all policy and participant records and is respon-
sible for any changes to those records. In a self-administered group plan, the
policyholder typically maintains records of group member names and addresses,
and the insurer needs to verify the information only when claims are submitted.
Handling Returned Mail

When an insurance company receives a request for information from a policy-
owner, the insurer needs to have a correct address or the policyowner won’t
receive the information. Having a correct address for a policyowner or beneficiary
is even more critical when an insurer needs to settle a claim, because most state
insurance laws require payment of claims within a specified period of time and
require insurers to establish procedures for handling unclaimed property. Unfor-
tunately, in spite of their efforts to maintain current names and addresses for their
customers, insurers sometimes have letters returned or have emails fail because of
incorrect information. In many companies, designated staff in various operational
areas—including underwriting, claims, and policyowner services—are assigned
to handle returned mail and ensure that requested services and transactions are
completed promptly and accurately.
As a first step, company staff check administration systems to see if customer
contact information is complete and accurate. If a CSR discovers that a policy-
owner’s file has not been updated, the CSR enters a note or code into the system
showing that mail was returned and that no further mail should be sent to that
address. The CSR’s next step is to see if an address is available from the financial
professional who negotiated the contract or from outside databases. To initiate a
database search, the CSR provides the customer’s name, Social Security or social
insurance number, date of birth, and last known address. Although most outside
databases charge a fee for searches, those charges usually apply only if the search
produces a usable address. If the CSR is unable to find an accurate address, a note
or code is entered into the system describing the reason for the search and the
results.
Making Policy Changes

Changes in an individual policyowner’s financial situation, insurability status, or
insurance needs sometimes make it necessary or desirable for the policyowner
to change the terms of an existing policy. For example, life changes such as mar-
riage or divorce, the birth or adoption of a child, a disabling illness or injury, or
the death of a spouse or other family member often trigger requests for changes
in individual life insurance policies. Requests for changes in group life insurance
plans are triggered by the need to (1) increase coverage for the addition of new

employees or (2) decrease coverage for the loss of current employees through job
changes or retirement.
Most policy changes fit into one of three broad categories:
Changing the amount of coverage
Changing the type of coverage
Adding or deleting policy riders

A policyowner who elects to make any of these changes usually must complete
a policy change form specifying the requested changes. Figure 10.3 shows a por-
tion of a typical change of coverage request form.
Figure 10.3. Portion of a Typical Change of Coverage Request Form
For Contract/Policy Number_______________________________
Subject to the terms of this policy, I hereby apply for change(s) checked
below:
1. (a) Change: ____ E ntire Policy _____ Continue Balance _____ Term Rider
____ Rollover Cash Value_____ Refund Cash Value
Amount_____________________________________________
Policy Date__________________________________________
Plan_________________________________________________
Premium/How Payable_____________________________
Auto Premium Loan ____ yes ____ no
(b) _Complete if changing existing Universal or Variable Life

�� Increase in Specified Amount of $_________________________
�� Decrease in Specified Amount of $________________________
�� Change Death Benefit Option to
�� Increasing, as defined in the policy (check one)
�� Reduce the Specified Amount to equal the death
benefit minus the cash value, as of the effective
date of this change
�� _Do not change the Specified Amount (satisfactory
evidence of insurability may be required)
______ Level, as defined in the policy
_____ Change my Premium to $_________ effective on the
_______________________________________________mode
(c) Additional Benefits (include benefits being continued)

Include Cancel
______ ______ Disability Waiver Benefit on Insured
______ ______ Waiver of Specified Premium $________ on Insured
______ ______ Guaranteed Insurability Rider $________ Option Amount
______ ______ Accelerated Benefit Rider

As long as a policy change doesn’t increase the insurer’s risk under the contract,
CSRs usually can handle the change without requesting additional underwriting.
If additional underwriting is indicated, the underwriter’s primary concerns are
whether the proposed change increases the insurer’s risk, whether the insured’s
original insurability status has changed, or both.
Changing the Amount of Coverage

Over time, policyowners often discover a gap between the amount of insurance
coverage they own and the amount of insurance coverage they want or need.
Changing the amount of coverage available under an existing life insurance policy
is a way to close that gap. Whether policyowners have the right to change cover-
age after the policy is issued depends on the insurer, the type of coverage, and the
provisions included in the policy. For example, newer policies often don’t allow
policyowners to change face amounts or add riders after the policy goes into effect.
Some older policies do allow changes.
If an individual life insurance policy allows changes in coverage, the policy-
owner can
Increase coverage by increasing the face amount of the policy or adding a
new benefit or rider to the policy. Whether a policyowner has the option to
increase coverage under an existing policy depends on the insurer and the
terms of the contract. When changes are allowed, they usually require at least
some additional underwriting to address the additional risks created for the
insurer. To cover the extra risks associated with increased coverage amounts,
insurers usually increase policyowners’ premiums.
Decrease coverage by reducing the face amount of an existing policy or
removing one or more benefits or riders offered in an existing policy. This
option, like the option to increase coverage, depends on the insurer’s require-
ments. Because decreasing the benefits payable under a policy reduces risk for
the insurer, requests to decrease coverage typically do not require additional
underwriting. The insurer, however, usually needs to recalculate the premium
based on the new coverage amount and, if necessary, send a premium refund
to the policyowner. Insurers that allow changes often have one or more under-
writers dedicated to handling these requests.
Under group insurance contracts, the total amount of coverage increases auto-
matically when current employees who had not previously participated in the
group insurance plan enroll for coverage. As long as the change in the amount
of coverage is not significant, a company’s CSRs can usually process the change.
Large increases in coverage, however, affect the amount of risk for the insurer and
require additional underwriting. The underwriter’s primary concerns are whether
the addition of new plan participants increases the insurer’s net amount at risk and/
or whether the group’s original insurability status has changed.
The amount of coverage under a group policy usually decreases automatically
as employees leave the plan. This reduction usually doesn’t require additional
underwriting unless the participation rate falls below the required minimum for
the plan. Group policyholders can also decrease coverage by reducing the amount
of coverage offered to group insureds, or removing one or more benefits or riders

from the existing coverage. Because requests to decrease coverage reduce rather
than increase risk, insurers can usually implement these decreases in coverage
without referring them to underwriting.
Changing the Type of Coverage

Sometimes a policyowner may contact an insurer to change the type of insurance
coverage he owns. For example, the owner of a term life insurance policy may
want to convert his coverage to a whole life policy. Alternatively, the owner of a
whole life policy may decide to change to a term life insurance policy. In other
cases, a policyowner may want to change from an individual policy to a joint
policy to provide coverage for a spouse or to change a joint policy to an individual
policy after a divorce.
In most cases, changing the type of coverage changes the premiums the
policyowner pays. For example, policyowners sometimes request a change to
a higher-premium plan as a way to increase the investment value of the policy.
In general, this type of change poses no problems for the insurer because the
insurer’s net amount at risk decreases more rapidly under a higher-premium plan
than under a lower-premium plan. An exception to this general rule occurs when
a policy includes a waiver of premium benefit. Although increasing the premium
lowers the risk for the base policy, it generally increases the risk for the waiver of
premium benefit. If this increase is above a specified dollar amount, the insurer
may require the policyowner to provide additional evidence of insurability.
Policyowners who request a change to a lower-premium plan usually want to
reduce their costs. For example, the owner of a term life insurance contract may
request a shorter term or the owner of a whole life insurance contract may request
a change to a lower benefit amount. Because requests to change policy premiums
or benefit amounts typically increase risk for the insurer, most companies require
policyowners to undergo at least some additional underwriting. For example,
insurers generally require policyowners requesting a change to a lower-premium
plan to complete the health declaration section of a supplemental application such
as the one shown in Figure 10.4. Insurers sometimes waive these requirements if
the insured’s
Health history does not include impairments or health ratings
Height and weight are within current standard limits
Answers on the health declaration section of the policy change form are
acceptable
If a policyowner requests a change in the type of coverage shortly after pol-
icy issue, the insurer often requires additional underwriting whether the change
involves increasing or decreasing the premium. This underwriting is necessary
because risk of policy lapse is especially high during the policy’s first year and
remains relatively high until the insurer’s first-year acquisition costs have been
recovered. If a policyowner requests a change after the insurer has recovered its
acquisition costs, the request usually results in only a moderate increase in the
insurer’s risk.

Figure 10.4. Sample Health Declaration

SUPPLEMENTAL APPLICATION
The undersigned hereby amends Contract/Policy Number___________________ dated ______________ .
All the following questions apply to the proposed insured and any additional proposed insureds.
If the answer of any

of these questions is
Proposed Additional
“YES”, give complete
Insured Insureds
details for each
insured including date
of last treatment and
name/address of
Since the date of the application, Yes No Yes No attending physicians.
have you
a. Started racing of any kind; skin or
scuba diving; parachuting,
sky-diving, or hang gliding;
mountain, rock, or technical
climbing; or participating in
private aviation?
b. Applied for life or health
insurance to any other insurance
company or had any life or health
insurance reinstated, declined,
postponed, or modified?
c. Been paid or made claim for any
benefits for injuries or sickness?
d. Had any surgical operation or
been advised to have any
surgical operation which has
not been performed?
e. Been admitted to a hospital or
other medical facility or been
treated at any hospital, clinic, or
any other medical facility?
f. Consulted or had an appointment
to consult a doctor, surgeon, or
other medical practitioner?

I agree that this Supplemental Application will be considered an amendment and supplement to
my original application. I have read the completed Supplemental Application before signing below.
All statements and answers in this application are correctly recorded, and are full, complete and
true. I understand that any false statements or material misrepresentations may result in the loss of
coverage issued in reliance on this application.
_____________________________________________ ______________________________________________
Signature of Proposed Insured Signature of Additional Insured, if applicable
_____________________________________________ __________________________________________________________________
Signature of Agent Signature of Owner/Trustee (if other than Proposed Insured)

Adding or Deleting Riders

If a policyowner asks to add a rider to an existing policy, the insurer first verifies
that the product allows the rider. If the rider is allowed, the insurer sends the nec-
essary application forms to the policyowner to complete, sign, and return. Because
adding a rider often increases the amount of coverage under the policy, it usually
increases the insurer’s risk. If the increase in risk is significant, the insurer may
require additional underwriting before approving the request. The premium the
insurer charges for the new rider typically reflects the amount of extra risk the
rider creates for the insurer.
Removing or cancelling a rider generally doesn’t require underwriting because
the risk to the insurer decreases when the amount of coverage decreases. The
insurer, however, usually needs to recalculate the premium for the policy and, if
necessary, send a premium refund to the policyowner.
Administering Premium Payments

With the exception of single-premium life insurance policies, which offer a guar-
anteed, paid-up death benefit in exchange for a single premium paid at the time of
purchase, most individual and group life insurance policies require policyowners
to pay premiums on a regular schedule to keep the contract in force. The schedule
can require payments monthly, quarterly, semiannually, or annually.
If policyowners request a change in the frequency or method of paying policy
premiums, the insurer’s service providers administer these requests. They also
manage situations in which policy premiums (1) increase automatically according
to the terms of life insurance contracts and (2) are not paid when due.
Changing the Frequency of Premium Payments

Occasionally, a policyowner may want to increase or decrease the frequency of
premium payments. For example, an individual policyowner whose policy speci-
fies annual premium payments may want to change to a semiannual or monthly
schedule to reduce the amount of each payment. Similarly, a group policyholder
whose contract specifies monthly premiums may change to a semiannual payment
schedule because even though the amount of each premium payment is higher, the
administrative costs involved in collecting premiums from plan participants on
a semiannual basis are usually lower than the costs for collecting premiums on a
monthly basis.
In most cases, an individual or group policyowner who wants to change the
frequency of premium payments must file a change of premium payment request
with the insurer. Requests for individual policies can often be made by phone,
without the need to file a formal request. If the request meets the insurer’s pre-
mium payment requirements, a CSR can usually approve the request without fur-
ther review. However, if the change results in a conflict between premium due
dates and the policy anniversary date, the insurer is likely to reject the change of
payment request. Insurers typically also reject requests to change the frequency
of premium payment if a policy includes a waiver of premium provision and the
premium is currently being waived.

Changing the Amount of Premium Payments

Premium amounts under individual or group life insurance policies often change
automatically when an insured reaches a certain age. For example, the premium
rate for an insured between age 21 and age 40 may be $10 per unit of coverage. The
premium rate may increase to $15 per unit of coverage when the insured reaches
age 41 and to $20 per unit of coverage when the insured reaches age 61. Premium
amounts for participants in group life insurance plans sometimes change when
employee compensation levels reach a specified threshold.
When premium amounts change automatically, the entire process—including
notifying the policyowners and/or insureds and sending premium bills or notices
reflecting the new premium amount—is completed electronically. If a change is
requested by a policyowner, a CSR is responsible for managing the change and for
sending premium bills or notices that reflect the new premium. CSRs also need
to notify the staff responsible for paying compensation to modify any premium-
based compensation due to the sales intermediary.
Changing the Method of Premium Payments

Occasionally, policyowners request a change in the method of premium payment.
For example, the owner of an individual life insurance policy may ask to change
from a direct billing method, which requires the policyowner to mail a check to the
insurer for premiums due, to electronic funds transfer (EFT), which is a method
of transferring funds between financial intermediaries through an electronic com-
puter network. The policyowner usually provides the insurer with a cancelled
check to use as authorization for the transfer. Policyowners can use EFTs for a
one-time payment or for multiple payments. Insurers can also initiate electronic
payments by entering into an electronic funds transfer arrangement with the poli-
cyowner. Under an electronic funds transfer arrangement, the policyowner signs
an authorization form giving the insurer the right to withdraw funds to pay premi-
ums from the policyowner’s bank account on or before the premium due date on
an ongoing basis. Insurers often encourage the use of EFT arrangements because
they reduce the likelihood of policy lapse for nonpayment of premium.
For group insurance, the policyholder pays premiums to the insurer whether
the group plan is contributory or noncontributory. If the plan is noncontributory,
the policyholder pays the entire premium out of company funds. If the plan is
contributory, the company pays part of the premium out of company funds and
participating employees usually authorize the employer, in writing, to deduct their
premium payments from their paychecks.
Managing Overdue Premiums

To ensure that premiums are paid on time, most insurers maintain systems that
automatically send premium due notices to policyowners. These same systems
also record payments made and update the status of the policy.
Although insurers expect individual and group policyowners to pay policy pre-
miums when due, they know that circumstances can prevent premium payments
from arriving on time. For example, a holiday that occurs shortly before or after
the due date of a policy premium can delay pickup of a mailed payment from
a policyowner or delivery of the premium to the insurer. As a result, insurance

policies include a provision that allows policyowners to pay renewal premiums

within a specified grace period, which is a length of time (often 31 days) follow-
ing each premium due date during which the contract remains in effect regardless
of whether the premium is paid. If a policy premium is paid before the end of the
grace period, the premium is considered to have been paid “on time” and coverage
will continue.
If a policyowner does not submit a premium payment to the insurer by the
due date specified in the policy, the insurer sends the policyowner a policy grace
notice, or lapse notice, which is a written notification that the policy’s grace period
is about to expire. Figure 10.5 shows a sample policy grace notice.
Figure 10.5. Sample Policy Grace Notice
There is no longer sufficient surrender value in your policy

to prevent termination or lapse of the policy. Accordingly,
your policy has entered a grace period, which will expire
on ______________________________________________ . If a sufficient
premium payment to continue your policy is not received
before the end of the grace period, your policy will terminate.
To continue your coverage, you must pay the minimum pre-

mium of $______________ . This premium must be received on or
before the grace period expiration date shown above.
We appreciate your business and hope that you will remit

your premium promptly.
Most insurers also send sales intermediaries a list of policyowners whose pre-
mium payments are overdue. This notice gives intermediaries an opportunity to
contact policyowners and retain the business or modify the contract so that cover-
age amounts and premiums more accurately meet the policyowners’ needs.
Although insurers have the right to require payment of policy premiums within
a specified time period, they sometimes extend the payment period beyond the
grace period—usually 30 to 90 days after the end of the grace period—by means
of a late payment offer. A late payment offer is an insurer’s conditional offer to
waive its right to timely payment of a policy premium. A late payment offer applies
only to a specified unpaid renewal premium and does not waive the insurer’s right
to require timely payment of future premiums.
Issuing Duplicate Policies

Occasionally policyowners contact insurers to request a duplicate copy of a cur-
rent insurance contract. To process this type of request, most insurers require the
policyowner to submit a written, signed lost policy request form stating that the
policy (1) has been lost or destroyed or is otherwise unavailable and (2) has not
been assigned, transferred, or encumbered in any manner. Figure 10.6 includes an
example of a typical lost policy request form.

Figure 10.6. Typical Lost Policy Request Form

Insured __________________________________________________
Contract/Policy Number ________________________________
Contract Type (choose one):
________ Life _________ Health ________ Annuity
Replacement (choose one):
_______ _Full Duplicate Policy ($30.00 administrative fee)
_______ _Lost Policy Certificate of Coverage (no charge)
Each of the undersigned hereby represents that each policy, contract, and any attached
amendment or endorsements specified on this form has been lost or destroyed, and
requests a duplicate copy of each such policy, contract, and amendment OR a lost policy
certificate as evidence of the coverage. Each of the undersigned agrees that if the lost policy,
contract, and amendment are later found, the duplicate policy, contract, and amendment or
lost policy certificate will be surrendered to the insurance company for cancellation.
Each of the undersigned further attests that this policy is not now assigned, nor has it
otherwise been transferred or encumbered in any manner.
____________________________________ _____________________________________
Date Signature of Owner, if other than Insured
____________________________________ _____________________________________
Signature of Insured Other Required Signature, if any
After a CSR confirms the loss of the original policy, he sends a duplicate con-
tract to the policyowner and enters the information in the company’s administra-
tion system. If the CSR cannot verify the loss, he usually issues a certificate of
coverage rather than a duplicate policy. The certificate of coverage verifies that
coverage exists, but does not contain all of the provisions and riders contained in
the original policy.
Handling Customer Complaints

In spite of their best efforts to provide a positive customer experience, most insur-
ers receive complaints from unhappy customers from time to time. Most of the
complaints handled by an insurance company’s customer service staff are service
complaints that relate to the timeliness, accuracy, courtesy, and professionalism
of the company’s interactions with its customers. Service complaints can focus on
direct customer contacts or on behind-the-scene services such as record-keeping
and billing, and they can vary in intensity from minor irritation to extreme frus-
tration and anger. Because a company’s procedures for handling customer com-
plaints are governed by regulatory requirements, most insurers have policies and
procedures for dealing with service complaints based on the reason for the com-
plaint and the way the customer presents the complaint.
The receipt of a service complaint typically triggers service recovery, which
consists of the company’s activities designed to fully resolve the problem that
caused a customer’s dissatisfaction and restore the customer’s good will. Because

customers don’t always know exactly what they need, it is often up to the CSR to
take the lead in service recovery. As a result, insurers usually train CSRs to
Respond to customer complaints objectively and not take customer comments
personally
Ensure that complaints are handled accurately by clarifying or summarizing
the customer’s complaint
Acknowledge the customer’s feelings and concerns by empathizing with the
customer
Work with customers to identify the cause of the complaint by asking ques-
tions and controlling the dialogue
Offer a resolution that satisfies the customer and complies with company and
regulatory requirements
If a CSR is not able or authorized to address a particular request or demand,
the insurer’s escalation processes, which are procedures that specify how an issue
or complaint is to be handled in those situations, go into effect. These escalation
processes can be as simple as transferring a call to a manager on duty to providing
the customer with an address so that he may submit an official letter of complaint.
Because an insurer’s procedures for handling customer complaints must comply
with regulatory requirements, CSRs are required to document all customer con-
tacts and the results of those contacts.
To help manage customer complaints and determine how the company can pre-
vent similar problems in the future, some insurers forward all complaints received
to specialized work groups called complaint teams. These complaint teams, or
problem resolution teams, include experienced CSRs, staff from the company’s
law and compliance divisions, or both, who are dedicated to resolving customer
complaints. Complaint teams may also recommend changing procedures, if neces-
sary, to prevent complaints in the future.
Complex Customer Service Transactions

In addition to processing routine customer requests, an insurance company’s poli-
cyowner services staff frequently handle more complex transactions that require
thorough investigation and input from company underwriters or legal staff. These
complex policyowner service transactions include
Beneficiary changes
Policy assignments
Policy conversions
Policy dividend payments
Policy loans
Policy terminations
Policy reinstatements
Administration of variable life insurance products

Beneficiary Changes
Most insurers allow owners of life insurance policies to name anyone as benefi-
ciary as long as the beneficiary has an insurable interest in the insured’s life. As
a result, beneficiaries can range from spouses and children to unrelated people
LEARNING AID such as trustees named in a trust agreement or will, or even nonpersons such as
the insured’s estate or a charitable organization. In addition, policyowners can
specify different types of beneficiaries—such as contingent or concurrent benefi-
ciaries and revocable or irrevocable beneficiaries—or different classes of benefi-
ciaries—such as per stirpes or per capita designations. These beneficiary options
are described in more detail in Figure 10.7. Unless an original beneficiary was des-
ignated as an irrevocable beneficiary, policyowners also have the right to change
beneficiaries during the lifetime of the insured.
Figure 10.7. Beneficiary Designations

Revocable beneficiary. A life insurance policy beneficiary who has
no right to the policy proceeds during the insured’s lifetime because
the policyowner has the unrestricted right to change the designation
during the life of the insured.
Irrevocable beneficiary. A life insurance policy beneficiary who has
a vested interest in the policy proceeds even during the insured’s life-
time because the policyowner has the right to change the beneficiary
designation only after obtaining the beneficiary’s consent or upon the beneficiary’s death.
Contingent beneficiary. The party designated to receive the proceeds of a life insurance
policy following the insured’s death if the primary beneficiary predeceases the insured.
Concurrent beneficiaries. Two or more life insurance beneficiaries who share the
policy proceeds on the death of the insured. The shares are distributed equally unless
otherwise provided.
Class designation. A life insurance beneficiary designation that identifies a certain group
of people rather than naming each person individually. Class designations can be either per
stirpes designations or per capita designations.
•• Per stirpes beneficiary designation. A type of life insurance policy beneficiary class
designation in which the descendants of a deceased class member take the deceased
class member’s share of the policy proceeds by representation. For example, a policy-
owner-insured who has three children—Roger, Samuel, and Tina—might provide that
each child would receive an equal share of the policy proceeds, per stirpes. If Samuel
died before the insured died, then at the insured’s death Roger and Tina would each
receive one-third of the proceeds and Samuel’s heirs would receive equal shares of the
remaining third of the proceeds. If Samuel died without heirs, Roger and Tina would
each inherit one-half of the policy proceeds.
•• Per capita beneficiary designation. A type of life insurance policy beneficiary class
designation in which the class members all stand in the same relationship to the
policyowner and the class members who survive the insured share in the policy
proceeds equally. For example, a policyowner-insured who has three children—Roger,
Samuel, and Tina—might provide that each child would receive equal shares of the
policy proceeds, per capita. If Samuel died before the insured died, then at the insured’s
death, Roger and Tina would each receive one-half of the proceeds, whether Samuel
had heirs or not.

To prevent mistakes and to avoid delays in processing claims, insurers require

CSRs to adhere to specific guidelines when making beneficiary changes. In most
cases, CSRs responding to a request for a beneficiary change must know the
Full name—the given name (first name) and surname (last name)—of the ben-
eficiary. For example, “John Smith and Louise Smith” is acceptable, whereas
“J. Smith and L. Smith” and “Mr. and Mrs. John Smith” are not acceptable.
Relationship of the beneficiary to the policyowner. For example, “Leslie
Adams, daughter of the insured” or “Lena Adams, wife of the insured.”
Date of birth for any named beneficiary.
Any other identifying information about a beneficiary—such as a Social
Security number, social insurance number, or address—that would enable the
insurer to locate the beneficiary in the event of a claim.
If a policyowner designates a trust as beneficiary of a life insurance policy, the
insurer needs the exact date the trust was established, the legal name of the trust,
and the legal name and address of the trustee. In some cases, insurers also require
a copy of the trust agreement. Because some trusts are difficult to interpret, insur-
ers often attach a disclaimer noting that the insurer is not obligated to inquire into
the terms of the trust agreement and will not be liable to other claimants after the
policy proceeds have been paid.
Most insurers allow policyowners to make beneficiary changes through the
company website if the policyowner’s identity has been verified by the login and
password or PIN. Policyowners generally cannot make beneficiary changes by
telephone because, even with safety checks, a CSR can’t be certain that a caller is
the policyowner. Policyowners can, however, request a change of beneficiary form
by phone. The CSR can then mail, email, or fax a change of beneficiary form.
When the form is returned, the CSR compares the policyowner’s signature to the
signature on file and completes the transaction.
When making beneficiary designations or changing those designations, poli-
cyowners cannot specify dollar amounts that beneficiaries are entitled to receive
because the amount of the death benefit payable may have changed.
Policy Assignments
Most individual life insurance policies include a provision that allows the poli-
cyowner to assign ownership of the rights under a policy to another person while
coverage is in force. An assignment is an agreement under which a policyowner—
the assignor—transfers some or all ownership rights in a particular policy to
another party—the assignee.
Assignments can take one of two forms: an absolute assignment or a collateral
assignment. Under the terms of an absolute assignment, the policyowner irrevo-
cably transfers all rights under a life insurance policy to another person or entity.
These rights include (1) the right to receive policy proceeds, if the policyowner is
the beneficiary or if there is no named beneficiary, and any other monetary values
when the insured dies, and (2) the right to change a revocable beneficiary designa-
tion so that proceeds will be paid to the new beneficiary when the insured dies.
In effect, the assignee becomes the owner of the policy and the assignor no longer
has any rights under the policy. The rights transferred under an absolute assign-
ment are more limited if the policy names an irrevocable beneficiary. In this case,

the assignor must obtain the beneficiary’s consent to enter into an absolute assign-
ment. In addition, the assignee does not have the right to change an irrevocable
beneficiary. (Revocable beneficiaries and irrevocable beneficiaries are described in
Figure 10.7). Policyowners frequently use an absolute assignment when a divorce
results in one spouse’s assumption of full ownership of a life insurance policy.
Under the terms of a collateral assignment, the policyowner temporarily trans-
fers the monetary value, but not all ownership rights, in a life insurance policy to
another person as collateral—or security—for a debt. If the insured dies before the
LEARNING AID entire debt is repaid, the assignee has the right to receive policy proceeds as pay-
ment for any unpaid portion of the loan before proceeds are payable to a revocable
beneficiary.
Example:
Jonathan Myers owned a $50,000 cash value life insurance policy that named
his wife, Eileen, as the revocable beneficiary. Last year, Jonathan assigned his
life insurance policy to Bently Bank as collateral for a $20,000 loan. Because
Eileen was the policy’s revocable beneficiary, Jonathan was not required to
obtain her consent to the assignment. When Jonathan died, he still owed
$5,000 on the loan.
Analysis:
At Jonathan’s death, Bently Bank was entitled to receive $5,000 of the
death benefit from Jonathan’s policy as repayment of the outstanding
loan balance and Eileen received the remaining $45,000.
The assignee also has the right to receive policy proceeds before payment to
an irrevocable beneficiary if the irrevocable beneficiary agreed to the assignment.
However, the assignee does not have the right to change the policy beneficiary. In
addition, the assignee’s rights under a collateral assignment end when the debt has
been repaid.
The insurer is not a party to the assignment and rarely asks the reasons for
the assignment. However, insurers generally require policyowners to complete an
assignment form. Figure 10.8 includes a portion of a typical assignment form.
This requirement is designed to protect the assignee by ensuring that the assignee
receives the payments to which he is entitled. It also protects the insurer if failure
to receive notification of an assignment results in payment of policy proceeds to
the wrong person.
Before recording an assignment, the CSR checks whether the policy has an
irrevocable beneficiary. If so, that beneficiary must sign the request for assign-
ment. The CSR also reviews the policy provisions to determine whether any exist-
ing provisions would prevent an assignment.
Policy Conversions
Some individual life insurance policies include a conversion provision that allows
the owner to change the type of coverage provided by the policy—for example,
to change from an individual term life insurance policy to an individual cash
value insurance policy, usually without providing evidence of insurability. Most

states also require group life insurance policies to include a conversion provision
that allows a group insured, a covered dependent, or both to convert coverage
under a group insurance contract to an individual life insurance policy without
providing evidence of insurability.
Figure 10.8. Portion of an Assignment Form
ABSOLUTE ASSIGNMENT
Policy # _________________________ Life of ____________________________________
The undersigned hereby assigns and transfers without any exception, limitation, or
reservation whatsoever to
________________________________________________________________________________________
[Name and address of each assignee]
all (his, her, its, their) assignable benefits, interest, property, and rights in the policy
described above.
The nature and effect of this assignment shall be as indicated in the following
expressions of intent and purpose, namely
•• This assignment is_______ for a valuable consideration. _______
without a valuable
consideration.
•• If two or more assignees are named above, their interests under this assignment
shall be as indicated in the line before which an “X” is inserted below.
____ Joint owners with right of survivorship between them

____ Common owners with no right of survivorship between them
____ Life interest, use, and enjoyment in ___________________________________________
with absolute control and power of disposition in such assignee during his
or her lifetime; remainder interest in other assignee(s). If there are two or
more assignees entitled to receive_remainder interests, such interests
shall be of the nature indicated in the line before which an “X” is inserted
below:
_____ Joint owners with right of survivorship between them
_____ Common owners with no right of survivorship between them
•• This assignment cancels and rescinds any reversionary provision in favor of the
assignor or his estate, whether contained in the policy or in any writing or provi-
sion pertaining to the policy.
•• This assignment does not affect or change the beneficiary designation or settle-
ment presently contained in the policy assigned. Proceeds payable on death
will be paid in accordance with such designation or settlement unless same be
hereafter changed by the assignee(s), when the right to make such change exists
under the policy.

Requirements for Converting Individual Coverage

To initiate conversion of an individual term life insurance policy to a cash value
life insurance policy, the policyowner must submit a written request for a change
in coverage to the insurer and pay the first premium for the new policy. When the
insurer receives the conversion request, a CSR verifies that the conversion request
is valid, that the policyowner has submitted all necessary paperwork, and that
the policyowner has paid the correct premium. The CSR then instructs the policy
issue department to prepare a new policy and updates the policyowner’s records to
reflect the converted coverage.
Requirements for Converting Group Coverage

The requirements for converting group coverage to individual coverage are simi-
lar to the requirements for individual coverage. However, group life insurance
policies often exclude the option of converting whole life coverage to term life
coverage. Conversion of coverage under a group insurance contract is allowed if a
Group insured is no longer employed by the sponsor company or because
the insured is no longer a member of a class eligible for coverage. An
insured who satisfies these requirements must be given the right to purchase
any type of individual policy the insurer offers at the insurer’s customary pre-
mium rate for that policy based on the insured’s age. However, some group
insurance policies exclude the option of purchasing term life insurance. The
amount of individual coverage available is usually limited to the lesser of
$10,000 or the difference between the amount of coverage under the termi-
nated policy and the amount the individual becomes eligible for within 31 days
after termination.
Group insured dies. When a group insured dies, any of the insured’s surviving
dependents who were covered under the group plan at the time of the insured’s
death must have the right to purchase any type of individual life insurance pol-
icy the insurer offers—with the possible exception of term life insurance—at
the insurer’s customary premium rate based on the dependent’s age.
Covered dependent under a group insurance plan no longer qualifies for
group coverage. A dependent covered under a group insurance plan usually
becomes ineligible for coverage when he reaches a specified age or is no longer
considered a dependent of the insured. In this case, the individual must have
the right to obtain any individual life insurance policy the insurer offers—
with the possible exception of term life insurance—at the insurer’s customary
premium rate for the policy, based on the dependent’s age.
Group policy terminates or is amended so that coverage of any class of
group insureds ends. Any group insured or dependent who has been insured
under the group policy for at least five years must be offered the smaller of (1)
$10,000 of individual coverage or (2) the difference between the amount of
group life insurance that terminated and the amount of group life insurance
for which the individual becomes eligible within 31 days after termination of
the group policy. Premiums will be based on the insurer’s customary rate for
the policy, based on the group insured’s or dependent’s age.
To convert group coverage to an individual policy, the group insured or cov-
ered dependent must complete an application for an individual policy and pay

the premium to the insurer within 31 days after becoming ineligible for group
coverage. If an applicant meets the requirements of the conversion provision, no
additional underwriting is required. The insurer’s policyowner service depart-
ment only needs to verify the applicant’s eligibility and the benefit amount avail-
able before issuing an individual life insurance policy. However, if an applicant
requests a different type or amount of coverage than was provided under the group
policy, then the application is sent to underwriting and evaluated according to the
insurer’s usual underwriting guidelines for the requested policy.
Dividend Payments
All mutual insurance companies and many stock insurance companies issue par-
ticipating policies. A participating policy, or par policy, is an insurance policy
that may pay the policyowner a policy dividend when the insurer experiences
favorable financial results. However, dividend payments are not guaranteed and
amounts are not known in advance. A policy dividend is the policyowner’s share
of the divisible surplus, which is the portion of an insurer’s earnings that is avail-
able for distribution to the owners of participating policies after the company sets
aside funds for contractual obligations, operating expenses, contingencies, and
general business purposes. It is considered a return on the premiums policyowners
pay to keep their policies in force.
When an individual submits an application for coverage under a participating
life insurance policy, the applicant also selects a dividend option. The most com-
mon dividend options include
Receiving cash payment of dividends on a periodic basis, usually quarterly or
annually
Allowing dividends to accumulate at interest
Applying dividends to pay some or all of the premiums on a participating policy
Applying dividends to pay some or all of an outstanding policy loan
Using dividends to purchase additional insurance
A CSR enters information about the policyowner’s dividend payment choice into
the company’s policy administration system.
When an insurer declares a dividend payment, the CSR identifies the dividend
option selected by the policyowner and processes the payment. If the insurer’s
administrative system is automated, the transaction is handled automatically. If a
policyowner has elected to receive dividends in cash or to withdraw some or all
dividends that have been left to accumulate at interest, any taxes due on the dis-
bursements are deducted before payment is made to the policyowner. In the United
States, dividend earnings themselves are not taxable, but any interest earned on
accumulations is taxable.
If a policyowner elects to use dividends to pay policy premiums or pay down a
policy loan, the transaction is processed and the customer receives notice that the
transaction has been completed. If a policyowner elects to apply existing dividends
to buy additional insurance, the insurer verifies that the additional coverage is allow-
able without further evidence of insurability, based on the amount of coverage the
dividend would purchase and the insured’s risk classification. If additional under-
writing is necessary, the policyowner receives notice of the required evidence of
insurability and the case is turned over to underwriters for further processing.

Policy Loans
Individuals who need extra funds to make purchases can obtain those funds in the
form of a loan from a bank or other financial institution. In most cases, the bor-
rower is required to repay the full amount of the loan, plus any applicable interest,
at the end of a specified period. Owners of cash value life insurance policies can
obtain funds by means of a policy loan. Unlike commercial loans extended to a
borrower by a lender, policy loans are considered a cash advance of policy pro-
ceeds the policyowner is entitled to receive under the terms of the contract. As a
result, the policyowner may repay the loan, but is not legally obligated to do so.
However, if the loan is not fully repaid at the time of a claim, the insurer has the
right to deduct any outstanding amount on the loan, plus interest, from the death
benefit payable under the policy.
The requirements for obtaining policy loans vary. For example, many insurers
accept telephone requests for loans under a certain amount and require a written
request only for amounts over that limit. Other insurers require policyowners to
submit written requests for all policy loans. Written requests, however, can range
from an official application form to a signed letter from the policyowner.
When an insurer receives a loan request, a CSR
Examines the policy record to ensure that an eligible person has made the
request. For example, if a policy has been assigned, has an irrevocable benefi-
ciary, or was issued in a community property state, insurers typically require
signatures by the assignee, beneficiary, or spouse.
Compares the signature on the loan form to the signature on the insurer’s
records. If signatures don’t match, the CSR typically sends a letter and a loan
form to the policyowner and instructs the policyowner to return the completed
form with a notarized signature.
Verifies that the policy’s cash value is large enough to cover the amount
requested. For example, if a policyowner is requesting a loan to pay overdue
premiums, the CSR checks to make sure that the policy’s cash value equals
or exceeds the amount of the premium due. If the cash value is too small to
provide the requested amount, most insurers credit the account for the greatest
amount available and notify the policyowner of the reason for not granting the
full amount. If the amount of policy loan is large enough to put the policy at
risk of default, the CSR usually also notifies the sales intermediary so that the
intermediary can attempt to conserve the business.
Even though insurers don’t require policyowners to repay policy loans, they
generally offer policyowners a choice of repayment plans. Under the terms of
A lump-sum plan, the policyowner uses a check or money order to repay the
entire loan amount plus any interest due
A partial loan repayment plan, the policyowner submits a check or money
order for a partial loan payment
A coupon plan, the insurer supplies the policyowner with coupons to return
with periodic payments against the loan amount
A dividend plan, the insurer applies available dividends plus future dividends
against the outstanding loan amount

An automatic deduction plan, the policyowner authorizes the insurer to auto-

matically deduct a set amount from the owner’s bank account each month
until the loan is repaid
Policy Terminations
Individual and group life insurance policies usually terminate automatically if
the policyowner fails to pay premiums and does not respond to premium due or
policy grace notices. This automatic termination is called a lapse. For most types
of cash value life insurance, a policyowner can also make a conscious decision to
terminate, or surrender, a policy—either because she no longer wants or needs the
coverage or because she wants to claim the policy’s net cash surrender value. The
net cash surrender value of a cash value life insurance policy is the amount of the
cash value a policyowner is entitled to receive upon surrender of the policy. It is
a net value because any outstanding premiums or charges are deducted from the
total cash value of the policy before the policyowner receives payment. The net
cash surrender value of a policy, therefore, is equal to the calculated cash surrender
value of the policy.
Plus any increases in value created by paid-up additions, policy dividends,
and advance premium payments
Minus any outstanding policy loans (plus interest on those loans) and any
charges imposed on the surrender
Example:
Sarah Edlin notified her insurer that she wanted to surrender her whole life
insurance policy in exchange for the policy’s surrender value. At the time of
the request, the value of Sarah’s policy included
• a cash value of $50,000
• paid-up additions of $10,000
• $100 in dividends
• a $5,000 balance on a policy loan
The insurer imposed a 2 percent surrender charge on the transaction.
Analysis:
To determine the amount due to Sarah—the net cash surrender value—
the insurer:
(1) calculated the total cash value of the policy (cash value + paid-up
additions + dividends) = ($50,000 + $10,000 + $100) = $60,100
(2) calculated the net cash value of the policy (total cash value –outstanding
loan balance) = ($60,100 – $5,000) = $55,100
(3) calculated the surrender charge (net cash value × surrender charge) =
($55,100 × 0.02) = $1,102
(4) calculated the net cash surrender value (net cash value – surrender
charge) = ($55,100 – $1,102) = $53,998

To initiate a surrender, a policyowner needs to submit a completed and signed

surrender request form such as the one shown in Figure 10.9. Some insurers also
require the policyowner to submit the policy to the insurer.
Figure 10.9. Cash Surrender Request Form
General Information
Policy/Certificate No________________________________________________
Owner’s Name _____________________________________________________
Owner’s Date of Birth_______________________________________________
Owner’s Social Security Number___________________________________
Declaration of Lost Policy

We do not require the policy to be returned to us. However, we do ask that the policy
be destroyed once payment is received.
Income Tax Withholding Election

Federal law requires 10 percent tax to be withheld from the taxable portion of certain
life insurance payments, unless you request not to have tax withheld. If you decide not
to have federal tax withheld, you are liable for payment of the income tax due on this
payment. You may be subject to tax penalties under the Estimated Tax Payment Rules
if your payment of estimated tax and withholding, if any, are not sufficient.
This section must be completed. If no selection is made and your surrender is considered
taxable, taxes will be withheld.
I request payment of the cash surrender value in exchange for surrender of the
attached policy.
Check ONE:
____ I do NOT want to have Federal Income Tax withheld.
____ I DO want to have Federal Income Tax withheld.
_________________________________________ ___________________________
Signature of Owner, if other than Insured Date
________________________________ ____________________________________
Signature of Insured Other Required Signature, if any


When the insurer receives a surrender request form, a CSR verifies that the
person who submitted the request is legally entitled to surrender the policy.
For example, a policyowner who has assigned some or all rights to a policy to some-
one else is not allowed to surrender the policy without the assignee’s a uthorization.
A policyowner also cannot surrender a policy that names an irrevocable benefi-
ciary without the beneficiary’s consent. As you saw in Figure 10.7, an irrevocable
beneficiary is a life insurance policy beneficiary who has a vested interest in the
policy proceeds even during the insured’s lifetime and the policyowner can change
the beneficiary designation only after obtaining the beneficiary’s consent or upon
the beneficiary’s death.
The CSR can attempt to conserve the business by asking the policyowner
whether an alternative action might satisfy the policyowner’s needs. For example,
if a policyowner requests a surrender because he is unable to pay policy premiums,
the CSR might suggest that the policyowner use accumulated policy dividends or
request a policy loan to pay premiums. If the policyowner requests a surrender
because the coverage is no longer needed or is too expensive, the CSR might sug-
gest reducing the amount of coverage.
Policy Reinstatements
Sometimes a policyowner who has allowed a policy to lapse later decides he wants
to continue coverage. To prevent loss of coverage for the insured and to keep busi-
ness on their books without the high first-year expenses normally incurred for a
new policy, most insurers allow policyowners to reinstate a lapsed policy as long
as the policyowner satisfies all requirements for reinstatement. Reinstatement is
the process by which an insurer puts back into force a life insurance policy that
either has been terminated because of nonpayment of renewal premiums or has
been continued under the extended term or reduced paid-up insurance nonforfei-
ture option. Insurers don’t allow reinstatement if a policyowner has surrendered a
policy for its net cash surrender value.
The ability to reinstate an existing policy is especially important for an insured
who might not qualify for new coverage because of advanced age or health prob-
lems. In addition, a reinstated policy usually maintains the original premium,
which is likely to be lower than the premium for a new policy, and may require
little, if any, new underwriting.
To reinstate a lapsed policy, the policyowner must submit an application for
reinstatement of coverage such as the one shown in Figure 10.10. When an insurer
receives a request for reinstatement, the CSR handling the request reviews the
policy to verify that it includes a reinstatement provision and that the policyowner
has satisfied the requirements for reinstatement of coverage. For example, most
insurance contracts specify that a request for reinstatement must be made within
a specified amount of time following policy lapse. The reinstatement provisions in
most life insurance policies specify that reinstatements must be completed within
2-5 years. Most contracts also require policyowners requesting reinstatement of a
lapsed policy to present evidence of insurability in the form of a completed medi-
cal questionnaire. If the policyowner’s health status has not changed significantly
since the original policy was issued, the CSR can usually reinstate the policy

without additional investigation. If the policyowner’s health has changed, the CSR
usually refers the reinstatement request to the underwriting staff. If underwriters
determine that the policyowner’s current health status is acceptable, they usually
grant reinstatement as requested. If the policyowner’s health status has changed,
the underwriter can either offer to reissue the policy at a higher premium rate or,
if the risk has increased enough to disqualify the application, decline coverage.
Figure 10.10. Application for Reinstatement of Coverage
Policy #_______________________________________________
Insured_______________________________________________
Owner________________________________________________
APPLICATION FOR REINSTATEMENT OF POLICY DESCRIBED ABOVE

1. Your present occupation ___________________________________________________
2. Have you for any reason received medical attention or advice since the
date you became covered by the policy in question? If so, give the nature
of the illness, date, and name of the physician.
_____________________________________________________________________________
_____________________________________________________________________________
_____________________________________________________________________________
3. Do you declare that you are of sound constitution and that you are now
in good health?_________________________
4. In the past 3 years, have you smoked a cigarette, cigar or pipe, chewed
tobacco, or used tobacco or nicotine in any form? _________
If yes, last used (form) ___________________ on Month, Year___________
5. Name and address of family physician

_____________________________________________________________________________
_____________________________________________________________________________
_____________________________________________________________________________
I hereby certify that the above declarations are complete and true, and
I agree that no reinstatement shall take effect until this application is
approved by the insurer at its home office.
Date _____________ Insured’s Signature ____________________________
Date _____________ Owner’s Signature _____________________________

To complete a reinstatement, the policyowner must pay any premiums owed on

the policy. However, some insurers waive this requirement if the policyowner can
provide evidence that the policy lapsed because of temporary financial hardship
caused by loss of employment, illness, divorce, or any other event that negatively
impacts the policyowner’s financial situation. In this case, the policy is reinstated
by redating, which involves advancing the policy date and the date to which premi-
ums were paid by the number of months that the policy has been lapsed. To qualify
for redating, a policy must meet criteria established by the insurer.
Example:
The Exeter Insurance Company extends a one-time redating offer to
policyowners whose coverage (1) has been in force for less than two years,
(2) has lapsed for more than 60 days but less than six months, and (3) provides
a benefit less than $30,000.
Exeter recently received a request from Norman Levy to reinstate a $15,000
whole life insurance policy that had lapsed at the end of the first policy
year when Norman lost his job and was unable to pay the policy premiums.
The policy had remained lapsed for four months. The policy included no
supplementary term coverage.
Analysis:
Because Norman was requesting a reinstatement for the first time and
because his coverage satisfied Exeter’s reinstatement criteria related to policy
age, face amount, and lapse time, Exeter approved the request and redated
the policy by advancing the policy date and paid-to date by four months.
Administration of Variable Products

Variable life insurance (VL) is a form of cash value life insurance in which
premiums are fixed, but the death benefit and other values vary in response to
the performance of the subaccount investments backing the contract. V ariable
universal life insurance (VUL) is a form of cash value life insurance that
combines the premium and death benefit flexibility of universal life insurance with
the investment flexibility and risk of variable life insurance.
Owners of VL and VUL policies have the right to select the subaccounts in
which premiums are invested and to determine how premiums are allocated
among selected subaccounts. Owners are also allowed to change subaccounts and
premium allocations at least once a year. Although most insurers allow policy-
owners to change allocations by telephone or through the company website, some
insurers require written notice if a policyowner wants to reallocate premiums.
When an insurer receives a request to change subaccounts—such as changing
from a money market or bond account to a growth and income stock account—the
CSR verifies the change and directs future allocations into the new account. When
a customer changes allocation amounts, the CSR enters the new amounts into the
system and applies the change to all future premiums.
Because assisting policyowners with subaccount selection and premium alloca-
tion often involves financial decisions, CSRs who work with owners of variable
life insurance contracts may be required to obtain special licenses and adhere to
regulatory requirements governing variable products.

Customer Service and Policy Conservation

One of the most important goals of policyowner service is to ensure that policy-
owners are so satisfied that they keep existing policies in place. In insurance com-
panies, the activities involved in achieving this goal are known as conservation,
which is the process of ensuring that policies do not lapse but are retained on an
insurer’s books for as long as possible. In most cases, conservation efforts focus on
Policyowner communications
Financial professional engagement
Management of unassigned policies
Superior claim service
Policyowner Communications
Customers who buy tangible products usually become dissatisfied if those prod-
ucts don’t perform as expected. Customers who buy insurance products usually
become dissatisfied if the insurer and its representatives don’t perform as expected.
For example, most insurers today stress the value of creating long-term relation-
ships with their customers through repeated and mutually beneficial company-
customer interactions. Those interactions can range from marketing campaigns
designed to educate customers about a company’s products and services, to email
messages or phone calls from financial professionals, notices or updates posted on
company websites, or telephone conversations with a company’s customer service
staff. If the only contact customers actually have with an insurer comes when they
receive a notice that the premiums on their policies are going to change or that a
premium payment is overdue, they can become dissatisfied.
Insurers can improve conservation—and prevent some, if not all, customer dis-
satisfaction—by taking steps to ensure that they communicate with policyowners
At the right time. Some insurance policies require owners to pay higher pre-
miums at certain ages. CSRs can often avoid dealing with an unhappy policy-
owner when he receives a higher premium notice by contacting the policyowner
in advance to inform him of the change and, if necessary, asking if he would
be interested in discussing other coverage options with a financial professional.
On a regular schedule. Communicating with policyowners is not a one-time
event. It’s an ongoing effort to provide necessary information to policyowners
when they need it. For example, most insurers send customers a summary of
benefits statement describing the features and benefits of their policy shortly
after purchase and send updated summaries each year. CSRs also contact
policyowners to inform them about upcoming changes in premiums or benefits
or to remind them of premium due dates. Regular communications are often
evidence of a company’s interest in continuing their relationship with customers.
Through the right channel. Today’s insurance customers, especially those
in younger age groups, are likely to gather information about products and
services through a variety of channels, including company websites, internet
pages, social media sites, financial professionals, or CSRs. After purchasing a
policy, these customers are more likely to keep insurance policies in force if
they can communicate with their insurer through those same channels.

In the right format. Customers typically only engage with content that they
consider relevant, so it’s important for companies to deliver messages in a for-
mat that meets their customers’ needs. For insurers, that often means deliver-
ing messages in different ways to different customer groups.
With the right payoff. Customers need a reason to respond to a particular
message. For most customers, the payoff is often the ability to obtain critical
information that will help them solve a problem.
Example:
Lorraine Bennet, a CSR for the Exeter Insurance Company, noticed that one
of the company’s customers repeatedly paid his premiums late, in spite of
repeated reminders. Lorraine checked the customer’s file and found that
he paid premiums by check and sent them through the mail. She called the
customer and suggested that he could avoid late payments by using an
electronic funds transfer (EFT) that would transfer funds directly from his
bank to the insurer through a computer network rather than writing checks.
Analysis:
By contacting the customer, Lorraine was able to not only identify the cause of
the problem but also help the customer resolve it so that his future premiums
arrived on time.
Insurers can also improve conservation by encouraging customers to contact

the insurer if they have questions or concerns and then responding to those con-
tacts quickly and appropriately.
Example:
Franklin Johnson called his insurance company’s customer service department
when he received a notice in the mail saying that his term life insurance policy
will expire at the end of the year. He called the insurer to find out why he got
this kind of notice when he had always paid his premiums on time.
Analysis:
The CSR who answered Franklin’s call explained to him that his policy wasn’t
being terminated because he hadn’t paid premiums, but because it had
reached the end of the specified term. She also explained that the policy
included a renewal option that would allow him to continue his coverage. She
then helped him through the steps to renew his policy.
CSRs also support conservation of business by suggesting, or even scheduling,

an appointment with a sales intermediary to discuss the customer’s options. Figure
10.11 provides additional examples of actions that insurance companies can take
to conserve existing business. CSRs also notify sales intermediaries of potential
lapses so that they can take action to conserve business.

Figure 10.11. Approaches to Conserving Business
•• Giving financial professionals access to information about

payments that policyowners make to flexible premium
policies so that financial professionals can take action if
payments decline or fall below the required level
•• Providing annual reports containing projections of values
on flexible-premium policies to ensure that products are
meeting policyowners’ current and future needs
•• Providing multiple reminders of premiums due
•• Sending notices of late premiums to both policyowners
and financial professionals
•• Conferring with policyowners who make maximum loan requests to ensure that policy values
are adequate to keep coverage in force
•• Advising policyowners who request a policy surrender about alternatives, such as a policy loan
•• Offering insureds who leave a group plan options for continuing their coverage on an individual
basis
•• Offering a toll-free number and a website or email address for policyowners to contact the
insurer
•• Surveying policyowners about their satisfaction with financial professionals and products to
identify problems and devise solutions
•• Providing extensive and ongoing training to CSRs
•• Testing the effectiveness of notices, letters, and other communication with policyowners
to determine the most effective and efficient approaches
•• Tracking the relationship between conservation and persistency and publicizing the results
to staff and management
Financial Professional Engagement

Insurers have found that a primary cause of policy lapses is the lack of connec-
tion between a financial professional and a policyowner. To resolve this problem,
insurers focus on
Recruiting financial professionals who are concerned with establishing rela-
tionships with their customers and meeting their customers’ needs.
Providing financial professionals with information about the insurer’s under-
writing principles and requirements so that customers have realistic expecta-
tions about the timing and steps of the process.
Training financial professionals to provide frequent, ongoing, and high-quality
customer service to their customers. Most insurers encourage their financial pro-
fessionals to contact their customers at least once a year to review their needs,
update their coverage, and reinforce client/intermediary/company relationships.
Rewarding financial professionals who successfully establish long-term rela-
tionships with customers that add value for the customer.

Management of Unassigned Policyowners

Most life insurance policyowners rely on financial professionals to help them keep
their insurance coverage up to date and to suggest ways to meet evolving insur-
ance needs. Over time, these repeated interactions lead to close relationships.
Those relationships, however, are sometimes disrupted when a financial profes-
sional moves from the area, stops marketing a particular insurer’s products and
services, retires, or dies. Insurers often refer to a policyowner who bought a policy
with the assistance of a financial professional but who currently does not have a
relationship with the person who sold the policy as an unassigned policyowner.
Because a strong policyowner-intermediary relationship is critical to main-
taining existing business, most insurers have established automated systems for
identifying and tracking financial professionals who are no longer active and for
locating financial professionals operating in an unassigned policyowner’s geo-
graphic area. A CSR may also contact a nearby financial professional directly and
ask him to reach out to the unassigned policyowner. To reinforce these efforts,
insurers often offer financial incentives to intermediaries who agree to take over
unassigned contracts. Insurers also communicate regularly with policyowners to
maintain and enhance the company-customer relationship.
Claims Processing
All life insurance policies are contracts between an insurer and a policyowner and
all policies involve an insured—whose life is covered under the contract—and
a beneficiary who is entitled to receive benefits when the insured dies. In some
cases, separate people assume each of these roles.
Example:
Isabel Morris purchased a life insurance policy from the Midway Insurance
Company on the life of her husband, John. The policy will pay benefits to her
two children—Jenny and Kevin—when John dies.
Analysis:
In this situation Isabel is the policyowner, and she and Midway are parties to
the contract. John, whose life is covered under the policy, is the insured, and
Jenny and Kevin are the beneficiaries.
In other cases, a single person can assume more than one of these roles.
Example:
Daniel Barns purchased a life insurance policy from Midway Insurance on his
own life and named his wife, Edna, as beneficiary.
Analysis:
In this situation, Daniel is the policyowner and is a party to the contract. He
is also the insured. Edna is the policy beneficiary, but she is not a party to the
contract.

Although filing a claim and receiving policy benefits when an insured dies
mark the end of a life insurance contract, these activities don’t mark the end of the
relationship between an insurance company and its customers. In fact, an insur-
ance company is in a position to strengthen its relationships and ensure its contin-
ued business by
Providing customers with a fast, easy way to contact the company and submit
a claim
Delivering a clear explanation of the claim process and any requirements a
claimant must satisfy
Offering personalized treatment to policyowners and beneficiaries
Processing claims quickly and accurately
Customer Service Quality Control

Because providing exceptional customer service is essential to satisfying and
retaining customers, insurers continually monitor key elements such as the timeli-
ness, accessibility, quality, and quantity of customer service. The measures insur-
ers use to evaluate customer service performance can be either quantitative or
qualitative.
Quantitative Performance Measures

Quantitative performance measures use numerical methods to track and report
objective results. Insurers typically use these measures to evaluate the speed, fre-
quency, accuracy, and profitability of their administration functions, including
their customer service activities. Figure 10.12 describes some of these quantitative
measures.
One of the most common methods insurers use to gather quantitative informa-
tion about their customer service performance is a survey, which gathers data
about customers’ attitudes, knowledge, buying behavior, and preferences toward a
particular product, service, or administrative process. Surveys used in quantitative
studies usually consist of structured questions that offer fixed alternatives.
Example:
Which of the following aspects of the customer services you receive from
your insurer do you value most? (Please rank these choices by assigning a
number to each one, with “1” being the aspect of service you value most and
“5” being the aspect of service you value least.)
___ Friendliness and professionalism of customer service staff
___ Timeliness of service
___ Easily understood communications
___ Accuracy in completing a request
___ Overall level of service

Figure 10.12. Quantitative Measures of Customer Service Performance
SERVICE LEVEL/ACCESSIBILITY TO THE CUSTOMER

•• Service level. The percentage of inbound customer contacts answered within a specified
time frame.
•• Number of blocked calls. The number of inbound telephone calls that cannot be connected
to an employee.
•• Average speed of answer. The average time, in seconds, to answer a telephone call or the
average amount of time callers are on hold before being connected with someone who can
meet their needs.
•• Abandonment rate. A measure that indicates the percentage of inbound telephone calls
automatically placed on hold and then terminated by the caller before the call is answered
by a service provider.
•• Misdirected calls. The number or percentage of inbound telephone calls that are trans-
ferred to the wrong person.
TIMELINESS
•• Turnaround time. The amount of time necessary to complete a particular customer-
initiated request or transaction. Also known as average handling time.
•• First contact resolution. The percentage of inbound customer contacts that are s uccessfully
completed at the initial point of contact, that is, without being transferred and without the
need for follow-up work.
QUALITY
•• Quality rate. The accuracy of a particular type of transaction. Quality rate is often expressed
as the percentage of total transactions handled or processed without reported errors.
•• Error rate. The percentage of transactions that resulted in errors.
PRODUCTIVITY
•• Processes completed. The number of transactions that are handled within a specified
period of time.
Qualitative Performance Measures

Qualitative performance measures focus on behaviors, attitudes, or opinions and
are used to determine how efficiently and effectively processes and transactions are
completed. For example, an insurer may send a questionnaire to customers asking
them to describe a recent interaction with a customer service representative or to list
the types of services the customer has received from the company in a given period
of time. Surveys used to gather qualitative information typically include unstruc-
tured questions, which are usually open-ended and provide no answer choices.
Example:
Which aspect of the customer service provided by your insurer do you
value most?
_________________________________________________________________________________

In addition to surveys, insurers often gather qualitative performance informa-

tion about their customer services by means of
Observation and monitoring. Insurers often have managers, senior staff, or
trainers observe or monitor a percentage of each service provider’s transac-
tions. For example, a manager might listen to live or taped telephone calls
between customers and CSRs and record their observations on a checklist
such as the one shown in Figure 10.13. Managers also look at cases that have
been returned to a CSR for additional work or to correct an error in the initial
transaction. Managers may also make follow-up calls to customers to ask how
well their transactions were handled and to solicit suggestions for improving
service.
Mystery shoppers. A mystery shopper is a trained evaluator who approaches
or calls a company’s customer service unit and pretends to be a customer.
Mystery shoppers may be company employees who are not known to a CSR
or they may be employees of an outside research vendor. The mystery shopper
works through the transaction with the CSR and then evaluates how well the
CSR handled the transaction. Mystery shopper evaluations offer considerable
flexibility because the evaluator can manipulate the circumstances to see how
a CSR responds to various scenarios.
Complaint monitoring. Insurers often look at complaint letters, emails, and
transcripts of telephone calls to gather information about the source, number,
frequency, and nature of complaints the company receives.
The in-depth process of capturing customers’ expectations, preferences, and
aversions is known as the voice of the customer (VOC). By monitoring cus-
tomer services practices and VOC results, insurers can identify potential prob-
lems or trends in their customer services and take steps to improve the customer
experience.

Figure 10.13. Checklist Used to Evaluate the Quality

of Telephone Conversations
99 Identify self and offer assistance

99 Determine the reason for the call by listening carefully
99 Express help/regret/acknowledgment appropriately
99 Request and verify caller information
99 Use caller’s name and “sir” or “ma’am” as appropriate
99 Accept appropriate responsibility for actions taken or not taken
99 Provide accurate, complete information in an organized fashion
99 Inform caller of any risks involved
99 Summarize action to be taken and verify customer’s understanding,
giving an expected timeline where appropriate
99 Offer additional assistance
99 Offer alternative solutions to problems
99 Avoid insurance jargon
99 Use appropriate presentation: pace, inflection, enunciation, courtesy, personalization
99 Use “please” and “thank you”
99 Use a proper approach to placing a customer on hold or transferring customer
to another department
99 Avoid short or curt answers
99 Remain calm and avoid becoming defensive
99 End call by saying “Thank you for calling” and “Have a nice day”
99 Accurately record the call

Key Terms
electronic funds transfer (EFT) dividend plan
electronic funds transfer arrangement automatic deduction plan
grace period net cash surrender value
policy grace notice reinstatement
late payment offer variable life insurance (VL)
certificate of coverage variable universal life insurance (VUL)
service complaint conservation
service recovery unassigned policyowner
escalation process quantitative performance measures
complaint team service level
revocable beneficiary number of blocked calls
irrevocable beneficiary average speed of answer
contingent beneficiary abandonment rate
concurrent beneficiary misdirected calls
class designation turnaround time
per stirpes beneficiary designation first contact resolution
per capita beneficiary designation quality rate
assignment error rate
absolute assignment processes completed
collateral assignment survey
conversion provision structured question
participating policy qualitative performance measure
divisible surplus unstructured question
lump-sum plan mystery shopper
partial loan repayment plan voice of the customer (VOC)
coupon plan

Insurance Administration Chapter 11: Overview of Claim Administration 11.1
Chapter 11
Overview of
Objectives
11A Explain the importance of an insurer’s claim philosophy in guiding
its claim practices and describe the steps in the claim evaluation
process
11B Describe the typical staffing, organization, and authorization levels of
a claim function
11C Give examples of the methods insurers use to improve the efficiency
of their claim administration processes
11D Describe the legal requirements insurers must satisfy when
evaluating insurance claims and the penalties courts can impose if an
insurer fails to meet these requirements
11E
Describe the activities that qualify as unfair claim practices under the
NAIC Unfair Claims Settlement Practices Act and the Unfair Life,
Accident, and Health Claims Settlement Practices Model Regulation
11F Describe the requirements insurers in many states must meet related
to unclaimed benefits
11G Identify legal issues associated with customer privacy that affect
claim administration
11H Identify the warning signs of a fraudulent claim and describe the
steps insurers are required to take to prevent claim fraud
11I Describe how the quality of claim administration is measured
internally and externally

11.2 Chapter 11: Overview of Claim Administration Insurance Administration
Outline
Claim Philosophy and Legal and Compliance Issues
Claim Practices Affecting Claim Administration
 The Claim Evaluation Process
Regulations Governing Claim
Claim Administration Staffing and Administration
Organization 
Unfair Claim Settlement Practices
 Staffing 
Unclaimed Benefits
 Organizational Systems 
Privacy Protection
 Relationships with Other Insurance 
Claim Fraud
Functions 
Financing Criminal Activities
Efficiencies in Claim Administration Quality Measurement for
 Automated Workflow Systems Claim Administration
 Express Claim Processing  Internal Evaluation of Performance
 Auto-Adjudication  External Evaluation of Performance
F
or most insurance companies, claim administration is the last activity in the
policy life cyle. It typically
Begins when the company receives a claim for benefits under an in-force
insurance policy
Includes all of the activities necessary to determine if the claim is eligible for
payment according to the terms of the policy
Ends with the insurer’s decision to either pay policy proceeds according to the
terms of the policy or deny the claim if the insurer determines that the claim
is not covered or is fraudulent
Ensuring that claims are administered accurately is essential because payment
of claims under an insurance policy is the last step in fulfilling the promise the
insurer made when the policyowner purchased the contract. Delayed payments
or payments made to the wrong claimant not only increase the insurer’s costs but
may also result in legal actions.
Claim Philosophy and Claim Practices

An insurer’s approach to claim administration is usually based on the company’s
claim philosophy, which is a statement of the insurer’s objectives for adminis-
tering claims. Objectives for claim administration generally focus on providing
timely, accurate, equitable, and courteous service to policyowners, insureds,
financial professionals, and beneficiaries. An insurer’s claim philosophy is sup-
ported by specific claim practices, which are statements that guide the day-to-day
handling of claims. Claim practices typically focus on
Processing requests as quickly as possible and notifying claimants if addi-
tional time is needed to make a decision
Applying the provisions of policies accurately and consistently

Following company procedures for investigating questionable claims
Obtaining medical and legal advice when needed to make a decision
Adhering to state, provincial, and federal regulations
Providing claimants with courteous, prompt, and complete explanations if

benefits are limited or are not payable
Allowing claimants to submit additional supporting information on a denied
or limited claim
Documenting evaluations and decisions accurately
Providing claimants with a way to appeal the insurer’s decision to deny a claim
The claim philosophy and claim practices adopted by most insurers are
based on principles established by the International Claim Association (ICA).
These principles, which are a condition for membership in the ICA, are shown in
Figure 11.1.
Figure 11.1. The International Claim Association’s Statement of Principles

The International Claim Association, in recognition of the need to continue public trust and
confidence in the insurance industry, reaffirms the following principles:
1. Any individual who has, or believes he has, a claim is entitled to courteous, fair and just
treatment; and shall receive with reasonable promptness an acknowledgment of any
communications with respect to his claim.
2. Every claimant is entitled to prompt investigation of all facts, an objective evaluation and the
fair and equitable settlement of his claim as soon as liability has become reasonably clear.
3. Claimants are to be treated equally and without considerations other than those dictated by
the provisions of their contracts.
4. Claimants shall not be compelled to institute unnecessary litigation in order to recover
amounts due, nor shall the failure to settle a claim under one policy or one portion of a policy
be used to influence settlement under another policy or portion of a policy.
5. Recognizing the obligation to pay promptly all just claims, there is an equal obligation to
protect the insurance-buying public from increased costs due to fraudulent or non-
meritorious claims.
6. Procedures and practices shall be established to prevent misrepresentation of pertinent facts
or policy provisions, to avoid unfair advantage by reason of superior knowledge, and to
maintain accurate insurance claim records as privileged and confidential.
7. Reasonable standards shall be implemented to provide for adequate personnel, systems
and procedures to effectively service claims. These standards shall be such as to eliminate
unnecessary delays or requirements, over-insistence on technicalities, and excessive apprais-
als or examinations. Claim personnel shall be encouraged and assisted in further developing
their knowledge, expertise, and professionalism in the field of claim administration.
Source: Statement of Principles, International Claim Association, www. claim. org (8 June 2017). Reprinted with permission.

The Claim Evaluation Process

When an insurer receives notice of a loss, the insurer typically provides the claim-
ant with a claim form or other means of supplying information about the loss.
A claim form, or claimant’s statement, is a document containing information
about a loss under an insurance policy and about the person or entity claiming the
proceeds that is submitted to an insurance company to begin the claim evaluation
process.
For claim evaluation, most insurers follow a multistep process similar to that
described in Figure 11.2. The actual order in which the steps are performed, how-
ever, varies widely depending on the complexity of the claim and whether the
analyst has all the information needed to complete a particular step.
Insurers are responsible for maintaining a complete record of the progress and
disposition of every claim. Clear and complete written documentation is espe-
cially important for claims that are denied. A claim history that supports the denial
may be of great value in the event that the claimant disputes the claim decision.
Claim Administration Staffing

and Organization
The staffing and organization of the claim function vary among different insurers
based on factors such as the customers the insurer services, the product it offers,
and its geographic location.
Staffing
Although job classifications in claim administration vary among different insur-
ers, companies typically maintain a staffing hierarchy that includes support staff,
claim analysts, and claim supervisors. In most insurance companies
Support staff are responsible for establishing files, ordering information
needed to analyze claims from other functional areas in the company, and
performing routine actions designed to facilitate decision making. Support
staff in many companies also (1) handle some communications with claimants
and financial professionals, (2) verify the claimant is a beneficiary of record on
the policy, and (3) facilitate the payment process.
Claim analysts, also known as claim examiners or claim adjusters, review
claims and determine the company’s liability under each claim. If a claim is
approved, analysts authorize payment to the person or entity designated to
receive benefits. The types of claims that individual analysts work on depend
on each analyst’s level of experience and expertise. New analysts typically
process routine claims that (1) involve relatively low payment amounts and (2)
don’t involve complex issues or unusual circumstances. Analysts with more
experience typically review complex cases and cases above a specified pay-
ment threshold.
Claim supervisors, also known as claim managers, work directly with new
analysts during training and oversee the activities of claim analysts and sup-
port staff. The typical duties of claim supervisors are listed in Figure 11.3.

Figure 11.2. Steps in the Claim Evaluation Process
1
Verify that the coverage was in force when the loss occurred. The claim analyst
must verify that premiums have been paid. For example, if the policy was issued
and delivered but the initial premium was never paid then the policy was never in
force and no benefit is payable.
2
Verify that the deceased is covered. The claim analyst must verify the identity
of the deceased and determine whether the life insurance policy actually covers
the deceased. This step is especially important when benefits are claimed under
a policy that covers more than one person.
3 Verify that the loss occurred. To pay policy benefits, the claim analyst must
examine evidence that the reported loss actually occurred. In most cases, proof
of death is provided in the form of an official, signed death certificate.
4
Determine whether the policy is contestable. If the contestable period has
not expired, the claim analyst investigates whether the application included any
material misrepresentations. If so, the claim must determine whether the policy
should be considered void.
5
Determine whether the loss is covered by the policy. The claim analyst must
verify that the loss is not excluded from coverage. For example, if an insured died
as a result of suicide during the policy’s suicide exclusion period, then the policy’s
death benefit is not payable. However, the insurer is generally obligated to return
the premiums paid for the policy.
6 Calculate the amount of the benefit payable. The claim analyst must apply the
policy’s method of calculating benefits to the claim.
7 Determine who is entitled to receive benefits. The claim analyst must

determine if the person claiming the benefits is the person entitled to the
benefits under the policy.

Figure 11.3. Typical Duties of an Insurance Company Claim Supervisor
•• Assigns cases to claim analysts in the absence of—

or in addition to—workflow systems
•• Consults with and advises claim analysts on cases with which the
analyst needs assistance
•• May handle difficult and large amount cases personally
•• Monitors the training and performance of each claim analyst
•• Responds to or assists in handling any complaints
•• Assists with claim audits
•• Produces periodic production reports that show the quantity and quality of claims
processed by claim analysts or reviews such reports if they are produced by the claim
administration system
•• Serves as a liaison with the insurer’s medical director and legal staff
Most insurers limit the types of claims an analyst can process and the amounts
the analyst can approve without a supervisor’s authority. The table below pro-
vides examples of the limits insurers often impose. Claims that involve complex
legal issues or potential fraud may also require investigation by the insurer’s legal
department or special investigative unit (SIU).
Type of Claim Amount of Claim Approval Authority
Routine claims that are not within Analyst Trainee—$25,000

the contestable period
Analyst—$200,000
Senior Analyst—$600,000
Claim Supervisor—$1 million
Claims that are within the Analyst Trainee—No authority

contestability period or involve
Analyst—$200,000
complications such as an accidental
death benefit provision Senior Analyst—$600,000
Claims that involve potential Analyst Trainee—No authority

fraud or unusual legal complications
Analyst—No authority
Senior Analyst—$500,000

Organizational Systems
An insurer’s size and product variety can affect the organization of its claim
administration function. Many small insurers have a single claim administration
unit that handles all claims submitted on the company’s products. Many larger
insurers maintain separate claim units to handle different amounts or types of cov-
erage—such as fixed amount and variable insurance, term and whole life insur-
ance, or living benefits such as disability income. As an alternative to separate
claim units, larger insurers sometimes establish separate branch offices whose
primary purpose is to administer specific types of claims.
Instead of handling claims internally, insurers may outsource some or all of
their claim administration activities to a third-party administrator (TPA) that is
not affiliated with an insurer but provides various administrative services to insur-
ers and group policyholders. Most insurers that outsource claims do so to manage
specific types of claims. For example, an insurer might handle variable life insur-
ance claims in-house and outsource other types of claims. An insurer might also
retain complex claims or claims above a specified amount in-house and outsource
claims under that amount.
Insurers and TPAs that administer claims can choose to allocate claims to
claim analysts according to a case assignment system, a work division system, or
a combination of the two systems. These systems are often similar to the systems
that insurers use to organize their underwriting function.
Case Assignment Systems

Under a case assignment system, claims are assigned to individual claim analysts
according to predetermined criteria such as type of coverage, amount of cover-
age, geographical origin of the claim, financial professional servicing the policy,
or alphabet (based on the last name of the insured). The analyst assigned to a
particular case is then responsible for completing all of the activities involved in
administering the claim.
Example:
The Barksdale Insurance Company, which sells whole life and term life
insurance policies in the northeastern region, the southeastern region, and
the midwestern region, uses a case assignment system for processing claims.
Under this system, Barksdale divides its claim analysts into three groups and
assigns each group to work on claims from a specific region.
Analysis:
By assigning analysts to work only on claims that come in from a particular
region, Barksdale can account for time differences and ensure that claims are
processed quickly and accurately. The company can also ensure that its claims
processes meet all applicable regulatory requirements within each region.
Work Division Systems

Insurers that use work division systems assign claims to analysts according to the
type of claim and amount of authority the analysts have. For example, insurers often
assign new analysts to work individually on simple claims or claims for relatively
low amounts. As an alternative, some insurers assign new analysts to work on teams

similar to jet underwriting units. In most cases, however, new analysts are required
to consult with a senior analyst before making a decision. As claim analysts gain
experience, the size of the claims they can process independently increases.
Example:
The Inglis Insurance Company uses a work division system in its claim
department. Under this system
•• New analysts who have worked for the company for less than one year
have the authority to process claims for up to $100,000 on noncontest-
able contracts, but usually aren’t assigned claims on contestable con-
tracts. Before a new analyst can authorize payment of a claim, however,
a senior analyst must review and sign off on the claim.
•• Analysts who have worked for the company for more than one year
have the authority to process claims for up to $250,000 on noncontest-
able contracts, but require approval for higher amounts. Analysts who
have worked for the company for more than three years are allowed to
process claims for higher amounts or for contestable contracts.
•• Team leaders have the authority to process claims for contestable
and noncontestable contracts up to $350,000, and managers have the
authority to process claims for up to $500,000.
Insurers may assign especially complicated claims to a committee that includes

the assigned analyst plus a claim supervisor and representatives from other func-
tional areas, such as underwriting, legal, and medical. Although non–claim divi-
sion personnel assigned to claim committees are expected to provide counsel, they
typically do not participate in the actual claim decision.
Relationships with Other Insurance Functions

Claim analysts occasionally work with the insurer’s underwriters, especially if ana-
lysts suspect misrepresentation or fraud. For example, claim analysts may ask com-
pany underwriters to review any information first discovered during claim admin-
istration and determine if and how that information would have affected the risk
appraisal process. Also, claim analysts and underwriters often collaborate on issues
related to beneficiary designations or policy riders to make sure that any questions
can be resolved before a policy is issued. This ongoing collaboration between claim
administration and underwriting enhances the insurer’s ability to compete success-
fully by improving the accuracy and quality of decisions in both areas.
To foster cooperation between claim administration and underwriting func-
tions, insurers often assign staff members from both areas to
Participate in the development of new insurance products
Provide data that managers can use to evaluate the probable success of new
products
Review potential new policy documents, including application forms and
claim forms, to check for potential problems
Undergo cross training to gain a deeper understanding of the work require-
ments of both functions
Claim analysts also consult with the company’s medical and legal staff on prob-
lematic claims and with financial professionals or vendors on information related
to claims. Statistical information generated by the claim administration area is
used by (1) actuaries in setting premium rates, (2) auditors in assessing the effec-
tiveness and efficiency of the claim process, and (3) the product development team
in developing new products.
Efficiencies in Claim Administration

The nature of the claim and the insurer’s use of claim-specific technology affects
the time required to process a claim. Simple claims and claims that are submit-
ted electronically can often be processed within a few days. Complex claims and
claims submitted by claimants using physical documents can take months or even
years to complete.
Fortunately, claim analysts today typically have access to claim management
technology that performs some or all of the claim evaluation steps automatically and
Increases productivity and efficiency. Automated claim management sys-
tems reduce the time analysts spend searching for the information they need
to evaluate a claim. Faster access to information, in turn, reduces the time
needed to make decisions and complete transactions. Faster decisions and ben-
efit payment also enhance customer satisfaction.
Reduces costs. Automated systems that reduce the time needed to complete
required steps and eliminate errors can reduce a company’s overall claim
costs. In general, the longer it takes an insurer to settle a claim, the higher the
cost for the company. Correcting errors in claim decisions, investigating ques-
tionable claims, and litigating disputed claims also increase costs.
Insurers can use technologies such as automated workflow systems, express
claim processing, auto-adjudication, and predictive analytics to improve the effi-
ciency and accuracy of their claim administration operations.
Automated Workflow Systems

In most cases, automated workflow systems break processes into specific tasks
and assign those tasks to different workers or work teams. For example, processing
a claim for life insurance typically involves the following tasks:
Entering a claim in the company’s claim tracking system
Collecting information relevant to the claim and, if necessary, requesting

additional information
Analyzing available information
Making a decision on the claim

If a problem arises in connection with any of these tasks, the system flags the
claim until all requirements are met.

Automated workflow systems usually record the date and time a claim is
received, questions that arose during processing, actions taken, documents cre-
ated, and task completion dates and times. These systems may provide claim ana-
lysts immediate access to all information related to a particular claim. Automated
workflow systems can be invaluable when multiple analysts are involved on a
single claim, when a committee is working on a large or complex claim, or when
a case must be temporarily transferred to a manager for consideration or advice.
Express Claim Processing

Some insurers and TPAs are implementing express claim processing systems
that reduce the cost and turnaround time for processing and paying life insurance
claims. In these companies, claim examiners gather information needed to process
the claim by telephone and, if the claim meets company requirements, authorize
immediate payment without additional paperwork. This method of claim process-
ing eliminates the need for the claimant to submit a formal claim form or provide
a death certificate.
Most U.S. companies that offer express claim processing limit its use to poli-
cies under which the
Death benefit is below a specified amount, such as $50,000 or $75,000
Date of death is less than one year prior to the claim for benefits
Insured died from a natural cause
Beneficiary designation in the policy has been in effect for a minimum amount
of time, such as three or six months
Policy has been in force for at least two years
Companies that offer express claims processing systems estimate that they can
reduce an insurer’s claim costs by as much as 75 percent.1
Auto-Adjudication
Some insurers have implemented auto-adjudication for claims that fit certain
parameters. Auto-adjudication is an electronic claim processing system that
can perform specified claim processing activities without human intervention.
For example, auto-adjudication systems perform actions such as
Receiving and creating records for claims submitted electronically
Verifying information about the coverage and the insured
Making a decision regarding the claim
Calculating benefit amounts
Authorizing payment of benefits
Producing checks or transferring funds electronically to pay benefits

Even if a claim is submitted on paper, insurers can usually use imaging tech-
nology to convert the claim to electronic format and then process the claim using
auto-adjudication. Claims that do not fit the requirements specified for electronic
processing are assigned to a claim analyst for processing.
Legal and Compliance Issues Affecting Claim

Administration
A life insurance policy is a legally binding contract between an insurer and a
policyowner under which the insurer promises to pay policy benefits to a specified
beneficiary when due. The insurer, however, maintains the right to evaluate all
policy claims and to deny payment if claims do not satisfy the provisions included
in the contract. Claimants, in turn, have the right to file an appeal if the insurer
fails to pay eligible claims when due and, if an appeal fails, to file a lawsuit against
the insurer for breach of contract. Some policies mandate that appeals on claim
decisions be resolved through arbitration instead of a lawsuit.
If a court determines that the insurer denied a claim improperly, the court can
require the insurer, as defendant, to pay compensatory damages or compensatory
damages plus punitive damages. Compensatory damages are monetary awards
intended to compensate the injured party for monetary losses that resulted from a
defendant’s improper conduct. For lawsuits related to claims, compensatory dam-
ages usually consist of the policy benefits and, in some situations, interest. Punitive
damages are awarded in addition to compensatory damages when a defendant’s
conduct meets the jurisdiction’s standards for behavior that is so egregious as to
warrant such damages. The purpose of punitive damages is to punish a defendant
and to deter others from similar conduct.
Some insurers establish a committee—composed of senior claim analysts,
a management representative, and a law department representative—to review
claim denials that may potentially result in legal action. This committee may also
be responsible for replying to insurance department complaints and monitoring
lawsuits filed to obtain benefits.
Regulations Governing Claim Administration

Insurers are also subject to various state and federal laws designed to ensure that
claims are handled accurately and that claim decisions are fair for both the claim-
ant and the insurer. In Chapter 2, you learned that failure to process claims in a
timely manner is considered an unfair trade practice and a violation of market
conduct laws. Claim administration is also the focus of various state laws and
regulations.
Unfair Claim Settlement Practices

Most states have enacted laws based on or similar to the NAIC’s model Unfair
Claims Settlement Practices Act and Unfair Life, Accident and Health Claims
Settlement Practices Model Regulation. The Unfair Claims Settlement Practices
Act describes a number of actions that are considered unfair if committed by an
insurer (1) in conscious disregard of the law or (2) so frequently as to indicate
a general business practice. Figure 11.4 lists some of the actions that qualify as
unfair claim settlement practices.

Figure 11.4. Actions that Qualify as Unfair Claims Settlement Practices
Any of the following acts by an insurer, if committed in violation of Section 3, constitutes an unfair
claims practice:
A. Knowingly misrepresenting to claimants and insureds relevant facts or policy provisions relating
to coverage at issue;
B. Failing to acknowledge with reasonable promptness pertinent communications with respect to
claims arising under its policies;
C. Failing to adopt and implement reasonable standards for the prompt investigation and
settlement of claims arising under its policies;
D. Not attempting in good faith to effectuate prompt, fair and equitable settlement of claims
submitted in which liability has become reasonably clear;
E. Compelling insureds or beneficiaries to institute suits to recover amounts due under its policies
by offering substantially less than the amounts ultimately recovered in suits brought by them;
F. Refusing to pay claims without conducting a reasonable investigation;
G. Failing to affirm or deny coverage of claims within a reasonable time after having completed its
investigation related to such claim or claims;
H. Attempting to settle or settling claims for less than the amount that a reasonable person would
believe the insured or beneficiary was entitled by reference to written or printed advertising
material accompanying or made part of an application;
I. Attempting to settle or settling claims on the basis of an application that was materially altered
without notice to, or knowledge or consent of, the insured;
J. Making claims payments to an insured or beneficiary without indicating the coverage under
which each payment is being made;
K. Unreasonably delaying the investigation or payment of claims by requiring both a formal proof
of loss form and subsequent verification that would result in duplication of information and
verification appearing in the formal proof of loss form;
L. Failing in the case of claims denials or offers of compromise settlement to promptly provide a
reasonable and accurate explanation of the basis for such actions;
M. Failing to provide forms necessary to present claims within fifteen (15) calendar days of a request
with reasonable explanations regarding their use;
N. Failing to adopt and implement reasonable standards to assure that the repairs of a repairer
owned by or required to be used by the insurer are performed in a workmanlike manner.
Source: NAIC, Unfair Claims Settlement Practices Act, Section 4. Unfair Claims Practices Defined, 1997. Reprinted with permission from the
National Association of Insurance Commissioners.
The Unfair Life, Accident and Health Claims Settlement Practices Model Reg-
ulation specifies the minimum standards insurers must meet in settling life and
health insurance claims. Many of these standards focus on the maximum amount
of time an insurer has to take a certain action. The standards for life insurance
claims specify that the insurer must
Provide claim forms within 15 days after receiving notification of a claim

Begin any necessary investigation of a claim within 15 days after receiving

proof of loss
Pay a claim within 30 days after determining that the insurer is liable
Provide claimants with information regarding any outstanding information

necessary to reach a decision on the claim at least every 30 days
Send the claimant a written notice of denial of a claim within 15 days after
determining that the insurer is not liable for payment
In addition, most states require insurers to pay interest on claim benefits that
are not paid within established time limits.
Unclaimed Benefits
Insurers usually ensure that beneficiaries receive benefits to which they are enti-
tled by processing and paying claims within a specified period. Sometimes, how-
ever, no claim is filed, because either a beneficiary is no longer alive or a person
is unaware that he is listed as a beneficiary. In such cases, the insurer may be
unaware that an insured has died. Although most states have enacted regulations
that define when unclaimed life insurance benefits default to the state, not all states
have enacted laws specifying the steps insurers must take to locate beneficiaries of
unclaimed benefits and help them initiate the claim process.
In 2012, the American Council of Life Insurers (ACLI) issued a standard requir-
ing all life insurers to use new technologies to proactively search for insureds who
have died rather than waiting for a claimant to send notice of the death, and to find
the claimants entitled to life insurance benefits. The ACLI encouraged all states
to adopt the standard by the end of 2017. By June 2017, nearly half of the states
in the United States had enacted laws based on the standard, and many more had
submitted proposals.
Under the terms of the unclaimed benefit standard, insurance companies are
required to compare their records against the Social Security Death Master File.
The Death Master File (DMF) is a Social Security Administration (SSA) data-
base of information about people who had a Social Security number and whose
deaths were reported to the SSA. When an insurer finds one of its insureds on the
DMF, the insurer must make a good-faith effort to determine if benefits are due as
a result of the insured’s death. If benefits are due, the insurer must make a good-
faith effort to locate the person or entity entitled to the benefits.
Because most insurers already use the DMF to verify death, expanding their
search to identify potential beneficiaries has been readily accepted. Most insurers
also support the creation of programs designed to help consumers identify and
locate lost policies. These “lost policy finder programs” allow people who believe
deceased loved ones may have owned life insurance to submit a request to insurers
doing business in a particular state to search their records. The NAIC and insur-
ance departments in several states have already established such programs.
Privacy Protection
As you learned in Chapter 2, the federal government and most states have enacted
laws and regulations designed to protect the privacy of insurance customers and

ensure the confidentiality of personal information. These laws, which regulate

how insurers collect, use, and share personal information, include
U.S. state laws based on the Model Privacy Act
U.S. state regulations based on the Model Privacy Regulation
The U.S. federal Gramm-Leach-Bliley (GLB) Act
The U.S. federal Fair Credit Reporting Act (FCRA)

The NAIC has also developed model laws and regulations that focus on pri-
vacy. For example, the NAIC’s Model Privacy Act generally prohibits the use of
pretext interviews in connection with insurance transactions. A pretext interview
is an interview in which one person attempts to gain information from another
person by (1) pretending to be someone he is not, (2) pretending to represent some-
one he does not represent, (3) refusing to identify himself, or (4) misrepresenting
the purpose of the interview. The exception is that, within stated limits, an insurer
may conduct pretext interviews during the investigation of a claim if the insurer
has a reasonable basis to suspect criminal activity, fraud, or material misrepresen-
tation in connection with the claim.
Claim Fraud
Occasionally claimants make mistakes in providing information on claims, but
generally their intent is to submit valid claims and receive only benefits to which
they are legally entitled. Unfortunately, some people fraudulently manipulate the
claim system to take advantage of insurance companies and obtain benefits to
which they are not entitled. In Chapter 2, you learned that insurance fraud is any
fraud that involves an insurance company, whether it is committed by consum-
ers, insurance company employees, sales intermediaries, or other individuals con-
nected with an insurance transaction. Claim fraud is a subset of insurance fraud
in which a person intentionally uses false information in an unfair or unlawful
attempt to collect benefits under an insurance contract. Claim fraud can be com-
mitted by any person in a position to influence a claim decision, including an
insured, a beneficiary, a financial professional, or an employee of an insurance
company. Figure 11.5 describes some of the warning signs of potential claim fraud.
Claim fraud is considered a crime in most jurisdictions, and governments can
prosecute individuals or entities that commit claim fraud. Policyowners and insur-
ers who have suffered financial losses as a result of claim fraud can also file civil
lawsuits against perpetrators. As you learned earlier in this course, most states
have passed fraud laws based on the Insurance Fraud Prevention Model Act to help
insurers prevent, detect, and investigate insurance fraud.
Some state laws also require insurers to establish a special unit or department
to investigate suspected cases of insurance fraud. A special investigative unit
(SIU) is a group of individuals—often composed of representatives of the claim,
legal, and internal audit functions as well as independent investigators—who are
responsible for detecting, investigating, and resolving claims, particularly those
involving insurance fraud. A claim analyst who suspects fraud is required to con-
tact the SIU and work with the unit in investigating the case. Insurers can also
receive assistance in detecting fraud from the MIB Group’s Claims Activity Index
(CAI), which is a shared, industry-wide database that includes information about
claims that have been filed with member companies. Claims analysts can use the

Figure 11.5. Warning Signs of Potential Claim Fraud

The claimant provides suspiciously
detailed or suspiciously vague
information and documentation
The claimant provides a concerning the claim.
post office box instead of Medical terms are
a street address. misspelled or inconsistent
with the diagnosis
or treatment.
The coverage was issued The coverage seems
within the last six months. excessive for the risk.
Information on the claim

White-outs, typeovers, form is omitted or differs
and erasures suggest from information in the
that the claim form has insurer’s files.
been altered.
The claim form

submitted is a photocopy,
The coverage is in the
not an original.
contestable period.
The claimant threatens involvement
of attorneys or the claim analyst’s
The financial professional who submitted
supervisor if the claim is not
the application for coverage also
paid rapidly or volunteers to come
submitted the applications for other
to the insurance company to
people who submitted questionable claims.
collect the proceeds.
CAI to determine whether an individual who has filed a claim with one insurer
has also filed similar claims with other insurers. However, because of the need to
maintain the privacy of personal information, use of the CAI by insurers is limited.
In spite of the benefits of antifraud laws, some people are reluctant to report
suspected insurance fraud for fear that the accused might file a lawsuit against
them for defamation or invasion of privacy. Defamation is a civil wrong that occurs
when a person makes false statements that tend to damage the reputation of another.
Invasion of privacy is a civil wrong that occurs when a person (1) appropriates
someone’s name or personality; (2) publicizes someone’s private affairs; (3) intrudes
into someone’s private affairs and the wrong causes mental suffering, shame, or
humiliation; or (4) places someone in a false light in the public eye. To encour-
age the reporting of suspected insurance fraud, most states have laws that protect
from civil liability anyone who in good faith reports potential fraud to the insurance
department.
Financing Criminal Activities

As you learned in Chapter 5, the Office of Foreign Assets Control (OFAC) maintains
a list of countries, individuals, and organizations that participate in or sponsor ter-
rorism or other illegal acts such as narcotics trafficking or money laundering. Claim
administration staff must guard against making any payments to anyone on the
OFAC list. Typically, the claim administration system runs checks on the OFAC list.

Quality Measurement for

In Chapter 2, you learned how insurers use performance standards, benchmarks,
and other tools to evaluate the quality of their administrative operations. Insur-
ers use many of these same measures to evaluate the performance of their claim
f unction.
Internal Evaluation of Performance

Insurers can use a variety of indicators to evaluate how well their claim function is
performing and determine whether employees are reaching turnaround time and
accuracy objectives. The table below describes some of the most common of these
indicators.
INDICATOR POSSIBLE INSURER RESPONSE
Number of new If the number of claims received is increasing or

claims received decreasing, management may need to adjust the
during a particular level of staffing or the method of assigning cases to
period claim analysts.
Average number If processing times change because the total number

of days needed to of claims received changes, management may need to
process each claim adjust staffing levels. If processing times change
because of the complexity of the claims, management
may need to adjust the mix of junior/senior analysts in
the department.
Number of claims A high number of closed claims is often an indicator

completed during of process efficiency. A low number may indicate the
a particular period need for additional staff or the need to revise existing
processes or replace them with automated processes.
Number and type Insurer may need to offer additional education and
of claim process- training or move some processing steps to automated
ing errors systems.
Number of Insurer should identify the cause of complaints—

complaints are errors caused by faulty systems, faulty processes,
or lack of training/experience of claim analysts?—
and make corrections.
Number of Insurer should identify cause (missing information, errors

reopened claims in evaluation) and make necessary changes to processes
or move cases to automated systems.
Average amount Because most insurers assign cases to staff according

paid per claim to experience, changes in average claim amounts may
require adjusting the number of analysts in one or
more levels.

Some of these measurements may also be conducted and reviewed as part of a

broader internal audit conducted by the insurer. By tracking the number of claims
in each category, an insurer can evaluate the efficiency and effectiveness of its
claim function.
External Evaluation of Performance

In the United States, insurers are subject to periodic market conduct examinations,
which are formal investigations of an insurer’s nonfinancial operations carried out
by one or more state insurance departments as a way to determine whether the
insurer’s operations comply with applicable laws and regulations. Although mar-
ket conduct examinations for insurance companies are designed to cover many
different functional areas, most examinations emphasize claim practices because
a large proportion of complaints received by state insurance departments relate to
claims.
During a market conduct examination, examiners verify that an insurer has
processed claims in compliance with policy terms and claim procedures manuals
by reviewing a sample of claim files to determine whether the
Time required to investigate and settle claims was within acceptable limits
Documentation in claim files was adequate and accurate
Amounts of claim payments were calculated accurately
Correct payee received benefits

Examiners also review any claims that have resulted in lawsuits to determine
whether (1) the insurer improperly denied the claims and (2) the insurer has con-
ducted adequate internal audits.
Finally, examiners determine whether the insurer has complied with the stan-
dards for doing business included in state laws and regulations, such as those
based on the NAIC’s Unfair Claims Settlement Practices Act and Unfair Life,
Accident and Health Claims Settlement Practices Model Regulation. Many states
have enacted additional legislation that defines the amount of time following the
death of an insured that an insurer has to process and pay a claim and the amount
of interest the insurer must pay if claims are not paid within the specific period.
Example:
The Washington Revised Code, Chapter 48.23 (RCW 48.23) establishes
the rules life insurers operating in the state must follow when settling life
insurance and annuity claims. RCW 48.23 specifies that, for deaths that occur
on or after September 1985, insurers are required to pay interest on benefits
due but not paid upon receipt of proof of an insured’s death. The interest rate
applied is equal to 8% percent for the first 90 days and increases by 3%—
to a total of 11%—on the ninety-first day.2

Key Terms
claim philosophy
claim practices
claim form
claim analyst
express claim processing system
auto-adjudication
compensatory damages
punitive damages
Unfair Claims Settlement Practices Act
Unfair Life, Accident and Health Claims Settlement Practices Model Regulation
Death Master File (DMF)
pretext interview
claim fraud
special investigative unit (SIU)
Claims Activity Index (CAI)
defamation
invasion of privacy
market conduct examination
Endnotes
1. Image Express Inc., Claims Processing, http://www .imageexpressinc. com/pages/claims-
process-ing.html (7/6/17).
2. Revised Code of Washington (RCW), Settlement on Proof of Death, Section 48.23, http://apps .leg.
wa.gov/RCW/default.aspx?cite=48.23.300.

Insurance Administration Chapter 12: Claim Administration Practices 12.1
Chapter 12
Claim Administration Practices
Objectives
12A Describe the claim administration process for evaluating whether life
insurance coverage was in force at the time of death and whether the
deceased is the insured
12B Identify the typical proofs of death for a life insurance claim and
describe the situations that may complicate the process for verifying
that a death has occurred
12C Explain how policy exclusions and a change of health statement may
affect the coverage under an individual life insurance policy
12D Explain how claim analysts determine the proper payee for life
insurance policy proceeds and describe situations that can complicate
the payment process
12E
Calculate the amount of the policy proceeds payable for a given life
insurance policy
12F Describe the various settlement options available to policyowners and
beneficiaries
12G Describe how claim analysts evaluate claims for supplemental
benefits such as waiver of premium for disability benefits, accidental
death benefits, family benefits, and accelerated death benefits
12H Describe the steps a reinsurer takes to examine, approve, and settle a
request from a direct writer for claim payment reimbursement
12I Provide examples of situations in which insurers generally deny
payment of benefits

12.2 Chapter 12: Claim Administration Practices Insurance Administration
Outline
Administering Life Insurance Claims Administering Claims for
 Verifying Coverage Was in Force Supplemental Benefits
 Verifying That the Deceased Is 
Waiver of Premium for Disability
Covered Benefit
 Verifying That Death Occurred 
Accidental Death Benefit
 Verifying That the Cause of Death Is 
Family Benefits
Covered 
 Determining Whether the Policy Is
Administering Claims for
Contestable
Reinsured Policies
 Determining the Proper Payee
 Calculating Policy Proceeds 
Establishing the Claim File
 Administering Settlement Options 
Verifying Claim-Related Information

Settling Reinsured Claims
Denying Payment of Benefits
I
n the previous chapter, you learned about the principles that govern how insur-
ance companies administer claims, the approaches they use to organize and
staff their claims function, and the important legal and regulatory issues that
affect insurance claim administration. In this chapter, you’ll see how claim ana-
lysts apply those principles and practices when they administer claims for basic
and supplemental benefits under individual and group life insurance policies.
You’ll also see how insurers administer claims under reinsured policies.
Administering Life Insurance Claims

Claim administration for individual life insurance policies begins when the insurer
receives notice of an insured’s death. When a person insured under an individual
life insurance policy dies, the policyowner, the beneficiary, a family member, an
attending physician, or a financial professional usually provides notice of death.
When a person insured under a group life insurance policy dies, the employer or
the plan administrator usually sends the notice of death.
The insurer then sends a claim form to the beneficiary named in the policy and
asks the beneficiary to complete the form and return it to the insurer. If a policy
names more than one beneficiary, each beneficiary must complete and submit a
claim form. Increasingly, insurers are making claim forms available online and
accepting electronic copies of completed forms.
Claim forms typically ask for basic information about the deceased insured—
such as name, date and place of birth, and Social Security number. Claim forms
also ask for information about the claimant, including name, address, and other
contact information; relationship to the insured; date of birth; and Social Security
number or taxpayer identification number. Figure 12.1 provides an example of a
typical claim form for individual life insurance.
Insurers also require claimants to provide proof of the insured’s death.
The most common proof of death used by insurance companies in the United States
is an original, certified death certificate issued by the appropriate governmental
authority. The death certificate provides information about the decedent, includ-
ing the dates of birth and death, cause and manner of death, and circumstances
of death. It is usually signed by an authorized government official, a coroner, or a
hospital representative.

Claim analysts attempt to obtain all information necessary to evaluate a claim

as soon as possible because they are required by law to process claims promptly.
For example, many U.S. states have regulations specifying that an insurer must pro-
cess a claim within a specified number of days and take follow-up action on a speci-
fied timetable, such as every 20, 30, or 45 days. In most cases, this follow-up action
includes notifying claimants about the status of a pending claim, asking for addi-
tional information, if needed, and confirming receipt of required documentation.
ERISA requires that insurers processing claims under group policies adhere to a
similar timetable. Insurers also encourage timely evaluation of claims because many
states require that interest accrue on the policy proceeds until claims are resolved.
The longer a claim is pending, the more difficult and costly it is for the insurer.
Figure 12.1. Typical Claim Form for Life Insurance
VERY IMPORTANT: BEFORE COMPLETING THIS FORM,

PLEASE READ ALL INSTRUCTIONS ON THE INSTRUCTION PAGE
NOTE: Any person who knowingly and with intent to defraud any insurance company or other person a)
files a claim form containing any materially false information or b) conceals information concern-
ing any fact material thereto for the purpose of misleading, commits a fradulent insurance act,
which is a crime. Such person may be subject to fines and/or confinement in prison.
PART ONE—To be completed in full

Name of Deceased (Print in Full) Policy Number(s)
Date and Place of Birth Date and Place of Death Cause of Death
If your proceeds exceed the current applicable minimum set by the Company (currently $15,000), an
interest bearing checking account will be opened for you, and you will promptly receive your personal-
ized checks. You may immediately utilize all or a portion of those funds by writing checks against that
account. The funds in the account, meanwhile, will earn interest at a competitive variable rate.
I certify, under penalty of perjury, the following is my correct Taxpayer Identification Number.
eneficiary’s Social Security Number

B Taxpayer Identification Number
if the beneficiary is an Employer/Corporation/Trust/Estate
Name of Beneficiary* (Print in full) Date of Birth (MM/DD/YY) Your Relationship to Deceased
/ /
Address (Street, City, State, Zip) Telephone Number

( ) –
Beneficiary/Payee Signature (Required) Date
*If there is more than one beneficiary, each must complete his or her own claim form.
Copies of the form are acceptable.
Continued on next page

Figure 12.1. Typical Claim Form for Life Insurance continued
PART TWO—To be completed only IF: Death has occurred within two (2) years of original issue
or reinstatement of the policy
1. Please fully complete claim authorization form XYZ
and submit with this claim form.
2. Fully complete information below and on the follow-
ing page with signature and date
Deceased driver’s license number Deceased driver’s license state of issue Date deceased first consulted
a physician for last illlness
/ /
Date deceased last worked at his/her Did the deceased ever use tobacco in any form? o Yes o No
regular occupation
/ / If Yes, date last used from_____________ to ____________
Name and addresses of all physicians (include personal physician) who attended to deceased and hospitals
where treated for past (5) five years.
Name Address (Street, City, State, Zip) & Telephone Number Dates Disease or Condition
List all Life and Health insurance of the Deceased

Company Policy Number(s) and Amount(s) Policy Issue Date(s)
SIGNATURES
____________________________________________________ ___________________________
Signature of Next of Kin/Authorized Representative Date
____________________________________________________ ______________________________________________________
Address (Street, City, State, Zip) Witness Name Witness Signature
When the insurer receives notice of death and all the necessary information
from claimants and physicians, analysts can begin processing the claim. In most
insurance companies, this process includes seven critical steps:
Verifying that the coverage was in force at the time of the insured’s death
Verifying that the deceased was covered under the policy

Verifying that the insured’s death actually occurred
Determining whether the cause of death is covered
Determining whether the policy is contestable
Determining who is entitled to receive policy proceeds
Calculating policy proceeds
Verifying Coverage Was in Force

In most cases, analysts can verify that coverage was in force at the time of the
insured’s death by checking the administration system’s record of premium pay-
ments made up to the date of the claim. However, verifying coverage can be dif-
ficult if the insured dies during the
New business process. Most insurers require applicants to pay the first pre-
mium for a life insurance policy when they submit the application for cover-
age. In exchange, insurers typically issue a premium receipt acknowledging
receipt of the policy’s initial premium. The premium receipt usually includes a
temporary insurance agreement (TIA) that offers temporary coverage until the
insurer (1) issues the policy, (2) declines the application, or (3) terminates cov-
erage under the receipt. The amount payable to the beneficiary if the insured
dies during the underwriting period depends on the wording of the TIA. Usu-
ally, the TIA specifies that if the insured would have been insurable, then the
benefit amount specified in the TIA will be paid to the named beneficiary.
If the insured is not insurable, then the insurer usually returns the premium
paid. In complicated situations, the claim analyst may need to refer the claim
to the company’s legal department to obtain a ruling regarding the validity of
the claim under applicable state and federal regulations and case law.
Policy grace period. Most insurance policies include a provision that contin-
ues coverage for a specified grace period (usually 30 days following the due
date of the policy premium). If an insured dies during the policy grace period,
the insurer will pay the death benefit specified in the policy even if the renewal
premium has not been paid. Insurers, however, typically deduct the amount
of the unpaid premium from the proceeds payable to the policy beneficiary.
Some insurers allow additional time for policyowners to pay unpaid premiums
on lapsed policies as a courtesy and to retain business. Extensions, in these
cases, are generally conditional on the insured being alive on the date the
delinquent premiums are paid and no coverage is offered during the extension.
Policy reinstatement process. Most insurers allow policyowners to reinstate
a lapsed policy as long as the policyowner has (1) not surrendered the policy
for its net cash surrender value, (2) provided evidence of insurability in the
form of a completed medical questionnaire, and (3) paid any premiums due
while the policy was lapsed. Although some insurers will reinstate a lapsed
policy only if the policyowner satisfies all of these requirements, many insur-
ers will reinstate a nonsurrendered policy as long as the policyowner provides
evidence of insurability. Most reinstatement offers require that the insured be
alive on the date the insurer receives premiums due. Proceeds are generally
not payable if the insured dies before repaying all premiums due.

When an insurer receives a claim under a group life insurance policy, the claim
analyst must verify that the deceased was a member of the group at the time of
death and that the deceased and/or the group sponsor had paid all required pre-
miums for the deceased’s coverage. If the deceased was a dependent of a group
insured, the claim analyst must verify that premiums had been paid for the depen-
dent’s coverage.
Verifying That the Deceased Is Covered

Verifying that a deceased is covered under an individual life insurance policy is
usually straightforward. The claim analyst typically needs only to compare the
deceased’s name and other vital information (such as date and place of birth and
Social Security number) found in the claim form with information in the com-
pany’s records and with information submitted as proof of death. Verifying that
a deceased is covered under a multilife or family policy is sometimes more com-
plicated, especially if vital information in the claim form, such as name, date of
birth, and place of birth, does not match the information included in documents
submitted as proof of death or in the insurer’s records.
Example:
When Jeremy Mathis purchased a joint life insurance policy from the Brighton
Insurance Company, he listed himself and his wife, Elaine, as joint insureds.
Jeremy was named as the beneficiary if Elaine died, and Elaine was named as
the beneficiary if Jeremy died. Five years later, the couple divorced and Elaine
legally changed her name back to her maiden name of Edmonds. Neither
Jeremy nor Elaine notified Brighton of the name change or changed the
beneficiary designation on the policy.
Elaine died in an accident a year later. Jeremy filed a claim for policy benefits,
but Brighton denied his claim, stating that the deceased was not covered
under the policy.
Analysis:
Because Elaine failed to notify Brighton of her name change, the name on the
death certificate and other proof of death documents Jeremy submitted to
the insurer did not match the name on the policy. Jeremy was probably able to
resolve the issue by obtaining copies of Elaine’s change of name documents
from the court that processed her request, but his access to policy benefits
was most likely delayed until the insurer could verify that Elaine was covered.
When an insurer receives a claim under a group life insurance policy, the claim
analyst must verify that the deceased was a member of the group at the time of
death and that all premiums had been paid. If the deceased is a dependent under a
group policy, the claim analyst verifies that the group insured was paying premi-
ums for the dependent’s coverage.

Verifying That Death Occurred

All insurers require proof that a person insured under a life insurance policy has
died before they agree to pay policy proceeds. In most cases, proof of death is veri-
fied by an official death certificate. In certain situations, however, an insurer may
accept alternate proof of death, such as a certified copy of the official death cer-
tificate or a document signed by a person with knowledge of the insured’s death.
However, insurers who accept these alternative proof of death documents often try
to obtain official documents to corroborate information in unofficial documents.
Deaths that occur outside the United States or under unusual circumstances often
require additional investigation.
Death Outside the United States

When a U.S. citizen dies outside the United States, the local government in the
country where the insured died issues a death certificate. However, this death cer-
tificate is typically issued in the local language rather than in English. To avoid
potential problems, insurers usually request that the U.S. Consulate in that country
issue additional verification in the form of a “Report of Death of an American
Citizen Abroad.” Although this report provides important information for a for-
eign death investigation and is required by most insurers, the form itself is usually
not considered acceptable proof of death. As a result, insurers usually also ask the
claimant or next of kin to complete and sign a foreign death questionnaire.
Because the procedures for registering deaths in other countries are often dif-
ferent from those in the United States, claims based on deaths outside the United
States sometimes make it difficult to establish how, or even if, a death occurred.
The difficulty of verifying deaths that occur abroad may also increase the pos-
sibility of fraud. To protect themselves against this risk, insurers generally take
additional steps to verify the validity of the claim. For example, insurers often
engage an investigator with resources in and knowledge of the country of death
to corroborate information about the insured’s death. The investigator may also
interview the family, persons in the location of death who are familiar with the
insured, and local authorities.
Disappearance of the Insured

Occasionally, insurers receive claims from policy beneficiaries who state that an
insured is dead because he has disappeared, but cannot provide an official death
certificate because the body has not been found. If evidence exists that the insured
was exposed to a specific peril that can account for the insured’s disappearance, LEARNING AID
and if no other suspicious circumstances or evidence of fraud exist, a court may
issue a presumptive death certificate stating that the insured is presumed dead.
Figure 12.2 describes the four elements courts consider before issuing a presump-
tive death certificate.

Figure 12.2. Considerations for Issuing a Presumptive Death Certificate
Before issuing a presumptive death certificate, a court will consider whether

1. The insured has been missing from his home or usual residence for
the period of time required in the jurisdiction
2. The insured’s absence has been continuous and whether any factors
such as large debts, marital problems, or criminal indictments exist
that would give cause for the disappearance
3. A diligent search for the insured has been conducted
4. The people most likely to hear from the insured have
not heard from him
Often, the combination of a presumptive death certificate and evidence of a

specific peril that accounts for the insured’s disappearance is enough to enable a
claim analyst to approve a claim for benefits.
Example:
Brad Kennedy was on a small fishing boat when a storm capsized the boat,
sending Brad overboard. A rescue team was dispatched to the scene. Divers
found wreckage from the boat but were unable to find the body. Two months
later, local officials announced that Brad was presumed dead and the court
issued a presumptive death certificate. Brad’s wife filed a claim for benefits
under his life insurance policy and used the presumptive death certificate as
proof of death.
Analysis:
Although Brad’s wife was unable to provide official proof of death, she was
able to provide a presumptive death certificate. The insurer’s claim analyst
was able to use this information, and the fact that Brad’s death could be
linked directly to a specific peril that accounted for his disappearance and
presumed death, to approve the claim.
However, if the analyst has reasonable grounds to suspect that the insured is still
alive, he may continue investigating the claim.
If an insured disappears without exposure to a specific peril and the benefi-
ciary is unable to provide evidence supporting the insured’s death, the insurer
may conclude that the burden of proof of death has not been met and deny the
claim. However, if an insured has been absent from home continuously for a speci-
fied period of time—seven years in most jurisdictions—the insurer or the policy
beneficiary can apply to a court for a declaration of death and request a presump-
tive death certificate. Claims analysts working with presumptive death certificates
generally check first to confirm that any premiums required during the seven-year
period have been paid. If premiums have been paid, the analyst generally calcu-
lates policy proceeds as of the date specified in the death certificate. If the policy
had lapsed during the specified period, the claim would not be valid even with a
presumptive death certificate.

Occasionally, the investigation into an insured’s presumed death shows that the
insured is not dead but does not want his location revealed. Although claim ana-
lysts attempt to respect the insured’s wishes, they are required to justify the deci-
sion to deny payment of policy benefits. In most cases, the analyst can meet the
needs of the insured and the insurer by obtaining a signed, dated, and notarized
statement from the insured affirming identifying information such as date of birth,
place of birth, and the names of parents, spouse, and children.
Reappearance of the Insured

Occasionally, an insured reappears after being declared dead by a court and after
the insurer has paid the policy proceeds. If the insurer has paid the policy pro-
ceeds in full, the insurer usually has the right to recover those proceeds because
they were paid under a mistake of fact. However, if the insurer paid less than the
full amount of benefits in a compromise settlement, the insurer generally cannot
recover the benefits because courts will not disturb a compromise settlement.
Verifying That the Cause of Death Is Covered

When an insurance company receives a claim for death benefits under an indi-
vidual life insurance policy, a company claim analyst checks to make sure that
the cause of death does not fall under any exclusions included in the policy, such
as suicide, aviation, or avocation exclusions. The analyst also verifies that the
insured’s health status did not change between the time the policyowner submitted
the application for coverage and the time the insurer delivered the policy.
Suicide Exclusions
Most life insurance policies include a suicide exclusion provision that allows the
insurer to pay a reduced benefit equivalent to premiums paid if an insured com-
mits suicide within a specified period—usually two years—following the date the
policy is issued. In most cases, the claim analyst can confirm whether the insurer
is liable for paying the full policy benefits or a reduced benefit by checking the
time and cause of death listed in the official death certificate.
In the United States, if a proposed insured commits suicide
During the underwriting process, the insurer relies on the language of the
initial premium receipt. Most receipts state that coverage under the receipt
will be effective subject to the limitations—including the suicide exclusion
provision—contained in the policy. Insurers typically return the initial pre-
mium, but do not pay full policy benefits.
During the suicide exclusion period, the insurer typically returns any pre-
miums paid, but does not pay full policy benefits. The return of premiums
paid is considered to be payment of the “limited benefit for death by suicide”
provision included in the contract and agreed upon when the application was
submitted and when the insurer accepted the risk. The return of premiums
is not considered to be a refund, and the insurer is not considered to have
rescinded the coverage or contested the validity of the policy.
After the end of the suicide exclusion period, the insurer pays the full policy
benefits provided under the contract.

After reinstatement of a lapsed policy, the suicide exclusion period speci-

fied in the original policy governs whether benefits are payable. As a result,
if a lapsed policy is reinstated before the end of the original suicide exclusion
period, the exclusion will continue until the end of the specified period. If the
policy is reinstated after the end of the original suicide exclusion period, the
reinstated policy typically does not include a suicide exclusion.
If an insurer denies a claim for basic death benefits under a life insurance policy
based on the suicide exclusion, the beneficiary has the option to dispute the deci-
sion and file a suit against the insurer for payment of benefits. Most jurisdictions
LEARNING AID presume that death is either natural or accidental unless they receive proof to the
contrary. In a case involving denial of insurance benefits based on the suicide
exclusion included in the policy, the insurer bears the burden of proving that the
insured committed suicide.
Aviation and Avocation Exclusions

Aviation and avocation exclusions are typically found in riders rather than in the
basic policy, and death benefits are payable in accordance with the terms of the
riders. An exclusion rider may specify that, if an insured’s death is the result of an
activity specifically excluded under the rider, the insurer will either (1) deny pay-
ment of death benefits and return the premiums paid, or (2) pay the policy’s cash
surrender value.
Changes in Health Status

Most applications and premium receipts for individual life insurance policies
contain a change in health statement that requires a proposed insured to notify
the insurer in writing if his health or any material information in the application
changes before the insurer delivers the policy. Some insurers require the financial
professional, the policyowner-insured, or both parties to sign another change in
health statement at the time of policy delivery. Figure 12.3 shows the information
included in a typical change in health statement in an application.
Figure 12.3. Typical Change in Health Statement
I understand that no policy based on this application will be effective unless all of my
statements and answers in the application continue to be true as of the date I receive
the policy. I understand that if my health changes or any of my answers or statements
change prior to delivery of the policy, I must so inform the insurer in writing.
If an insured does not notify the insurer of a change in health prior to policy
issue, the insurer has the right to deny a subsequent claim if it occurs during the
policy’s contestable period. However, most jurisdictions allow an insurer to deny
payment of policy proceeds based on a change in the insured’s health between
application submission and policy delivery only if the insurer can show that the

Change in health directly affected the degree of risk represented by the pro-
posed insured
Proposed insured knew of the change in health at the time of policy issue or
delivery
Change in health statement was unambiguous
If an insured dies as a result of a sudden event, such as an accident or an
unknown or undiagnosed acute condition, the insurer’s liability for payment of
policy benefits depends on the terms of the premium receipt.
Determining Whether the Policy Is Contestable

If an insurer receives a claim for life insurance benefits during the policy’s con-
testable period, the claim analyst examines the application to see if it contains
any material misrepresentations. If the analyst finds evidence of possible misrep-
resentation, he refers the claim to the underwriting department. The underwriter
assigned to the case then compares any available information about the insured’s
medical risk factors prior to the application with the information in the applica-
tion to ensure that all relevant risk factors were disclosed during the underwriting
process. If the underwriter discovers any material medical or personal risk factors
that were not disclosed and that would have influenced the underwriting deci-
sion, the claim analyst usually refers the claim to the insurer’s legal department
or special investigative unit for further examination. If an insurer suspects fraud,
the company is required to submit a report to authorities in the state in which the
policy was issued.
If an insured dies during the contestable period, some insurers also ask for
the names and contact information of all physicians or other healthcare providers
who attended the deceased during the previous five to 10 years, depending on the
historical information requested on the application for insurance. To comply with
regulatory requirements regarding the privacy of personal health information,
insurers ask that the deceased’s next of kin, an authorized representative of the
deceased, or the executor of the deceased’s estate complete and return a HIPAA
authorization form granting the insurer access to protected information.
Determining the Proper Payee

When policy proceeds become payable, the insurer and the beneficiary enter into a
settlement agreement. Under a settlement agreement, the person entitled to receive
policy proceeds is referred to as the payee rather than the beneficiary. Although
determining the proper payee of life insurance policy proceeds is an essential step
in claim administration, it also creates risks for the insurer. For example, if an
insurer mistakenly pays proceeds to an ineligible payee and then later receives
a claim from a valid payee, the insurer is obligated to pay the claim again. The
insurer may be able to recover the proceeds from the original payee, but the pro-
cess can be complicated and costly. To help avoid these risks, claims analysts take
steps to verify the payee’s identity and age before approving payment of benefits.
Usually the payee of a life insurance policy is the policy beneficiary, and the
beneficiary’s identity is clearly indicated in the application for coverage. The ben-
eficiary under an individual or group life insurance policy can be a spouse, a child,

an estate, a trust, a charity, or any other entity that has an insurable interest in the
insured’s life. When a beneficiary files a claim for benefits, the beneficiary must
provide proof of identity, usually in the form of a driver’s license, passport, or
Social Security card. The claim analyst then compares the provided information
with information in the application for coverage and with information in the com-
pany’s files.
Claim analysts also need to verify a payee’s age to ensure that the payee has
reached the age of majority and is legally qualified to provide an insurer with
a valid discharge of liability. In most cases, claim analysts can verify a payee’s
age using the same documents used to verify identity, such as a birth certificate,
driver’s license, or passport.
In most cases, paying policy proceeds to the proper payee is fairly straightfor-
ward. However, it can be complicated if the
Policyowner doesn’t name a beneficiary
Beneficiary designation in the policy has been changed
Policy has been assigned
Beneficiary has died, disappeared, or been disqualified from receiving benefits
Insured and the beneficiary die simultaneously
Insurer receives conflicting claims for the proceeds
Policyowner-insured failed to change the designation of a spouse after a divorce
Policy is subject to community property laws

Because of these difficulties and the risks they represent, insurers invest time
and effort to confirm the identity of the proper payee.
No Named Beneficiary
If a policyowner does not name a beneficiary, the terms of the policy govern who is
entitled to receive benefits if an insured dies. For example, most individual policies
specify that, if no beneficiary is named, proceeds will be payable to the policy-
owner—if the policyowner is not the insured—or the policyowner’s estate—if the
policyowner is also the insured.
Group policies typically state that, if the insured doesn’t name a beneficiary, the
insurer will pay the policy proceeds in a stated order of preference. For example,
group policies often specify that benefits will be paid, in order, to the
Spouse of the insured, if living
Children of the insured, if living
Parents of the insured, if living

If no one in any of these categories is living, the insurer usually pays policy pro-
ceeds to the insured’s estate.

Change of Beneficiary
While an insurance policy is in force, circumstances may prompt a policyowner to
change the original policy beneficiary. Whether such a change is possible depends
on whether the original beneficiary is an irrevocable beneficiary or a revocable
beneficiary. The chart below summarizes the rights of revocable and irrevocable
beneficiaries.
Revocable Beneficiary Irrevocable Beneficiary
The policy beneficiary No Yes

has a vested interest in
policy proceeds during
the insured’s lifetime.
The policyowner has Yes No

an unrestricted right to
change the beneficiary
designation at any time.
For a beneficiary change Yes Yes

to be legally effective,
the policyowner must be
mentally competent to
make the change.
When an insurer receives a claim on a policy that has undergone a beneficiary

change, the analyst’s first task is to determine whether the change involved an
irrevocable beneficiary, and if so, whether the beneficiary consented to the change.
If the claim analyst verifies the validity of a beneficiary change, the insurer will
pay the proceeds to the new beneficiary.
Depending on the circumstances, the analyst may also verify that the poli-
cyowner was mentally competent when she made the change. The analyst, how-
ever, is not legally bound to question the competence of every policyowner who
changes a beneficiary designation. If the analyst determines that the policyowner
was incompetent to make the change, the insurer will pay the proceeds to the
original b eneficiary.
Beneficiaries affected by the claim analyst’s decision have the right to chal-
lenge the decision. However, they will have the burden of proving that the policy-
owner was—or was not—competent to make the change. If an insurer pays policy
proceeds to a new beneficiary and later discovers that the policyowner was incom-
petent when he made the beneficiary change, the insurer usually is not required by
law to pay the proceeds a second time.
Policy Assignment
You learned earlier that most individual life insurance policies include a provision
granting the policyowner the right to assign, or transfer, the rights under the policy

to another person. A transaction that permanently transfers all ownership rights

under a policy is known as an absolute assignment. A transaction that temporarily
transfers some, but not all, ownership rights as security for a loan is known as a
collateral assignment. You also learned that insurers typically require policyown-
ers to complete an assignment form stating that the insurer is not responsible for
determining the validity of the assignment. If a policyowner or assignee does not
provide notice of an assignment and the insurer pays policy proceeds to the ben-
eficiary designated in the policy rather than to the assignee, the assignee will not
be able to enforce a claim against the insurer.
To ensure that the insurer is protected against legal action by an assignee, the
analyst handing a claim on an assigned policy must confirm the type of assignment
involved—absolute or collateral—and the rights granted to the assignee under the
agreement. In addition, the analyst must determine whether the policy beneficiary
designation is revocable or irrevocable and, if required, whether the beneficiary
agreed to the assignment. The table below illustrates the rights of assignees and
beneficiaries under absolute and collateral assignments.
Revocable Beneficiary Irrevocable Beneficiary
Absolute Policyowner does not Policyowner must obtain

Assignment need to obtain a revocable an irrevocable beneficiary’s
beneficiary’s consent to an consent to an absolute
absolute assignment. assignment.
Assignee has the right to Assignee can’t change the
change the beneficiary des- beneficiary designation
ignation and to have benefits without the irrevocable
paid to the new beneficiary. beneficiary’s consent.
If the assignee does not If the assignee doesn’t change
change the beneficiary the beneficiary designation,
designation, some insur- proceeds are payable to the
ers automatically pay policy original beneficiary.
proceeds to the assignee.
Other insurers pay policy ben-
efits to the original beneficiary.
Collateral Assignee’s rights under the If an irrevocable b eneficiary

Assignment policy are superior to those consents to a collateral
of the revocable beneficiary assignment, the assignee is
regardless of whether the entitled to his appropriate
revocable beneficiary consents share of policy proceeds if
to the assignment. the insured dies.
As a result, the collateral If the irrevocable beneficiary
assignee is entitled to does not consent to the
payment from policy proceeds. assignment, his right to policy
The amount payable to the proceeds takes precedence
assignee is limited to the over the assignee’s right, and
amount of the debt. the assignee gets nothing.

Death of the Beneficiary

If a beneficiary named in an insurance policy dies before the insured, the claim
analyst checks the policy to determine whether the policyowner named more than
one primary beneficiary or designated a contingent beneficiary. If the policy does
not name a contingent beneficiary, or if no named beneficiaries are living when an
insured dies, benefits are usually payable to the insured’s estate.
Disappearance of the Beneficiary

If a beneficiary has disappeared and cannot be located within a reasonable period,
the insurer generally follows the laws governing unclaimed property in the state
in which the beneficiary last resided. Most states have adopted variations of the
NAIC Uniform Disposition of Unclaimed Property Act, which requires an insurer
to hold the proceeds of a life insurance policy for a specified period—usually five
to seven years. If a missing beneficiary cannot be found by the end of the period,
the insurer deposits the policy proceeds with the state, which then holds the money
in trust for a specified period of time. If the proceeds are not claimed within the
specified time period, the proceeds become the property of the state.
Disqualification of the Beneficiary

Occasionally, insurers evaluating claims for life insurance benefits discover that
a beneficiary is responsible for the insured’s death. In most jurisdictions, if a ben-
eficiary kills an insured in self-defense, the death is legally justifiable and the
beneficiary is eligible to receive policy proceeds.
If the beneficiary did not kill the insured in self-defense, whether policy pro-
ceeds are payable depends on the beneficiary’s intent at the time the policy was
issued. If the beneficiary did not intend to kill the insured when the policy was
applied for and purchased, the contract is considered valid. However, the benefi-
ciary is disqualified from receiving policy proceeds. As a result, the insurer typi-
cally pays the policy proceeds to the contingent beneficiary. A criminal court does
not have to convict the beneficiary of the insured’s death for the disqualification
to be valid. A beneficiary will also be disqualified from receiving policy proceeds
if a civil court finds that the beneficiary intentionally and wrongfully killed the
insured.
If the insurer finds evidence that the policyowner-beneficiary obtained the pol-
icy with the intent to cause the insured’s death, then the contract is void from its
inception and the insurer is required only to return the amount of premiums paid,
plus interest and less any outstanding policy loans and unpaid interest on those
loans.
Because investigating a beneficiary’s role in an insured’s death can take a long
time, the insurer usually deposits the amount of policy proceeds with the court and
payment occurs after the court determines the beneficiary’s guilt or innocence.

Simultaneous Deaths of the Insured and the Beneficiary

If the insured and the beneficiary named in a life insurance policy die in a common
disaster and the claim analyst cannot determine with certainty the order of death,
the claim analyst generally follows the guidelines provided in the jurisdiction’s
simultaneous death act. A simultaneous death act is a law that specifies how ben-
efits will be paid if both the insured and the beneficiary die under circumstances
that make it impossible to determine which died first. The simultaneous death act
in most jurisdictions directs insurers to presume that the insured survived the ben-
eficiary, unless the policy provides otherwise. The claim analyst, therefore, pays
policy proceeds to a contingent beneficiary.
If proof exists that a beneficiary survived the insured, even if only for a few
minutes, the simultaneous death act does not apply and the insurer is obligated to
pay policy proceeds to the beneficiary’s estate. Because this outcome may not be
what the policyowner intended, some policies include a survivorship clause stat-
ing that the beneficiary must survive the insured by a specified period, usually 30
or 60 days, to be entitled to receive policy proceeds. If the beneficiary dies before
the end of the specified period, the insurer pays the proceeds as if the insured sur-
vived the beneficiary.
Example:
Jonathan Welby owned a life insurance policy on his life that named his wife,
Glenda, as the primary beneficiary and his brother Warren, as a contingent
beneficiary. The policy included a survivorship clause stating that a beneficiary
could receive policy benefits only if the beneficiary survived the insured by
at least 30 days. Several years later, Jonathan and Glenda were involved in
an automobile accident. Jonathan died in the ambulance on the way to the
hospital. Glenda died three weeks later as a result of injuries she sustained in
the accident.
Analysis:
Ordinarily, the benefits under Jonathan’s policy would have been payable to
Glenda or, if the claim was not settled before her death, to Glenda’s estate.
However, because she died before the end of the 30-day period specified in
the policy, the insurer was obligated to pay policy proceeds to Warren.
Adverse Claims for Benefits

Occasionally, an insurer receives conflicting claims for proceeds of a life insur-
ance policy. In this situation, the claim analyst usually notifies all claimants of the
conflicting claims. If claimants can resolve the conflict among themselves, the
claim analyst only needs to obtain written notice of their decision and pay policy
proceeds in accordance with that decision.
If the claimants cannot resolve the matter, the insurer’s claim department con-
ducts an investigation to determine which claimant has a clearer claim to policy
benefits. The first step in this investigation is usually to review the beneficiary des-
ignation in the insurance contract. In general, a claim from a primary beneficiary
has precedence over a claim from a contingent beneficiary. Similarly, a claim from

an irrevocable beneficiary usually has precedence over a claim from a revocable

beneficiary. If the claim analyst can’t establish precedence, she usually consults
the insurer’s legal department to confirm whether a particular claim is or is not
valid. The analyst then notifies all claimants of the decision.
If adverse claimants can’t agree on the disposition of policy proceeds, insur-
ers in the United States have the option of resolving the situation by means of
interpleader. Interpleader is a legal process that allows an insurer that cannot
determine the correct recipient of insurance policy proceeds to pay the proceeds
to a court, advise the court that the insurer cannot determine the correct recipient
of the proceeds, and ask the court to determine the proper payee. By submitting a
claim to interpleader, the insurer is not contesting its liability for paying the claim.
It is only protecting the company from paying proceeds more than once.
Spousal Rights Following a Divorce

Married policyowners who purchase life insurance on their own lives typically name
their spouse as the policy beneficiary. If the policyowner and spouse later divorce,
whether the policyowner can change the beneficiary designation depends on the
divorce statutes in force in the jurisdiction and the terms of the divorce decree.
The laws in most jurisdictions state that if a policyowner does not change the
beneficiary designation after a divorce, the insurer must pay benefits to the former
spouse. If the divorce decree specifies that the policyowner must continue to pay pre-
miums on the policy and retain the former spouse as beneficiary, determining spou-
sal rights to policy proceeds is straightforward. Payment of benefits to the former
spouse satisfies both regulatory requirements and the terms of the divorce decree.
Example:
When Kevin Warren purchased an insurance policy on his life, he named
his wife, Eleanor, as beneficiary. Kevin and Eleanor later divorced and the
divorce decree required that Kevin continue to pay premiums on the policy
and maintain Eleanor as beneficiary. As a result, Kevin did not change the
beneficiary designation in the policy. Kevin remarried two years later. When
Kevin died, both Eleanor and Kevin’s second wife filed claims for benefits
under his life insurance policy.
Analysis:
In this situation Eleanor has a clear claim to the benefits of Kevin’s life
insurance because (1) the divorce decree required Kevin to maintain her as
the policy beneficiary and (2) insurance laws in most jurisdictions state that,
if a policyowner does not change the beneficiary designation of an insurance
policy after a divorce, benefits will be paid to the former spouse.
The laws in some states, however, automatically remove a former spouse as

beneficiary unless the divorce decree names the former spouse as beneficiary. If
the divorce decree does not require the policyowner to retain a former spouse as
policy beneficiary, the policyowner is free to change the beneficiary designation.
As long as the insurer receives notice of the change of beneficiary, the new benefi-
ciary will receive the benefits when the insured dies. If the insurer does not receive

notice of a change of beneficiary and pays policy proceeds to the former spouse,
the insurer typically is not liable to pay the benefits a second time if the new ben-
eficiary later submits a claim. If the claim analyst receives notice of the existence
of a rival claimant to policy benefits before paying the benefits, the insurer typi-
cally files an interpleader action.
Community Property Laws

In some U.S. states, community property laws govern how spouses acquire and
share property during a marriage. Most community property laws specify that a
spouse is entitled to receive an equal share of earned income and an equal share
of property acquired by the other spouse. However, some property is classified as
separate property that belongs entirely to one spouse. Separate property generally
includes any property acquired by one spouse
Before marriage. For example, an automobile purchased by an individual
before marriage remains the property of the individual even if he later marries.
During marriage with separate funds. For example, if a spouse put money
in a savings account prior to marriage and uses that money to make a purchase
during the marriage, the acquisition is considered separate property.
During marriage as a gift or inheritance. For example, if a person inherits
money when a family member dies, that money is considered separate prop-
erty and the person’s spouse has no claim to the money.
In general, both spouses must agree before transferring ownership of community
property to a third party.
In a community property state, when one spouse dies, the surviving spouse is
entitled to half of the community property and the other half generally belongs to
the deceased spouse’s estate. If a spouse purchases an insurance policy on her life
during marriage and pays the policy premiums with community property funds,
the policy is considered community property. If the beneficiary is the insured’s
spouse, the proceeds generally belong solely to the beneficiary on the theory that
the deceased spouse made a gift to the surviving spouse. If a third party is the
beneficiary, the claim analyst is relieved of determining whether benefits are pay-
able to the spouse or to a named beneficiary by exculpatory statutes in place in
community property states. Exculpatory statutes are laws that permit an insurer
to pay life insurance proceeds according to the terms of a policy without fear of
double liability.
Calculating Policy Proceeds

All individual and group life insurance contracts specify a basic death benefit due
when an insured dies. In most cases, the basic death benefit is equal to the face
amount of the policy. However, most policies specify that the basic death ben-
efit will be adjusted if the claim examiner finds that the application for coverage
included a misstatement of age or sex. In most cases, the method of adjusting the
benefit is described in the policy.

The ability to adjust benefits is important because the premiums charged for
a specified amount of coverage provided under a life insurance policy are set to
accurately reflect the amount of risk the insurer assumed when it issued the policy.
The proposed insured’s age and sex are critical to risk classification because, in
general,
Older applicants have a higher risk of death and represent a higher level of
risk for the insurer than do younger applicants. Therefore, older applicants
generally pay a higher premium rate than do younger applicants for the same
amount of coverage.
Females in a given age group have a longer life expectancy than males in that
same age group. Because fewer females in a given age group are likely to die
each year than are males in the same age group during the same period, insur-
ers generally charge lower premium rates to females in a given age group than
they charge males in the same age group.
Adjustments to the death benefit based on misstatement of age or sex are allowed
throughout the life of the policy, not just during the contestable period. Generally,
an adjustment for misstatement of age or sex made during claim administration
results in a death benefit amount equal to the death benefit that the premiums paid
would have purchased at the correct age or sex, based on the insurer’s published
premium rates at the time of policy issue.
Claim analysts usually begin the calculation of benefits by verifying that the
insured’s age and sex recorded in the application for coverage match the age and sex
reported on the death certificate. If the analyst identifies a discrepancy, she notifies
the claimant and asks the claimant to provide acceptable proof of age and sex. In most
cases, proof of age can be obtained from the insured’s birth certificate or a document
that establishes the insured’s age at the time of a specific ceremony or activity, such
as a certificate of baptism, bar or bat mitzvah, or other religious ceremony. Proof of
sex can usually be obtained by examining the applicant’s birth certificate or medical
records. If the claim analyst identifies differences, the next step is to determine if
and how those differences affect death benefits. Figure 12.4 describes how insurers
usually calculate the death benefit if an insured’s age was misstated.
Figure 12.4. Calculating the Death Benefit with a Misstatement of Age
Rena Salazar mistakenly stated her age as 34 when she a pplied for $150,000
of whole life insurance. She was charged an annual premium of $1.42 per thousand,
or $213 ($1.42 × 150).
When Rena died and her beneficiary submitted a claim, the claim analyst
discovered a discrepancy between Rena’s age according to the applica-
tion and her age at time of death. The insured actually was 43 years old
when she applied for coverage. According to the insurer’s published pre-
mium rates at the time of policy issue, the paid premium of $213 a year would
have purchased $136,000 of whole life insurance. Therefore, the amount of the basic death
benefit is $136,000.
If Rena actually had been less than 34 years old at the time of application, the premiums she
paid while the policy was in force would have purchased more than $150,000 of coverage. In that
situation, the claim analyst would adjust the amount of the basic death benefit upward accordingly.

In most jurisdictions, the burden of proving a misstatement of an insured’s age

or sex on the insurance application that results in a lower benefit amount rests with
the insurer. The burden of proving a misstatement of age or sex that results in a
higher benefit amount rests with the claimant.
In addition to increasing or decreasing the basic death benefit payable, a mis-
statement of age or sex sometimes affects an insured’s eligibility for certain sup-
plemental benefits. For example, accidental death benefits are often payable only
until an insured reaches a specified age, such as 65 or 70. If an applicant’s reported
age is 70, he may be denied coverage, even if his actual age is only 60.
Calculating Additions and Deductions to the

Basic Death Benefit
Some life insurance policies generate additional monetary amounts that are pay-
able to an insured during his lifetime or to a named beneficiary at the insured’s
death. These additional benefits include
Unearned premiums paid in advance
Policy dividends declared but not yet paid
Policy dividends left with the insurer plus the interest earned on those divi-
dends
Interest earned on delayed claim payments
Loan interest paid in advance

When a beneficiary files a claim for policy benefits, any amounts that were not
paid to the insured before death are added to the basic death benefit due under the
policy.
Claim analysts may also need to deduct certain amounts from the basic death
benefit provided by a life insurance policy. These deductible amounts include
Premiums due but unpaid during the grace period
Amounts outstanding on policy loans

Interest on any policy loans
Accelerated death benefits that have been paid

Figure 12.5 describes how additions and deductions to basic death benefits are
calculated.
Administering Settlement Options

Individual life insurance policies allow policyowners to designate how they want
policy proceeds to be distributed to beneficiaries. In addition to lump-sum pay-
ments, insurers provide alternative methods known as settlement options to dis-
tribute policy proceeds at an insured’s death. Figure 12.6 describes the most com-
mon settlement options available under individual life insurance policies.

Figure 12.5. Calculating Additions to and Deductions from Life Insurance

Policy Death Benefits
Sal Donato purchased a nonparticipating life insurance policy in the amount of $200,000, plus a
$150,000 accidental death benefit rider. Sal subsequently bought $60,000 of additional coverage.
At the time of Sal’s death, which resulted from an accident, he had paid $500 in advance premi-
ums and had an outstanding policy loan of $22,000 plus $1,500 of interest on that loan. The claim
analyst would calculate the total benefit payable under this policy in the following manner:
Face value of policy $200,000
+ ADB rider + 150,000
+ Additional coverage + 60,000
+ Premium paid in advance + 500
Death benefit plus additions $410,500
– Unpaid policy loan – 22,000
– Unpaid interest on policy loan – 1,500
Total death benefit payable $387,000
Figure 12.6. Typical Settlement Options for Life Insurance Policies
•• The interest option, under which the insurance company invests the
policy proceeds and periodically pays interest on those proceeds
•• The fixed-period option, under which the insurance company agrees
to pay policy proceeds in equal installments to the payee for a specified
period of time
•• The fixed-amount option, under which the insurance company pays
equal installments of a stated amount until the policy proceeds, plus
the interest earned, are exhausted
•• The life income option, under which the insurance company
agrees to pay the policy proceeds in periodic installments over the
payee’s lifetime
Group life insurance policies typically offer settlement options if the proceeds
payable exceed a specified minimum amount. Although policyowners usually
select a settlement option when they apply for coverage, they can choose—or
change—a settlement option at any time while the policy is in force.

If the policyowner does not select a settlement option, policy beneficiaries can
choose one of the available options when the insured dies. The beneficiary can also
change an existing settlement option as long as the policyowner did not make the
option irrevocable. Most often, beneficiaries choose to have the entire benefit paid
in a lump sum, either by check or through a direct deposit into an interest-bearing
checking, draft, or money market account established in the beneficiary’s name.
Administering Claims for

Supplemental Benefits
Earlier, you learned how the protection provided under most individual life insur-
ance policies can be expanded by adding supplemental benefits such as waiver
of premium for disability (WP) benefits, accidental death benefits (ADB), family
benefits, or accelerated death benefits. When evaluating claims for these supple-
mental benefits and calculating the amount payable, the claim analysts follow the
same steps required when evaluating the primary benefit.
Waiver of Premium for Disability Benefit

When an insurer receives a claim for benefits under a waiver of premium for dis-
ability (WP) benefit rider, the claim analyst’s first task is to verify that the claim-
ant is disabled according to the definition of disability included in the rider. The
analyst also verifies that the disability is not excluded from coverage, and that the
claimant has satisfied the waiting period, if any, specified in the rider.
The analyst can find most of the information needed to verify disability in
the disability information form submitted by the claimant, which provides details
about the
Initial date of the disability
Cause of the disability and the medical diagnosis
Claimant’s occupation and job duties
Additional sources (if any) of disability income benefits and the names and
addresses of providers of those benefits
Expected return-to-work date
The analyst can also find information in claim forms, medical records—includ-
ing the attending physician’s statement—financial records, and documents pro-
vided by the claimant’s employer.
Most insurers review WP cases periodically to confirm that the claimant is
still eligible for benefits. For short-term disability cases, claim analysts typically
review claims every three to six months. For long-term disability cases or cases
in which benefits terminate or are reduced when a claimant reaches a certain age,
claim analysts may review claims annually. Depending on the result of the review,
the claim analyst may contact the claimant to verify the person’s medical condi-
tion. If the claimant does not supply proof of continued disability, most insurers
notify the claimant that he will lose his waiver status and will be responsible for
paying future life insurance premiums in order to keep the coverage in force.

Accidental Death Benefit

Accidental death benefit (ADB) riders provide a death benefit in addition to the
policy’s basic death benefit if the insured dies as a result of an accident. The claim
analyst examining a claim under an ADB rider, therefore, must verify that the
insured’s death resulted directly from an accident and was independent of any
other cause. Sometimes, however, determining the precise cause of death is dif-
ficult. For example, an insured might have suffered a heart attack that resulted in a
fatal automobile accident or other mishap. In this situation, the claim analyst may
need to examine the autopsy report and the insured’s medical records to determine
the immediate cause of death. If the insured’s death resulted from the heart attack,
no accidental death benefits would be payable.
Most ADB riders expire when an insured reaches a specified age, such as 65
or 70. The claim analyst, therefore, must verify that the benefit was still in force
when the insured died. Although current state laws usually prohibit insurers from
specifying that an insured’s death must occur within a stated time—such as 60
or 90 days—after an accident, some older policies do include time limits on acci-
dental death benefits. To ensure that a claim decision complies with regulatory
requirements and case law, claim analysts often consult with the insurer’s legal
department before making a decision.
Family Benefits
Some individual life insurance policies include a family benefit that covers not
only the insured’s life but also the lives of the insured’s spouse and children. When
an insurer receives a claim under a family benefit, the analyst must verify that the
deceased meets the definition of a spouse or child and the age requirements specified
in the benefit provision or rider. In most cases, the claim analyst can verify coverage
by examining a marriage certificate, a birth certificate, or an adoption certificate.

An accelerated death benefit gives a policyowner-insured the right to receive a por-
tion of the policy’s basic death benefit before death as long as certain conditions
are met. Most accelerated death benefit riders specify that the policyowner-insured
must provide evidence that he meets the policy’s requirements to claim accelerated
death benefits. To deter fraudulent claims and to validate that the insured’s health
was not misrepresented during the application process, insurers usually require
a policyowner-insured who claims accelerated death benefits during the policy’s
contestable period to provide additional evidence of their medical condition.
The amount available to a policyowner-insured under an accelerated death ben-
efit depends on the nature of the medical condition and the provisions of the rider
defining the benefits available to the insured. For a policyowner-insured who suf-
fers from a
Terminal illness, the amount payable prior to death varies. Some insurers
allow payment of the full face amount of a policy prior to the insured’s death;
others allow up to a specified percentage of the face amount—such as 25 per-
cent or 75 percent—or up to a maximum dollar amount, such as $250,000.
When the policyowner-insured dies, the insurer deducts any amount paid out
as an accelerated death benefit from the basic death benefit provided by the
policy and pays the remainder to the beneficiary.

Critical illness, insurers usually pay benefits in a lump sum or in monthly

installments over a period of six to 12 months. Some, but not all, insurers do
not make payments for multiple or recurring events.
Chronic illness or a condition requiring long-term care, insurers usually
pay monthly benefits equal to a stated percentage of the policy’s death benefit.
For example, an insurer might pay 2 percent of the policy’s death benefit each
month if the insured requires nursing home care and 1 percent of the death
benefit each month if the insured requires home health care. Insurers usually
limit the total amount paid out in monthly benefits to a specified percentage
of the policy’s face amount and pay any remaining death benefit to the policy
beneficiary after the insured’s death. Long-term care benefits usually are sub-
ject to a 90-day waiting period before benefits are payable. Most policies also
specify that coverage must be in force for a given period of time, usually one
year or more, before the insured can qualify for benefits.
Because payment of accelerated death benefits reduces the benefit payable to
the policy beneficiary at the insured’s death, the insurer may require an irrevo-
cable beneficiary or an assignee to sign a release acknowledging that the policy’s
death benefit will be reduced by the amount paid to the policyowner-insured under
the accelerated death benefit provision. However, because only a portion of the
death benefit is accelerated, the policy typically continues to provide some degree
of protection for beneficiaries and assignees.
Administering Claims for Reinsured Policies

In Chapter 8, you saw how insurers use reinsurance as a way to manage the finan-
cial risks they assume in the course of doing business. Eventually, however, claims
on reinsured policies become payable, and when they do, the direct writer must
pay benefits to the policy beneficiary and the reinsurer must pay benefits to the
direct writer according to the terms of the reinsurance agreement.
In most cases, the direct writer is responsible for determining whether claims
submitted under reinsured policies are payable. The direct writer is also respon-
sible for identifying claims that can be recovered from the reinsurer. If the direct
writer determines that the reinsurer is responsible for paying some or all of a
claim filed on a reinsured policy, the direct writer sends a request to the reinsurer
for payment of the reinsurer’s portion of benefits due to the policy beneficiary.
The reinsurer’s claim analysts, with assistance from the company’s reinsurance
analysts, determine whether to reimburse the direct writer for the requested por-
tion of the claim.
Establishing the Claim File

The reinsurance claim administration process usually begins when a direct writ-
er’s reinsurance analyst sends the reinsurer a claim notice that provides informa-
tion about the
Insured
Loss incurred
Reinsured policy or policies that the direct writer has in force on the insured

Reinsurance arrangements that apply to the policy or policies under

consideration
Status of the claim, such as whether the claim is under investigation, approved
but not paid, or paid
Amount of payment requested from the reinsurer for the claim
The direct writer’s analyst may also send the reinsurer a copy of (1) the claim
form submitted to the direct writer by the claimant or a representative of the claim-
ant, and (2) proof of loss, usually in the form of an official death certificate or other
document verifying the insured’s death. If the direct writer has already paid the
claim, the direct writer also sends the reinsurer proof of payment.
The reinsurer creates its own claim file that includes all information relevant
to a claim under a reinsured policy. In addition to the information about the claim
provided by the direct writer, the reinsurer’s claim file also includes information
about the
Direct writer—such as name, contact information, and policy number
Insured—such as name, gender, proof of loss, and proof of claim payment
Reinsurance arrangement—such as the reinsured risk for the policy and any
reinsurance claim activities in progress or completed
Verifying Claim-Related Information

When all necessary information has been assembled in the reinsurer’s claim file,
the reinsurer’s reinsurance analyst determines whether the reinsurer has a liabil-
ity for the claim under the terms of the reinsurance agreement. The reinsurance
analyst also verifies proof of loss, determines whether the claim is fraudulent or
contestable, and confirms the amount of the reinsurer’s claim liability.
Verifying Claim Liability

To verify the reinsurer’s liability for a claim for life insurance benefits, the reinsur-
ance analyst confirms that
The claim relates to a policy covered by a reinsurance agreement
Both the policy and the reinsurance agreement were in force at the time of the
loss
Any policy changes, such as reinstatements or increases in coverage, are prop-
erly administered according to the parameters of the policy and the reinsur-
ance agreement
Riders or provisions in the policy have been properly administered according
to the terms of the reinsurance agreement so that the amount recoverable from
the reinsurer is correct
Figure 12.7 lists examples of information used to verify liability under a rein-
sured claim.

Figure 12.7. Reinsurance Agreement Specifications or Claims Liability
Reinsurance agreements typically specify that claims for benefits under a reinsured policy meet
certain requirements. These requirements typically apply to the
•• Type of policy
•• Information used to underwrite the policy
•• Underwriting classification of the insured
•• Age limits for policy
•• Effective date of the policy
•• Allowable coverage
•• Maximum amount of risk to be ceded
•• Jumbo limit
The reinsurance analyst also determines whether the reinsurer has reinsured
other policies on the insured from any other direct writer. If the analyst determines
that the reinsurer is covering other policies on the same insured, she notes these poli-
cies and the names of the direct writers in the claim file. The analyst next checks for
any amounts retroceded on the case. If the claim involves retroceded coverage, the
analyst creates a retrocession claim file that contains all the information relevant to
the claim, plus information about the retrocession. The analyst can then refer to the
information in the file when sending notice of the claim to the retrocessionaire.
The reinsurance analyst’s next task is to confirm the details of the reinsurance
agreement. In most cases, this involves confirming whether the
Direct writer has paid reinsurance premiums on the case. The analyst adds
any premium-related information to the claim file and, if necessary, calculates
any premium refunds due if the reinsurance coverage terminates as a result
of the claim.
Reinsurance agreement includes any special instructions or arrangements. For
example, the reinsurance analyst typically notifies the reinsurer’s claim ana-
lyst if the reinsurer has the right to review the claim and offer its opinion to
the direct writer regarding whether the direct writer should pay the claim. This
right to review a potential claim and offer an opinion is known as the right of
recommendation.
If the reinsurance analyst identifies any discrepancies between the claim and
the terms of the reinsurance agreement, the analyst refers the case to the rein-
surer’s claim analyst for additional review.
Verifying Proof of Loss

When a person insured under a life insurance policy dies, the direct writer requires
the claimant to provide proof of loss. If the policy has been reinsured, the reinsurer
must also receive proof of loss. The reinsurance analyst or claim analyst reviews
the documentation to confirm that it applies to the insured and then adds the proof
of loss documents to the claim file.

Determining Whether the Claim is

Fraudulent or Contestable
When a reinsurer receives a claim for benefits, a reinsurance analyst checks all
documents related to the claim for signs of fraud. The analyst also verifies when
the death occurred. If death occurred during the policy’s contestable period, it is
classified as a contestable claim; the reinsurance analyst assigned to the case notes
the length of time the policy has been in force, checks MIB records (if the rein-
surer is a member of MIB), and enters the information in the claim file. When the
reinsurance analyst has collected all necessary information, he sends the claim to
a claim analyst for processing. If a claim is not contestable, the reinsurance analyst
can send the claim directly to a claim analyst without further investigation.
Verifying Claim Liability Amounts

For certain types of proportional reinsurance arrangements, the reinsurance claim
analyst checks information in the reinsurance agreement and reinsurance admin-
istration records to determine the portion of the claim payable by the reinsurer.
Example:
Forthright Insurance has a reinsurance agreement with Sentry Reinsurance.
The agreement specifies that Sentry will pay 60% of all claims on reinsured
policies. Forthright recently received a claim on a $200,000 life insurance
policy that was reinsured by Sentry.
Analysis:
Under the reinsurance agreement, Forthright is responsible for paying the
entire amount of the claim. However, Sentry is responsible for reimbursing
Forthright for Sentry’s share of the total amount, or $120,000 ($200,000 ×
0.60 = $120,000).
For other types of proportional reinsurance arrangements, the reinsurer’s claim

liability is based on the reinsurer’s net amount at risk (NAR). Direct writers typi-
cally know future policy reserve amounts for traditional whole life insurance
policies in advance and list them in a schedule. The reinsurer can determine its
liability under one of these policies by reviewing the appropriate schedule. Direct
writers typically can’t accurately predict future policy reserves and NAR amounts
for policies with flexible or indeterminate premium rates, so in these cases reinsur-
ers usually rely on the most recent billing statements to determine their NAR and
overall claim liability.
If the reinsurer’s calculation of claim liability under a reinsured policy is the
same as the claim liability specified on the direct writer’s claim notice, the reinsur-
ance analyst can proceed by updating the claim file. If the two amounts are differ-
ent, the reinsurance analyst usually refers the case to a claim analyst to investigate
the discrepancy.

Settling Reinsured Claims

Once the amount of the claim liability has been approved, the reinsurance analyst
or claim analyst settling a reinsured claim usually notifies the direct writer of the
amount due from the reinsurer and arranges for payment of that amount in settle-
ment of approved claims.
In reinsurance arrangements under which the direct writer is the reporting party
and provides only summarized reports to the reinsurer, the direct writer can usually
net off claims from billing statements. Netting off is a process by which a direct
writer subtracts the claim amount owed to it by a reinsurer from the amount that the
direct writer owes the reinsurer for premiums. If the reinsurance agreement allows
netting off, the direct writer notifies the reinsurer of a claim through the billing state-
ment, which shows claim amounts that the direct writer has netted off.
Settling Retroceded Claims

If a reinsurer retroceded a portion of the reinsured risk, the reinsurer may be
required to send the retrocessionaire a copy of the proof of loss, a copy of the
claim form, and proof of claim payment from the direct writer. If necessary, the
reinsurer also sends a request for payment of the retrocessionaire’s portion of the
claim. The retrocessionaire examines the claim, secures approval for the claim
liability to the reinsurer, and settles the claim liability by sending payment to the
reinsurer.
Denying Payment of Benefits

Although insurers pay the majority of claims filed for life insurance benefits, they
are sometimes obligated to deny payment. For example, insurers generally deny
claims if
An insured dies as a result of conditions specifically excluded by the policy
An insured dies during the policy’s contestable period and the insurer discov-
ers a material misrepresentation in the application for insurance
A claimant does not provide acceptable proof of the insured’s death
The insurer has reason to suspect that a claim is fraudulent

In many companies, the claim supervisor is required to approve a denial of
benefits before notice is sent to the claimant. In cases that involve potential fraud
or suspicious circumstances, the insurer’s legal department or a special investiga-
tive unit assigned to the case may also need to review the case and approve denial
of benefits.
If denial of payment is approved, the insurer sends a letter to the claimant
explaining the reason for the denial and stating that, if the claimant can provide
additional information critical to the case, the insurer will reexamine the claim.
In some companies, this letter goes out before the claims department has made a
final decision.

Key Terms
death certificate
presumptive death certificate
change in health statement
payee
simultaneous death act
survivorship clause
interpleader
community property laws
exculpatory statutes
settlement options
interest option
fixed-period option
fixed-amount option
life income option
claim file
retrocession claim file
right of recommendation
netting off

Insurance Administration Glossary GLOSS.1
Glossary
Abandonment rate. A measure that indicates the percentage of inbound telephone

calls automatically placed on hold and then terminated by the caller before the
call is answered by a service provider. [10]
Absolute assignment. An irrevocable transfer of all of a policyowner’s ownership
rights in a life insurance policy to the assignee. [10]
Accelerated death benefit. A supplemental life insurance policy benefit that
allows the policyowner to receive all or part of the policy’s death benefit before
the insured’s death if certain conditions are met. [6]
Accidental death benefit (ADB). A supplemental life insurance policy benefit
that requires the insurer to pay a specified amount of money in addition to the
policy’s basic death benefit if an insured dies as a result of an accident (subject
to exclusions such as suicide or accidents resulting from the insured’s commis-
sion of a crime). [6]
Accounting. The functional area of an insurance company that collects, records,
summarizes, analyzes, and reports data about a company’s financial condition. [1]
ACD. See automatic call distributor. [9]
Activities of daily living (ADL). Activities that healthcare professionals use to
measure the functional status of a person; usually defined as bathing, dressing,
transferring, toileting, continence, and eating. [6]
Actively at work provision. A provision that requires an employee to be actively
at work—rather than ill or on leave—on the day the group overage is to take
effect. [7]
Actuary. A technical expert in insurance, annuities, and other financial products
who applies mathematical knowledge to industry and company statistics to cal-
culate various financial values. [1]
ADB. See accidental death benefit. [6]
ADL. See Activities of daily living. [6]
Administration system. An interactive combination of technology, people, and
processes that collect, manipulate, and distribute information about insurance
policies and customers. [2}
Administrative services only (ASO) arrangement. A method of administering a
group insurance plan under which the group sponsor funds an employee benefit
plan but hires an outside provider to perform specific administrative services
for the plan. [7]
Adverse action. A denial or revocation of insurance coverage, a change in the
terms of existing insurance coverage, or a refusal to grant insurance in substan-
tially the amount or on substantially the terms requested. [2]

GLOSS.2 Glossary Insurance Administration
Affinity group. A group of people who share a common bond, background, or

interest and who belong to an association group. [7]
Age and amount requirements chart. A chart, typically included in field under-
writing manuals, that specifies the kinds of information the underwriter must
obtain and review in assessing the insurability of a proposed insured. [3]
Agent’s statement. A section included in most individual life insurance applica-
tions in which the financial professional submitting the application can com-
ment on any factors relevant to the case and the risk it involves. [3]
Allowance. An amount the reinsurer reimburses to the direct writer and that is
designed to recognize the direct writer’s acquisition, maintenance, and other
expenses related to the ceded business. Also known as a ceding commission. [8]
ANI. See automatic number identification. [9]
Antiselection. The tendency of people who believe they have a greater-than-average
likelihood of loss to see insurance protection to a greater extent than do those who
believe they have an average or less-than-average likelihood of loss. [3]
Apps. See mobile applications. [9]
Application triage. An automated underwriting approach that allows applicants
to obtain coverage at the same price they would pay under a standard, fully
underwritten approach, but in less time. [3]
APS. See attending physician’s statement. [4]
Assignment. An agreement under which a policyowner—the assignor—trans-
fers some or all ownership rights in a particular policy to another party—the
assignee. [10]
ASO. See administrative services only arrangement. [7]
Association group. A group that consists of the members of an association, which
is an organization of employers or individuals formed for a purposes other than
to obtain insurance. [7]
Assuming company. See reinsurer. [8]
Assumption certificate. An insurance certificate issued to a policyowner by a
reinsurer that has assumed the risk of the policy as a result of an assumption
reinsurance transaction. [8]
Assumption reinsurance. Reinsurance designed to permanently and entirely
transfer blocks of existing insurance business from one company to another.
Also called portfolio reinsurance. [8]
Attending physician. A primary care physician or specialist who has provided
medical care for a proposed insured at the individual’s request. [4]
Attending physician’s statement (APS). A report by a physician who has treated
or is currently treating a proposed insured. [4]
Audit. An evaluation of a company’s records and operations to ensure the accu-
racy of the records and effectiveness of operational policies and procedures. [3]

Auto-adjudication. An electronic claim processing system that can perform spec-

ified claim processing activities without human intervention. [11]
Automated underwriting. A type of underwriting in which technology performs
some or all of the steps needed to assess and classify insurance risks. [3]
Automated workflow system. A type of technology that coordinates the flow of
documents and work tasks associated with a business process. [2]
Automatic call distributor (ACD). A CTI device that, at the most basic level,
answers telephone calls and directs them to a specified employee or work team
or to a recorded message. [9]
Automatic deduction plan. A policy loan repayment plan in which the policy-
owner authorizes the insurer to automatically deduct a set amount from the
owner’s bank account each month until the loan is repaid. [10]
Automatic number identification (ANI). A technology that identifies and
inbound telephone call by the caller’s telephone number or some other type of
personal identifier. [9]
Automatic reinsurance. A reinsurance cession arrangement in which the direct
writer agrees in advance to cede all risks that meet the specifications in the rein-
surance agreement and the reinsurer agrees in advance to assume these risks.
Average handling time. See turnaround time. [11]
Average speed of answer. The average time, in seconds, to answer a telephone
call or the average amount of time callers are on hold before being connected
with someone who can meet their needs.
Benchmark. A performance standard, often based on standards achieved by lead-
ing companies, that represents a company’s goals for performance. [2]
Benefit schedule. A table or schedule included in a group insurance policy that
specifies the amount of coverage provided for each class of group insureds. [7]
Benefit transmittal. An attachment to a request for proposal for group insurance
coverage that provides details about the insurance benefits being requested, the
effective date of coverage, how premium billing and claims will be adminis-
tered, and other information about the requested group insurance plan. [7]
BI. See business intelligence. [2]
Big data. A large amount of data gathered from various sources, in various for-
mats, and at a rapid speed, making it difficult to manage with traditional tech-
nology. [2]
Billing statement. A reinsurance report that lists the amounts owed by and due to
each party to a reinsurance agreement. [8]
Block of business. A number of similar insurance policies. [8]
BMI. See body mass index. [4]
Body mass index (BMI). A measurement of body fat based on height and weight.
[4]
BPM. See business process management. [2]

BPM technology suite. A collection of technology tools that support and manage
the design, modeling, construction, deployment, monitoring, and refinement of
business processes. [2]
BPO. See business processing outsourcing. [2]
BRE. See business rules engine. [2]
Build. The shape or form of the body, including the relationships among height,
weight, and distribution of weight. [4]
Build chart. A chart showing the average weights for various heights and the
mortality debits associated with increases in weight above those averages. [4]
Business continuation insurance plan. An insurance plan designed to ensure
the continued financial viability of a business after the death or disability of an
owner or other person important to the business. [6]
Business continuity planning. The process of developing arrangements and pro-
cedures to be used if events occur that would prevent or hamper normal busi-
ness activities. Also known as disaster recovery planning. [2]
Business insurance. Insurance that serves the needs of a business organization
rather than of a person. [6]
Business intelligence (BI). A technology-driven process for analyzing data and
presenting it as actionable information to help corporate executives, business
managers and other users to make more informed business decisions. [2]
Business process management (BPM). A strategy that combines proven man-
agement practices with technology to automate and optimize busine4ss pro-
cesses or adapt them to meet changing needs. [2]
Business process outsourcing (BPO). A strategy that allows a company to offload
tasks that must be done, but that may not directly contribute to the company’s
growth and profitability, to an organization that specializes in those tasks. [2]
Business rules engine (BRE). Computer software that automates the decision-
making process by creating and applying rules to all available information . [2]
Buy-sell agreement. A contract between two or more parties in which (1) one
party agrees to purchase the financial interest that a second party has in a busi-
ness following the second party’s death or permanent disability and (2) the sec-
ond party agrees to direct his estate to sell his interest in the business to the
purchasing party. [6]
Business-to-business (B2B) e-commerce. The electronic transmission of
data or information between organizations to perform or facilitate business
transactions. [8]
B2B. See business-to-business e-commerce. [8]
CAI. See Claims Activity Index. [11]
Case. A single policy or group of policies involved in a reinsurance arrangement.
[8]
Case assignment system. A method of assigning cases to underwriters based on
the characteristics of the case. [3]

Catastrophic coverage. A type of nonproportional reinsurance designed to par-

tially protect direct writers from (1) a single catastrophic event resulting in
multiple claims or (2) an annual total of claims in a catastrophic amount. Also
called cat cover. [8]
Cat cover. See catastrophic coverage. [8]
CCXO. See Chief Customer Experience Officer. [1]
Ceding commission. See allowance. [8]
Ceding company. See direct writer. [8]
CEM. See customer experience management. [1]
Census. A document that lists demographic information about a group prospect as
a unit and about individual members within the group. [7]
Certificate of coverage. A certificate issued in the event an original policy is lost
or destroyed to verify that coverage exists, but does not contain all the provi-
sions and riders that the original policy may have contained. [10]
Cession. The unit of insurance risk that a direct writer transfers to a reinsurer. [8]
Cession arrangement. An reinsurance arrangement that (1) identifies the direct
writer’s obligations and rights to cede risks, and (2) identifies the reinsurer’s
obligations to accept risk as well as its rights to reject risk. [8]
Change in health statement. A document contained in most individual life insur-
ance applications and premium receipts that requires a proposed insured to
notify the insurer in writing if his health or any material information in the
application changes before the policy is delivered. [12]
Chief Customer Experience Officer (CCXO). A senior-level executive who is
responsible for managing corporate strategies to improve the customer experi-
ence. Also known as the Chief Customer Officer or Chief Experience Officer. [1]
Chief Customer Officer. See Chief Customer Experience Officer. [1]
Chief Experience Officer. See Chief Customer Experience Officer. [1]
Chronic illness benefit. An accelerated death benefit under which the insurer
pays a portion of the policy’s death benefit to a policyowner if the insured per-
manently cannot perform at least two of the six activities of daily living, has a
permanent severe cognitive impairment, or both. [6]
Churning. A prohibited sales practice that occurs when a financial professional
induces a client to replace one policy after another, multiple times, so that
the financial professional can earn a series of first-year commissions on the
replacements. [6]
Claim administration. The process of evaluating each submitted claim, deciding
whether or not the claim is valid, informing the person who submitted the claim
of the decision, and authorizing the payment of each valid claim according to
the terms of the policy. [1]
Claim adjuster. See claim analyst. [11]

Claim analyst. An insurance company employee who reviews claims and deter-
mines the company’s liability for each claim. Also called a claim examiner or
claim adjuster. [11]
Claim examiner. See claim analyst. [11]
Claim file. An organized collection of all the information relevant to a claim. [12]
Claim form. A document containing information about a loss under an insurance
policy and about the person or entity claiming the proceeds that is submitted to
an insurance company to begin the claim evaluation process. [11]
Claim fraud. A subset of insurance fraud in which a person intentionally uses
false information in an unfair or unlawful attempt to collect benefits under an
insurance contract. {11]
Claim philosophy. A statement of an insurer’s objectives for administering
claims. [11]
Claim practices. Statements that guide the day-to-day handling of claims. [11]
Claims Activity Index (CAI). A shared, industry-wide database that includes
information about claims that have been filed with member companies. [11]
Class designation. A life insurance beneficiary designation that identifies a cer-
tain group of people rather than naming each person individually. See also per
stirpes beneficiary designation and per capital beneficiary designation. [10]
Collateral assignment. The transfer of some of a policyowner’s rights in a life
insurance policy to provide security for a debt. [10]
Committee underwriting. A work division approach in which a committee of
highly qualified people from inside and outside the underwriting function is
called together for case assessment. [3]
Communication channels. Mediums that senders use to transmit or deliver mes-
sages to intended audiences. [9]
Community property laws. Laws that provide that a spouse is entitled to receive
an equal share of earned income and an equal share of property acquired by the
other spouse during a marriage. [12]
Compensatory damages. Monetary awards intended to compensate an insured
party for monetary losses that resulted from a defendant’s improper conduct.
[11]
Complaint team. A work group dedicated solely to resolving customer com-
plaints. Also known as a problem resolution team. [10]
Compliance department. The functional area of an insurance company that is
responsible for ensuring that the insurer adheres to all applicable laws and regu-
lations in each jurisdiction in which the company does business. [1]
Computer network. A group of interconnected computers and computer devices
that provide a platform for electronic communications and information sharing.
[2]

Computer telephony integration (CTI). The hardware, software, and pro-

gramming tools that integrate computers and telecommunication devices—
particularly telephones—to enhance the service and information provided to
customers. [9]
Concurrent beneficiary. One of two or more life insurance beneficiaries who
share the policy proceeds on the death of the insured; shares are distributed
evenly unless otherwise provided. [10]
Consumer report. Under the Fair Credit Reporting Act (FCRA), any communica-
tion of information by a consumer reporting agency that (1) bears on an indi-
vidual consumer’s creditworthiness, credit standing, credit capacity, character,
general reputation, personal characteristics, or mode of living and (2) is used or
collected by a private business that assembles or evaluates information on con-
sumers and furnishes consumer reports to third parties in exchange for a fee. [2]
Contestable period. The time period within which an insurer has the right to
avoid a life insurance policy on the grounds of a material misrepresentation. [3]
Contingent beneficiary. The person or entity designated to receive the proceeds
of a life insurance policy following the insured’s death if the primary benefi-
ciary dies before the insured. Also called a secondary beneficiary. [10]
Contractual reserve. See policy reserve. [7]
Contributory plan. A group insurance plan under which insured group members
must pay part of all of the premium for their coverage. [7]
Conversion provision. A policy provision that gives a policyowner who meets
specific conditions the right to change the type of coverage provided by the
policy without providing evidence of insurability. [10]
Corporation. A legal entity, separate from its owners, that is created by the
authority of a government and that continues beyond the death of any or all of
its owners. [6]
Cost basis. The amount invested in an insurance contract, equal to the sum of all
premiums paid less withdrawals, dividends, and outstanding policy loans. [6]
Coupon plan. A policy loan repayment plan in which the insurer supplies the
policyowner with coupons to return with periodic payments against the loan
amount. [10]
Credibility factor. A percentage that represents the amount of weight given to
a group’s actual claim experience for premium rate calculation purposes. [7]
Creditor insurance. Insurance coverage designed to pay for the economic loss
suffered by a creditor if a debtor or a key person at a business that has borrowed
funds from the creditor dies before the debt is paid. [6]
Credits. A proposed insured’s medical and personal risk factors that have a favor-
able effect on mortality and are assigned “minus” values (such as –25). [5]
Critical illness benefit. An accelerated death benefit under which the insurer
agrees to pay a portion of the policy’s death benefit to the policyowner if the
insured suffers from one of a number of specified diseases. Also known as a
dread disease (DD) benefit. [6]

CRM. See customer relationship management system. [9]

Cross-purchase agreement. A type of buy-sell agreement in which each partner
agrees to purchase a share of a deceased partner’s interest in the partnership by
funding the agreement with an insurance policy on the life of each of the other
partners. [6]
CTI. See computer telephony integration. [9]
Current assets. Assets that can be readily be converted to cash within one year.
[6]
Current liabilities. Debts expected to be paid within the following 12 months. [6}
Current ratio. A measure of a company’s liquidity that is calculated by dividing
the company’s current assets by its current liabilities. [6]
Customer contact center. An organizational unit that provides customers with a
variety of channels for communicating with a company. [9]
Customer contact system. A customer database and work tracking tool that com-
bines a variety of features—such as data entry and retrieval, history of previous
customer contacts, document management, scripted presentations, and follow-
up tools—to provide a framework for handling and documenting customer
contacts. [9]
Customer experience management (CEM). An enterprise-wide business strat-
egy that allows an organization to manage all aspects of its interactions with
current and potential customers. [1]
Customer experience. The impression of a company that a customer forms over
time as a result of a series of encounters with the company. [1]
Customer journey map. A view of all a customer’s interactions with a company.
[1]
Customer journey. The path each individual customer travels with a company,
beginning with the first touchpoint and ending with the last. [1]
Customer relationship management (CRM) system. A technology platform
that allows a company to collect, maintain, share, and analyze customer trans-
action information from various channels. [9]
Customer service. The broad range of activities that a company and its employees
perform to keep customers satisfied so they will continue doing business with
the company and speak positively about it to other potential customers. [1]
Customer service representative (CSR). A company employee who provides
support to customers face-to-face or through communication media. [9]
Customer-centric philosophy. A business philosophy focused on the needs of
customers and how to fill those needs. [1]
Cyber security. Measures undertaken to protect a company’s computer networks,
systems, and data from unauthorized access. [2]

Dashboard. An information system application that combines information from

multiple business intelligence sources into a single, easy-to-real electronic for-
mat that identifies positive and negative trends for an individual business pro-
cess or for the whole company. Also known as a performance dashboard. [2]
Data analytics. The process of examining data to draw conclusions about it. [2]
Data governance. The process of establishing organizational ownership and
accountability for data so that business processes are optimized and data are
secure and protected. [2]
Data mining. The analysis of large amounts of data to discover previously
unknown trends, patterns, and relationships. [2]
Data scientist. An individual who uses techniques from statistics and computer
programming to (1) identify patterns and trends in data and (2) create math-
ematical models that forecast business outcomes. [2]
Data visualization tool. A technology-driven graphical display of an organiza-
tion’s metrics and key performance indicators. [2]
Data warehouse. A system that consolidates data from various organizational
databases and external sources and houses it in a centralized location on the
company’s server. [2]
Database management system (DBMS). A software application that organizes
the data in one or more databases or date warehouses logically and allows users
to access, update, and analyze data while ensuring the integrity and security of
the system. [2]
Date of expiry. The date on which a reinsurer will cancel the reservation of rein-
surance capacity if the reinsurer doesn’t receive a cession or other placement
information from the direct writer. [8]
DBMS. See database management system. [2]
DD benefit. See dread disease benefit. [6]
Death certificate. A document that attests to the death of a person and bears the
signature—and sometimes the seal—of an official authorized to issue such a
certificate. [12]
Death Master File (DMF). A Social Security Administration (SSA) database of
information about people who had a Social Security number and whose deaths
were reported to the SSA. [11]
Debits. A proposed insured’s medical and personal risk factors that have an unfa-
vorable effect on mortality and are assigned “plus” values, such as +25. [5]
Debt ratio. See debt-to-equity ratio. [6]
Debt-to-equity ratio. A financial ratio calculated by dividing a company’s total
long-term debt by its owners’ equity. Also known as a debt ratio. [6]
Debtor-creditor group. A group that consists of lending institutions—such as
banks, credit unions, savings and loan association, finance companies, retail
merchants, and credit card companies—and their debtors. [7]

Declined class. A risk class composed of proposed insureds whose anticipated

mortality rates are so great that the insurer cannot provide coverage at an
affordable cost or whose mortality risk cannot be predicted because of recent or
unusual medical conditions or other risk factors. [3]
Defamation. A civil wrong that occurs when a person makes false statements that
tend to damage the reputation of another. [11]
Dependent. An individual covered under a group insurance plan who is (1) a
spouse, (2) an unmarried child who is under a specified age limit, (3) a child
age 19 or older—up to a stated maximum age, often 25—who is a full-time
students, or (4) a disabled child of any age who relies on a group member for
financial support and maintenance. [7]
Descriptive analytics. A type of analytics that summarizes or describes raw data
to show how past behaviors might influence future outcomes. [2]
Direct response distribution system. A type of distribution channel in which
customers purchase products directly from a company by responding to adver-
tisements, internet web sites, or telephone solicitations. [6]
Direct response policy. A life insurance policy that is distributed through a direct
response system and that may be fully underwritten, underwritten on a non-
medical basis, or underwritten on a guaranteed-issue basis. [6]
Direct writer. In a reinsurance arrangement, the insurance company that sells
insurance coverage to the public. Also called a ceding company. [8]
Disability income benefit. A supplemental life insurance policy benefit that pro-
vides a monthly income benefit if the insured becomes totally disabled while
the policy is in force. [6]
Disaster recovery planning. See business continuity planning. [2]
Dividend plan. A policy loan repayment plan in which the insurer applies avail-
able dividends against an outstanding policy loan amount. [10]
Divisible surplus. The portion of an insurer’s earnings that is available for dis-
tribution to the owners of participating policies after the company sets aside
funds for contractual obligations, operating expenses, contingencies, and gen-
eral business purposes. [10]
DMF. See Death Master File. [11]
Document management system. A type of technology that stores, organizes, and
retrieves documents that have been converted to digital images. [2]
Double indemnity benefit. An accidental death benefit that pays a benefit equal to
the face amount of the underlying life insurance policy. [6]
Dread disease (DD) benefit. See critical illness benefit. [6]
Drop notice. A notification from a direct writer to a reinsurer stating that the
direct writer no longer needs reinsurance that it previously requested and ask-
ing the reinsurer to cancel the reservation. [8]

Earned income. Income that will not continue after an individual dies, such as
salary from a full- or part-time job, regular bonuses and commissions, and
stock options. [5]
e-application system. See electronic application system. [3]
EFT. See electronic funds transfer. [10]
EHR. See electronic health record. [4]
Electronic application system. A technology that allows producers or appli-
cants to enter information into a computer, rather than on paper, and transmit
the information to the insurer over a computer network. Also known as an
e-application system. [3]
Electronic commerce (e-commerce). A company’s use of the Internet and com-
puter networks to deliver information, perform business transactions, and facil-
itate the delivery of products and services to customers. [8]
Electronic funds transfer (EFT). A method of transferring funds between finan-
cial intermediaries through an electronic computer network. [10]
Electronic funds transfer arrangement. A method of paying insurance premi-
ums under which a policyowner signs an authorization form giving an insurer
the right to withdraw funds to pay premiums from the policyowner’s bank
account on or before the premium due date on an ongoing basis. [10]
Electronic health record (EHR). A digital version of an individual’s paper medi-
cal records that include the individual’s medical history, diagnoses, medica-
tions, treatment plans, immunizations, radiology images, and laboratory tests
and results. [4]
Electronic signature. A unique personal identifier that makes a legally binding
contract using electronic communications media such as the internet. Also
known as an e-signature. [3]
Eligibility period. The period of time, usually 31 days, during which eligible
group members may enroll for contributory insurance coverage without having
to provide evidence of insurability. Also known as an enrollment period. [7]
Empathy. The ability to understand another person’s emotional state and imaging
how you would feel in a similar situation. [9]
Employee application. See enrollment card. [7]
Employee benefit plan. A program under which an employer provides its employ-
ees with various benefits in addition to their wages. [6]
Employee Retirement Income Security Act (ERISA). A United States federal
law designed to protect employees by ensuring that employee benefit plans meet
specific requirements related to plan creation and maintenance. [7]
Employer-employee group. See single-employer group. [7]
Enrollment application. See enrollment card. [7]

Enrollment card. A document providing personal data about a group member that
must be completed and signed by the group member to enroll in a group insur-
ance plan. Also known as a group enrollment card, an enrollment application,
or an employee application. [7]
Entity agreement. A type of buy-sell agreement under which the partnership—
rather than the individual partners—agrees to purchase the share of any partner
who dies and to distribute the proportionate share of that ownership interest to
each of the surviving partners. [6]
Error rate. The percentage of transactions that resulted in errors. [10]
Escalation process. Procedures that specify how an in issue or complaint is to be
handled in situations where the customer service representative (CRS) is not
able or authorized to address a particular request or demand. [10]
E-signature. See electronic signature. [3]
Estate. The totality of an individual’s net worth, including all owned assets and
all liabilities. [5]
Ethics. A system of accepted standards of conduct and moral judgment that com-
bines the elements of honesty, integrity, and fair treatment. [1]
Examining physician. A physician who examines a proposed insured at the
request of the insurance company. [4]
Exception-based underwriting. A system of underwriting in which rules are
applied to process all applications electronically, except those that require an
underwriter to apply human judgment in the decision-making process. [2]
Exclusion. An insurance policy provision that describes circumstances under
which the insurer will not pay the policy’s benefit following an otherwise cov-
ered loss. [3]
Exculpatory statutes. Laws that permit an insurer to pay life insurance proceeds
according to the terms of a policy without fear of double liability. [12]
Expected claim experience. The monetary amount of claims an insurer estimates
a proposed group will submit during the upcoming policy year. [7]
Expense allowance. See allowance. [8]
Experience rating. A method of establishing group insurance premium rates
using a group’s own claim experience. [7]
Experience refund. The portion a group insurance premium that is returned
to a group policyholder if the group’s claim experience during the year was
more favorable than expected when the premium was calculated. Also called a
premium refund. [7]
Express claim processing system. A system for reducing the cost and turnaround
time for processing and paying life insurance claims by gathering information
by telephone and, if the claim meets company requirements, authorizing imme-
diate payment without additional paperwork. [11]

Extension request. A request from a direct writer to a reinsurer to extend the

direct writer’s reservation of capacity for a specified period so that the direct
writer can gather all information needed to move the case from reserved to
placed status. [8]
External audit. An audit conducted by a third party who is not employed by the
company being audited. [3]
External network. A computer network that links a company to people and com-
puters outside the company. [2]
External replacement. A situation in which a new policy is purchased from an
insurer other than the insurer that issued the original policy. [6]
Extra-percentage table. A document that presents the total mortality for each sub-
standard group and that lists all the tables used in the table rating method. [5]
Fac-ob reinsurance. See facultative-obligatory reinsurance. [8]
Factor table. A chart that shows the maximum amount of insurance—expressed
in multiples of a person’s salary or current gross earned income—that an insurer
typically approves in each of several age ranges. [5]
Facultative-obligatory (fac-ob) reinsurance. A reinsurance cession arrange-
ment in which (1) the direct writer may choose to submit specific cases to the
reinsurer and (2) the reinsurer must accept the cases based on the direct writer’s
underwriting, up to a stated maximum amount, if the reinsurer has available
financial capacity. [8]
Facultative reinsurance. A reinsurance cession arrangement in which a direct
writer chooses whether to cede a risk and the reinsurer chooses whether to
accept that risk. {8]
Family benefit. A supplemental term life insurance benefit that insures the lives
of an insured’s spouse and children. [6]
Fair Credit Reporting Act (FCRA). A U.S. federal law that regulates the report-
ing and use of consumer information and seeks to ensure that consumer reports
contain only accurate, relevant, and recent information. [2]
FCRA. See Fair Credit Reporting Act. [2]
Field underwriting. The practice of gathering initial information about appli-
cants and proposed insureds and screening proposed insured’s to determine if
they are likely to be approved for a specific type of coverage. [3]
Field underwriting manual. A paper or online document that (1) presents spe-
cific guidance for a financial professional’s assessment of the risk represented
by a proposed insured and (2) guides the financial professional in assembling
and submitting the application and in sharing any other information needed for
the underwriter to evaluate the risk. [3]
Financial capacity. The total monetary amount of risk a company can accept
based on the investable funds it has available to write new business. [8]
Financial Crimes Enforcement Network (FinCen). A bureau of the U.S. Trea-
sury Department that requires financial institutions, including insurers that sell
covered products, to have Anti-Money Laundering programs in place. [5]

FinCen. See Financial Crimes Enforcement Network. [5]

Financial professional. In insurance sales, any individual who is licensed to
sell insurance products, including agents, bank-affiliated sales personnel, and
brokers. [1]
Financial ratio analysis. A method of analyzing the relationships between vari-
ous pairs of financial statement values for the purpose of assessing a company’s
financial condition. [6]
Financial risk factor. Financial information that an underwriter considers to
determine whether a person is applying for more insurance than he reasonably
needs or can afford. [3]
Financial status. An individual’s (1) current income expressed in terms of amount,
sources, and permanency and 92) net worth. [5]
Financial supplement. A document that requests information about the type and
current financial condition of a business and the purpose for which insurance
on the business is requested. [6]
Financial underwriting. The assessment of a proposed insured’s financial con-
dition, conducted by an individual life insurance underwriter, to determine
whether (1) the proposed insured needs the coverage, (2) a reasonable rela-
tionship exists between the need for the coverage and the amount of coverage
applied for, and (3) the premiums are affordable. [5]
First contact resolution. The percentage of inbound customer contacts that are
successfully completed at the initial point of contact, without being transferred
and without the need for follow-up work. [10]
First-to-die life insurance policy. See joint life insurance policy. [6]
Fixed-amount option. A settlement option under which an insurance company
agrees to pay the policy proceeds to the payee in equal installments of a stated
amount until the policy proceeds, plus interest earned, are exhausted. [12]
Fixed-period option. A settlement option under which an insurance company
agrees to pay policy proceeds in equal installments for a specified period of
time. [12]
Flat extra premium method. A method of charging for substandard risks in
which the insurer adds to the standard premium a specified extra dollar amount
for every $1,000 of individual life insurance coverage. [5]
Fully insured group plan. A group insurance plan under which an insurer is
financially responsible for all incurred claims. [7]
GI benefit. See guaranteed insurability benefit. [6]
GLB Act. See Gramm-Leach Bliley Act. [2]
Grace period. A specified length of time (often 31 days) following each premium
due date during which the contract remains in effect regardless of whether the
premium has been paid. [10]

Gramm-Leach-Bliley (GLB) Act. A U.S. federal law enacted in 1999 that

removed many of the regulatory barriers to affiliations among institutions in the
various segments of the financial services industry and that governs privacy. [2]
Group enrollment card. See enrollment card. [7]
Group insurance policy. See master group insurance contract. [7]
Group representative. A salaried insurance company employee specifically
trained in the techniques of marketing and servicing group products. [7]
Guaranteed insurability (GI) benefit. A supplemental benefit that gives the poli-
cyowner the right to purchase additional insurance of the same type as the basic
life insurance policy—for an additional premium amount—on specified option
dates during the life of the policy without supplying evidence of the insured’s
insurability. [6]
Guaranteed-issue basis. A system under which certain insurance products are
issued with no individual underwriting so that every eligible proposed insured
who applies and meets specified conditions is automatically issued a policy. [6]
Health Insurance Portability and Accountability Act (HIPAA). U.S. federal
legislation that sets forth requirements that employer-sponsored group insur-
ance plans, insurers, and managed care organizations must meet in providing
individual and group health insurance. [2]
HIPAA. See Health Insurance Portability and Accountability Act. [2]
Human resources. The functional area of an insurance company that recruits
and screens job applicants; helps select qualified employees; plans and presents
appropriate orientation, training, and development for each employee; adminis-
ters employee benefit programs; and maintains employee records. [1]
IAI. See Insurance Activity Index. [4]
ICR. See intelligent call routing. [9]
Impairment. A physical or psychological abnormality that results in a loss of
function. [4]
Impairment guide. A list of common impairments and the probable underwriting
decision for proposed insureds who have each type of impairment. [3]
Incontestability provision. A life insurance policy provision that limits the time
within which an insurer has the right to avoid a life insurance policy on the
basis of material misrepresentation in the application. Typically lasts for two
years from the date the policy was issued. [3]
In-force policy report. A reinsurance report that lists all in-force reinsured poli-
cies as of a given date and provides detailed information about each policy. [8]
Information security. The physical, technical, and procedural steps a company
takes to prevent the loss, wrongful disclosure (accidental or intentional), or theft
of information. [2]

Information technology (IT). The functional area of an insurance company that

develops and maintains the company’s information systems and oversees infor-
mation management throughout the company. [1]
Inspection report. A type of investigative consumer report that a consumer
reporting agency prepares about a proposed insured. [4]
Insurable interest. A requirement for insurance coverage that exists when a per-
son is likely to suffer a genuine financial loss or detriment if the event insured
against occurs. [3]
Insurance Activity Index (IAI). An index maintained by the MIB Group, Inc.
that provides information about the number of times an MIB request for infor-
mation about a particular applicant was entered into the system during the last
two years. [4]
Insurance administration. Those insurance company activities specifically asso-
ciated with administering insurance policies, such as underwriting, reinsur-
ance, claims, and customer services. [1]
Insurance Fraud Prevention Model Act. An NAIC model law designed to permit
state insurance departments to (1) investigate and discover fraudulent insurance
acts, and (2) receive assistance from state, local, and federal law enforcement and
regulatory agencies in enforcing laws that prohibit fraudulent insurance acts. [2]
Insurance fraud. Any fraud that involves an insurance company, whether commit-
ted by consumers, insurance company employees, financial professionals, health
care providers, or anyone else connected with any insurance transaction. [2]
Insurance Information and Privacy Protection Model Act. An NAIC model
law that sets standards for the collection, use, and disclosure of information
gathered in connection with insurance transactions. [2]
Insurer-administered plan. A group insurance plan for which the insurer handles
most of the administrative aspects of the plan. Compare to self-administered
plan. [7]
Intelligent call routing (ICR). Any automated process of analyzing and directing
inbound telephone calls. [9]
Interactive voice response (IVR) system. A computer-based technology that
answers telephone calls, greets callers with a recorded or digitized message,
and prompts them to enter information or make requests by voice or telephone
keypad. [9]
Interest option. A settlement option under which an insurance company invests
policy proceeds and periodically pays interest on those proceeds. [12}
Internal audit. An audit conducted by a company’s own staff. [3]
Internal network. A computer network that a company creates to link its people
and equipment to each other. [2]
Internal replacement. A situation in which a new policy is purchased from the
same insurer that issued the original policy. [6]

Interpleader. A procedure by which an insurer pays the policy proceeds to a court,

advises the court that the insurer cannot determine the correct recipient of the
proceeds, and asks the court to determine the proper recipient or recipients. [12]
Intranet. An internal network that looks and functions much like the internet, but
is designed to be accessible only to company employees. [2]
Invasion of privacy. A civil wrong that occurs when a person (1) appropriates some-
one’s name or personality, (2) publicizes someone’s private affairs, (3) intrudes
into someone’s private affairs and the wrong causes mental suffering, shame, or
humiliation, or (4) places someone in a false light in the public eye. [11]
Irrevocable beneficiary. A life insurance policy beneficiary who has a vested
interest in the policy proceeds even during the insured’s lifetime because the
policyowner has the right to change the beneficiary designation only after
obtaining the beneficiary’s consent or upon the beneficiary’s death. [10]
IT. See information technology. [1]
IVR. See interactive voice response system. [9]
Joint life insurance policy. A multi-life policy that pays policy proceeds when the
first of the insureds covered by the policy dies. Also known as a first-to-die life
insurance policy. [6]
Juvenile insurance policy. An insurance policy issued on the life of a child but
owned and paid for by an adult—usually the child’s parent, grandparent, or
legal guardian—who is usually also the beneficiary. [6]
Key performance indicator (KPI). A performance standard for a process or
activity that is critical to the success of an organization. [2}
Key person. An individual whose continued participation in a business is vital to
the success of the business and whose death or disability would cause signifi-
cant financial loss to the business. [6]
Key-person life insurance. A form of individual life insurance that a business
purchases on the life of a key person with the benefits typically payable to the
business. [6]
Knowledge management system. A system that gathers, evaluates, and shares a
company’s information assets and applies that knowledge to business activities.
[2]
KPI. See key performance indicator. [2]
Lapse. The termination of a life insurance policy as a result of nonpayment of
premiums. [5]
Lapse notice. See policy grace notice. [10]
Last survivor life insurance policy. A multi-life insurance policy that pays pol-
icy proceeds only after all insureds covered under the policy have died. Also
known as a second-to-die life insurance policy. [6]
Late enrollee. A group member or eligible dependent who does not enroll when
coverage is first offered and later decides to enroll in the plan. [7]

Late payment offer. An insurer’s conditional offer to waive its right to timely
payment of a policy premium. [10]
Law department. See legal department. [1]
Legal department. The functional area of an insurance company that handles all
legal matters for the company. Also known as the law department. [1]
Life income option. A settlement option under which an insurance company agrees
to pay policy proceeds in periodic installments over the payee’s lifetime. [12]
Life settlement. The sale of a life insurance policy to a third party for more than
its cash surrender benefit and less than its face amount. [5]
Liquidity. A company’s ability to easily convert its assets to cash for an approxi-
mation of their true value. [6]
Long-term care (LTC) insurance benefit. An accelerated death benefit under
which the insurer agrees to pay monthly benefits to a life insurance policyo-
wner if the insured requires constant care—in his own home or a qualified
facility—for a specified medical condition. [6]
LTC benefit. See long-term care insurance benefit. [6]
Lump sum plan. A policy loan repayment option that allows the policyowner to
repay the entire loan amount, plus any interest due, in a single payment. [10]
Manual rating. A method of establishing group insurance premium rates under
which the insurer establishes rates for very broad classifications of group
insureds. [7]
Market conduct examination. A formal investigation of an insurer’s nonfinancial
operations carried out by one or more state insurance departments as a way to
determine whether the insurer’s operations comply with applicable laws and
regulations. [11]
Market conduct laws. State insurance laws that are designed to ensure that insur-
ance companies conduct their business fairly and ethically. [2]
Marketing. The functional area of an insurance company that is responsible for
(1) identifying the insurer’s customers and the products or services that its cus-
tomers want, and (2) promoting and distributing those products or services to
customers. [1]
Master application. An application for group insurance that contains the specific
provisions of the requested plan of insurance and is signed by an authorized
officer of the proposed policyholder. [7]
Master group insurance contract. An insurance contract that insures a number
of people. Also called a group insurance policy. [7]
Material misrepresentation. A misrepresentation made by one party that induces
another party to enter into a contract that it would not have entered into had it
known the truth. [3]
Medical report. A type of Part II application that contains the proposed insured’s
answers to medical history questions recorded by a physician and the results
of a medical examination conducted by a physician. The results of the medical
examination do not become part of the contract. [4]

Medical risk factor. A physical or psychological characteristic that may increase

the likelihood of loss. [3]
Member service. A specific type of customer service that includes all the service
activities performed for group insureds. [1]
Metric. A numerical measure that quantifies the performance of a specified
activity. [2]
MEWA. See multiple-employer welfare arrangement. [7]
MIB. See MIB Group, Inc. [4]
MIB Group, Inc. (MIB). A not-for-profit membership corporation established to
provide coded information to insurers about impairments that applicants have
disclosed or other insurance companies have detected in connection with previ-
ous applications for insurance. [4]
Misdirected calls. The number or percentage of inbound telephone calls that are
transferred to the wrong person. [10]
Misrepresentation. An untrue statement of fact. In the context of insurance, an
untrue statement of fact contained in an application for insurance. [3]
Mobile applications (apps). Software applications specifically designed to
increase customer access to a company through the use of smart phones, tablet
computers, and other mobile devices. [9]
Model Privacy Regulation. See Privacy of Consumer Financial and Health
Information Regulation. [2]
Money laundering. The practice of engaging in financial transactions that hide
the identity, source, and/or destination of money associated with criminal activ-
ities. [5]
Moral hazard. A characteristic that exists when the reputation, financial position,
or criminal record of an applicant or proposed insured indicates that the person
may act dishonestly in the insurance transaction. [3]
Morbidity. The in incidence of sickness and injury among a specified group of
people. [3]
Morbidity rate. The rate at which sickness or injury occur among a specified
group of people during a specified period. [3}
Mortality. The incidence of death among a specified group of people. [3]
Mortality rate. The rate at which death occurs among a specified group of people
during a specified period, typically one year. [3]
Motor vehicle record (MVR). A report that contains information about a per-
son’s driving history, including information about traffic violations, arrests, and
convictions. [4]
Multi-life policy. A life insurance contract that is written on two or more lives. [6]
Multiple-employer group. A group that consists of the employees of (1) two or
more employers in the same industry, (2) two or more labor unions, or (3) one
or more employers and one or more labor unions. [7]

Multiple-employer welfare arrangement (MEWA). A multiple-employer group

formed by two or more small employers—usually in the same industry—to
provide group insurance benefits to their employees. [7]
MVR. See motor vehicle record. [4]
Mystery shopper. A trained evaluator who approaches or calls a company’s cus-
tomer service unit and pretends to be a customer. [10]
Natural language technology. See speech recognition technology. [9]
Net amount at risk (NAR). The difference between the face amount of a life
insurance policy—other than a universal life policy—and the policy reserve (or
cash value) at the end of any given policy year. [8]
Net cash surrender value. The amount of cash value the owner of a cash value
life insurance policy is entitled to receive upon surrender of the policy. [10]
Net worth. An amount representing the difference between all of a person’s assets
and liabilities. [5]
Netting off. A process by which a direct writer subtracts the claim amount owed
to it by a reinsurer from the amount that the direct writer owes the reinsurer for
reinsurance premiums. [12]
New business. The activities an insurer undertakes in receiving applications,
underwriting applications, and issuing policies. [1]
New business strain. See surplus strain. [8]
Noncontributory plan. A group insurance plan for which the group insureds are
not required to pay any part of the premium for the coverage; the premiums are
paid entirely by the policyholder and all eligible group members are provided
with coverage automatically. [7]
Nonmedical limit. The total amount of insurance an insurer will permit to be
issued on a proposed insured without requiring the proposed insured to undergo
a physical examination. [4]
Nonmedical supplement. A type of Part II application that contains a proposed
insured’s answers to medical history questions recorded by a financial profes-
sional or teleunderwriter. [4]
Nonproportional reinsurance. A type of reinsurance arrangement in which nei-
ther the reinsurer nor the direct writer knows in advance what share of a risk
the reinsurer will ultimately assume. [8]
Nonpublic personal financial information. Personally identifiable financial
information, such as a person’s income or credit history; and any list, descrip-
tion, or other grouping of customers that is derived using any personally identi-
fiable financial information that is not publicly available. [2]
Nonpublic personal health information. Health information about an individual
that is not publicly available but that identifies the individual or provides a reason-
able basis to think the information could be used to identify the individual. [2]

Notice of expiry. A document reinsurers use to notify a direct writer that an offer
to reinsure is due to expire and to request additional information, a cession, or
a drop notice, or an extension request from the direct writer. [8]
Number of blocked calls. The number of inbound telephone calls that encounter
a busy signal and do not get through to an employee. [10]
Numerical rating system. A risk classification method in which an underwriter
calculates a numerical value for the degree of risk a proposed insured presents
to the insurer and then places the proposed insured in a risk class according to
the numerical value. [5]
OFAC. See Office of Foreign Assets Control. [5]
Office of Foreign Assets Control (OFAC). An office of the U.S. Treasure Depart-
ment that maintains a list of countries, individuals, and organizations, that
participate in or sponsor terrorism and other illegal acts. [5]
Omnichannel service. A form of customer service that enables personalized
interactions between a company and its customers through multiple, integrated
communication channels. [9]
Open claimant. A group insured who is currently receiving short- or long-term
disability income benefits. [7]
Overinsurance. An amount of applied-for insurance that, together with in-force
insurance, is excessive in relation to the need for which coverage is being pur-
chased. [5]
Pain point. A real or imagined problem for a customer that a company plans to
solve. [1]
Par policy. See participating policy. [10]
Paramedical report. A type of Part II application that contains the proposed
insured’s answers to medical history questions recorded by a paramedical
examiner and the results of a paramedical examination conducted by a para-
medical examiner. [4]
Partial loan repayment plan. A policy loan repayment option in which the poli-
cyowner submits a check or money order to repay part of a policy loan. [10]
Participating policy. An insurance or annuity contract that may pay the owner a
policy dividend when the insurer experiences favorable financial results. Also
known as a par policy. [10]
Partnership. A type of company that is owned and operated by two or more peo-
ple (the partners) who jointly earn all company profits and are responsible for
all company debts. [6]
Passive income. See unearned income. [5]
Payee. The person or entity who is to receive the policy proceeds under a settle-
ment option. [12]
PBM. See pharmacy benefit manager. [4]

Per capita beneficiary designation. A type of life insurance policy beneficiary

class designation in which the class members all stand in the same relationship
to the policyowner and the class members who survive the insured share the
policy proceeds equally. [10]
Per stirpes beneficiary designation. A type of life insurance policy beneficiary
class designation in which the descendants of a deceased class member take the
deceased class member’s share of the policy proceeds by representation. [10]
Percentage-of-income rule. A method of calculating the amount of money a pro-
posed insured can afford to spend annually on insurance that bases the amount
on a specified percentage of the person’s current annual gross earned and
unearned income. [5]
Performance dashboard. See dashboard. [2]
Performance measurement. A process through which a company (1) decides
what activities are key to the achievement of the company’s goals and objec-
tives, how to measure the performance of those activities, and what perfor-
mance standards it hope to achieve; (2) gathers the measurements; and (3) com-
municates the results. [2]
Performance standard. An established level of performance against which a
company or an individual compares actual performance. [2]
Permanent flat extra premium. An amount added to the premium for cases in
which a personal risk factor is expected to remain constant throughout the life
of the policy. [5]
Persistency rate. The percentage of a specified group of contracts that remain in
force during a specified period, such as a year. [5]
Personal history interview (PHI). A conversation between an underwriting or
other insurance company employee and a prop0sed insured in which the under-
writer verifies the accuracy of information already received about the proposed
insured and obtains any additional information needed for underwriting. [4]
Personal risk factor. A lifestyle choice that can significantly affect a person’s
health of longevity. [3]
Pharmacy benefit manager (PBM). A clearinghouse that manages health care
prescription benefit programs and maintains pharmaceutical databases con-
taining records of prescriptions filled by the persons enrolled in such benefit
programs. [4]
PHI. See personal history interview. [4]
Plan administrator. The individual or organization responsible for handling the
administrative aspects of a retirement plan or other employee benefit plan and
ensuring that the plan complies with applicable regulatory requirements. [7]
Policy change report. A reinsurance report that shows details for all policies that,
during the reporting period, have changed in a way that affects the amount
of the reinsurance coverage, the reinsurance premium, or the allowance. Also
known as a transaction report. [8]

Policy dividend. A share of an insurer’s divisible surplus, payable to owners of

participating policies at the end of the policy year or on the policy anniversary. [8]
Policy issue. The process of preparing an insurance contract and delivering the
policy to the policyowner. [3]
Policy lapse notice. A written notification that a policy’s grace period is about to
expire. Also known as a lapse notice. [10]
Policy reserve. A liability that identifies the amount that, together with future
premiums and investment earnings, represents the expected amount of future
benefits payable on an insurer’s in-force business. Also known as a contractual
reserve. [8]
Policy rider. An amendment to an insurance policy that becomes part of the
insurance contract and either expands or limits the benefits payable under the
contract. [3]
Policyowner service. A specific type of customer service that includes all the
service activities performed for people or entities that own individual insurance
policies. [1]
Pooling. A rating method by which the insurer combines several small groups into
one large group, or pool. [7]
Portfolio reinsurance. See assumption reinsurance. [8]
Predictive analytics. A type of data analytics that determines the probably future
outcome of an event or the likelihood of a situation occurring. [2]
Preferred class. A risk class composed of proposed insureds whose anticipated
mortality rates are lower than average and who represent the lowest degree of
mortality risk. [3]
Premium receipt. A receipt issued to the applicant for a life insurance policy in
exchange for payment of the first premium for the policy. [3]
Premium refund. See experience refund. [7]
Preplacement. The process by which a reinsurer (1) reviews a direct writer’s
request for coverage, (2) establishes appropriate records and reserves capacity
for the case, and (3) as necessary, follows up on reservations for capacity that
have been inactive for a specified period of time. [8]
Prescriptive analytics. A type of data analytics that makes predictions, suggests
decision options based on those predictions, and shows the possible implication
of each decision. [2]
Presumptive death certificate. A court issued document stating that a person is
presumed dead. [12]
Pretext interview. An interview in which one person attempts to gain informa-
tion from another person by (1) pretending to be someone he is not, (2) pretend-
ing to represent someone he does not represent, (3) refusing to identify himself,
or (4) misrepresenting the purpose of the interview. [11]

Privacy of Consumer Financial and Health Information Model Regulation

(Model Privacy Regulation). A National Association of Insurance Commis-
sioners (NAIC) model law that includes requirements similar to those contained
in the Gramm-Leach-Bliley (GLB) Act, including limits on an insurer’s right
to disclose nonpublic personal information about a consumer without the con-
sumer’s consent. [2]
Probationary period. The length of time—typically from one to six months—
that a new group member must wait before becoming eligible to enroll in a
group insurance plan. Also called a waiting period. [7]
Problem resolution team. See complaint team. [10]
Processes completed. The number of transactions that are handled within a speci-
fied period of time. [10]
Professional association group. A group of people who share the same types of
occupation and who belong to the association. [7]
Profitability. The overall degree of success a business has in generating positive
returns for its owners. [6]
Proportional reinsurance. A type of reinsurance arrangement in which the direct
writer and reinsurer agree to share premiums and claim obligations according
to a specified amount or percentage. [8]
Proposal for insurance. A document that details the specifications of a group
insurance plan proposed by an insurer for a group prospect. [7]
Punitive damages. Monetary amounts that are awarded in addition to compensa-
tory damages when a defendant’s conduct meets the jurisdiction’s standards for
behavior that is so egregious as to warrant such damages. [11]
Qualitative methods. See qualitative performance measurement. [2]
Qualitative performance measurement. A form of performance measure-
ment that focuses on behaviors, attitudes, or opinions to determine how effi-
ciently and effectively processes and transactions are completed. Also called
qualitative methods. [2]
Quality control. The process of ensuring that an organization accomplishes its
objectives and follows its standards. [2]
Quality rate. The accuracy of a particular type of transaction. Quality rate is
often expressed as the percentage of total transactions handled or processed
without reported errors. [10]
Quantitative performance measurement. A type of performance measurement
that uses numerical methods to track are report objective results. Also called
quantitative methods.[2]
Quick ratio. A measure of liquidity that is calculated by dividing a company’s
liquid assets by its current liabilities. [6]
Rating. Approving a higher-than-average risk by charging a higher-than-average
premium rate for the coverage applied for. [3]

Ratio. A comparison of two numeric values that results in a measurement

expressed as a percentage or fraction. [6]
Real-time underwriting. A straight-through processing system that evaluates
insurance applications typically submitted over the Internet and that almost
instantly provides the applicant or financial professional with an underwriting
decision. [3]
Reflexive question. A question that triggers additional, more probing questions
related to the original question. [3]
Reinstatement. The process by which an insurer puts back into force a life insur-
ance policy that has been terminated because of nonpayment of premium or has
been continued under the extended term or reduced paid-up insurance nonfor-
feiture option. [10]
Reinsurance: Insurance that one insurance company obtains from another insur-
ance company to protect against the possibility of financial loss associated with
insurance policies issued by the first company. [1]
Reinsurance account executive. See reinsurance marketing officer. [8]
Reinsurance administration. All of the day-to-day activities conducted by the
direct writer and the reinsurer to process and manage each risk that the direct
writer cedes automatically or submits for facultative or facultative-obligatory
consideration. [8]
Reinsurance agreement. A document that contains the terms of the business to
be conducted, including the nature of the risk transfer, reinsurance administra-
tion procedures, information exchanges, and the rights and duties of each party
under the agreement. Also called a reinsurance treaty. [8]
Reinsurance analyst. Any direct writer or reinsurer employee—except the per-
son holding top leadership responsibility—who is involved in any phase of rein-
surance administration. [8]
Reinsurance arrangement. A business deal that two companies—the direct
writer and the reinsurer—make for the transfer of risk from one company to
the other. [8]
Reinsurance certificate. A document that notifies the direct writer that reinsur-
ance is officially in force. [8]
Reinsurance intermediary. A third party who is not employed by a direct writer
or reinsurer but who acts on behalf of a direct writer or reinsurer to place rein-
surance. [8]
Reinsurance marketing officer. A reinsurer employee who sells reinsurance and
coordinates the marketing process for the reinsurer. Also called a reinsurance
account executive. [8]-
Reinsurance treaty. See reinsurance agreement. [8]
Reinsurer. An insurer that provides reinsurance coverage by accepting, or assum-
ing, insurance risk from a direct writer. Also called an assuming company. [8]

Remote application. An application that insurers accept from financial profes-

sionals who meet with clients over the phone or over videoconferencing plat-
forms such as Skype. [3]
Renewal underwriting. The process by which an underwriter assesses the risk
presented by a group that has requested to renew its group insurance contract.
[7]
Replacement of Life Insurance and Annuities Model Regulation. An NAIC
model law that states that replacement of policies is generally permissible if the
replacing insurer provides full and fair disclosure and no deceptive practices
are involve. [6]
Request for coverage. A document used in facultative or fac-ob reinsurance
agreements in which the direct writer requests reinsurance coverage on a par-
ticular insured or group of insureds. [8]
Request for proposal (RFP). A document that provides detailed information
about a group and the requested coverage and solicits a bid from insurers for
providing that coverage. [7]
Reserve listing. A reinsurance report that shows all policies reinsured and the
reserve held for each policy. [8]
Responsive web design. Technology that allows users to create one version of a
website that adapts content to the device used to review it. [9]
Retention limit. A specified maximum amount of insurance per life that an
insurer is willing to carry at its own risk without transferring some of the risk
to a reinsurer. [8]
Retrocession claim file. A file containing all the information relevant to a claim
on a policy that has been transferred to a retrocessionaire. [12]
Retrocessionaire. An insurance company that accepts risk from—and provides
reinsurance to—a reinsurer. [8]
Return-on-equity (ROE) ratio. A ratio that measures the return to a company’s
owners by relating profits to owner’s equity. [6]
Revocable beneficiary. A life insurance policy beneficiary who has no right to the
policy proceeds during the insured’s lifetime because the policyowner has the
unrestricted right to change the designation during the life of the insured. [10]
Right of recommendation. The right of a reinsurer to review a claim and offer its
opinion to the direct writer on whether to pay the claim. [12]
RFP. See request for proposal. [7]
Risk class. A group of insureds in a given age category who represent a similar
level of risk to an insurance company. [3]
Risk factor. Any aspect of a proposed insured’s present health, medical history,
family history, health habits (such as tobacco use), financial condition, reputa-
tion, driving record, criminal record, occupation, or activities that increases the
likelihood that the person will suffer a covered loss. [3]
Risk-taking capability. See underwriting capacity. [8]

ROE. See return-on-equity ratio. [6]

SAR. See suspicious activity report. [5]
Scorecard. A data visualization tool that shows progress over time toward a speci-
fied goal. [2]
Screen pop. A computer-telephony integration application that delivers a custom-
er’s account information and relevant data to a CSR’s computer at the same time
the CSR receives a call from that customer. [9]
Secondary beneficiary. See contingent beneficiary. [10]
Second-to-die life insurance policy. See last survivor life insurance policy. [6]
Section 1035 Exchange. A tax-free replacement of an insurance policy for another
policy insuring the same person and meeting conditions specified in the United
States tax code. [6]
Self-administered plan. A group insurance plan for which the group policyholder
handles most of the administrative aspects of the plan. Compare to insurer-
administered plan. [7]
Self-insured group plan. A group insurance plan for which the group spon-
sor rather than an insurance company is financially responsible for paying all
claims incurred by group insureds. [7]
Service complaint. A complaint that pertains to the timeliness, accuracy, cour-
tesy, or professionalism of a company’s interactions with its customers. [10]
Service level. The percentage of inbound customer contacts answered within a
specified time frame. [10]
Service recovery. The efforts an organization makes to fully resolve a problem
that caused a customer’s dissatisfaction and to win back the customer’s good-
will. [10]
Settlement option. An alternative method—other than a lump-sum settlement—
of receiving the proceeds of a life insurance policy. [12]
Simplified underwriting. An underwriting process in which only a few key risk
factors are considered in assessing and classifying risk. [3]
Simultaneous death act. A law that specifies if both the insured and the benefi-
ciary die under circumstances that make it impossible to determine which died
first, the insurer is to presume that the insured survived the beneficiary unless
the policy provides otherwise. [12]
SIU. See special investigative unit. [11]
Single employer group. A group that consists of the employees of one employer.
Also known as an employer-employee group. [7]
Social media. A form of electronic communication that allows users connected to
a network to share and exchange information and ideas with other users who are
also connected to the network. [9]
Sole proprietorship. A business owned and operated by one person—or, in some
jurisdictions, by a husband and wife. [7]

Solvency laws. Laws designed to ensure that insurance companies are financially
able to meet their debts and to pay policy benefits when they come due. [8]
Special investigative unit (SIU). A group of individuals who are employed by an
insurance company and are responsible for detecting, investing, and resolving
cases involving insurance fraud. [11]
Specialized medical questionnaire. A document that requests detailed informa-
tion about a specific illness or condition from a proposed insured’s attending
physician or examining physician. [4]
Speculation. The unethical purchase of insurance to make a profit on the proceeds
rather than to protect against the risk of financial loss. [5]
Speech recognition technology. A type of technology that enables a computer
to recognize spoken words by converting human speech into a string of text or
program commands. Also known as voice recognition technology or natural
language technology. [9]
Split-dollar life insurance plan. A legal arrangement between an employer and
an employee that describes (1) how each party to the arrangement will contrib-
ute to the employee’s life insurance premium payments and (2) the nature of
each party’s entitlement to the policy’s cash value and death benefits. [6]
Step rating. A method of determining group insurance premium rates in which
an insurer’s accumulated claim experience is used to create rate tables that are
divided into a series of age-graded, and sometimes sex-specific, steps. [7]
Stock redemption agreement. In a corporate setting, the method of funding a
buy-sell agreement, under which proceeds from an insurance policy on the
life of a deceased stockholder provide the remaining stockholders with money
to buy back the stock of the deceased stockholder rather than distributing the
shares to surviving stockholders. [6]
STOLI. See stranger-originated life insurance. [5]
STP. See straight-through processing. [2]
Straight-through processing (STP). The electronic processing of every step of a
transaction without manual intervention. [2]
Stranger-originated life insurance (STOLI). Life insurance for which an inves-
tor (or group of investors), acting as a third part, instigates the purchase of a
policy on the life of a person in whom the investor has no insurable interest. [5]
Standard class. A risk class composed of proposed insureds whose anticipated
mortality rates are average. [3]
Structured question. A question in a survey that offers a set of fixed alternatives.
[10]
Substandard class. A risk class composed of proposed insured’s whose antici-
pated mortality rates are higher than average, but who are still considered to
be insurable. [3]

Suitability requirement. A regulatory requirement that imposes a duty on finan-

cial professionals and insurers to have reasonable grounds on which to believe
a recommended is suitable for a customer’s needs. [3]
Supplemental benefit. A benefit or additional coverage added to the coverage
specified in a basic insurance policy. [6]
Surplus. The amount of assets a company has over and above its policy reserves
and other financial obligations. [8]
Surplus relief. A decrease in potential surplus strain that strengthens an insurer’s
financial position. [8]
Surplus strain. The decrease in surplus caused by the high initial costs and reserve
requirements associated with issuing new insurance policies. Also called new
business strain. [8]
Survey. A device used to gather quantitative data about a customer’s attitudes,
knowledge, buying behavior, and preferences toward a particular product, ser-
vice, or administrative process. [10]
Survivorship clause. A clause contained in some life insurance policies that states
that the beneficiary must survive the insured by a specified period, usually 30 or
60 days, to be entitled to receive the policy proceeds. [12]
Suspicious Activity Report (SAR). A form that a financial institution must pre-
pare and file with FinCEN whenever the institution detects evidence of a ques-
tionable financial transactions among its customers. [5]
Table rating method. A method for adjusting individual life insurance premium
rates to compensate for extra mortality that divides substandard risks into broad
groups—or tables— according to the values assigned by the numerical rating
system. [5]
Team underwriting. A work division system in which underwriters are divided
into small groups. [3]
Teleunderwriting. A method by which the insurer, rather than a financial profes-
sional, takes responsibility for gathering from the proposed insured most of the
information needed for underwriting. [3]
Temporary flat extra premium. An flat amount added to the premium for cases
in which a personal risk factor is expected to remain constant throughout the
life of the policy. [5]
Temporary insurance agreement (TIA). A contract between an insurer and an
applicant that provides temporary coverage on the proposed insured before
a policy is issued and delivered; such coverage may be subject to certain
conditions. [3]
Terminal illness (TI) benefit. An accelerated death benefit under which the
insurer pays a portion of the policy’s death benefit to the policyowner if the
insured suffers from a terminal illness and has a physician-certified life expec-
tancy of less than a specified time, generally 12 or 24 months. [6]

Third-party administrator (TPA). An organization that is not affiliated with an

insurer and that provides various administrative services to insurers and group
policyholders. [7]
Third-party policy. An individual insurance policy purchased by one person to
insure the life of another person. [1]
TIA. See temporary insurance agreement. [3]
TI. See terminal illness benefit. [6]
Touchpoint. Points of contact between a company and its customers. [1]
TPA. See third-party administrator. [7]
Traditional indemnity reinsurance. A reinsurance arrangement that is used to
transfer a portion of a direct writer’s accepted risk on an ongoing basis and that
is intended to be a permanent transfer. [8]
Transaction report. See policy change report. [8]
Treasury operations. The functional area of an insurance company that manages
cash as if flows through the company. [1]
Turnaround time. The amount of time necessary to complete a particular customer-
initiated request or transaction. Also known as average handling time. [10]
Twisting. A prohibited sales practice that occurs when a financial professional
misrepresents the features of a policy to induce a client to replace an existing
policy, often to the client’s disadvantage. [6]
Unassigned policyowner. A policyowner who bought a policy with the assistance
of a financial professional but who currently does not have a relationship with
that financial professional. [10]
Underwriter. An insurance company employee who performs the risk assessment,
classification, and selection activities involved in the underwriting p rocess. [1]
Underwriting. The process of (1) assessing and classifying the degree of risk
represented by a proposed insured or group with respect to a specific insurance
product and (2) making a decision to accept or decline that risk. [1]
Underwriting capacity. The highest monetary amount of risk that a direct writ-
ing company will accept on an individual insured so that unusual fluctuations
in claims will not damage ongoing company solvency. Also called risk-taking
capacity. [8]
Underwriting guidelines. General standards that underwriters follow as they
establish the level of risk presented by a proposed insured or group. [3]
Underwriting manual. A document that contains values assigned to a proposed
insured’s debits and credits and typically provides descriptive information on
impairments and services as a guide to underwriting action. [5]
Underwriting worksheet. A document that contains records of telephone calls,
letters, and other communications; documentation of requests for reinsurance;
lists of reports and other information requested; and other notations that explain
clearly the manner in which the underwriter has handled a case, beginning with
the submission of the application to the insurer. [3]

Unearned income. Income that may continue after a person dies, such as interest
income, dividends, and capital gains on investments. Also referred to as passive
income. [5]
Unfair Claims Settlement Practices Act. A state law, based on the NAIC model
law, which lists a number of actions that are considered unfair claims practices
if committed by an insurer (1) in conscious disregard of the law or (2) so fre-
quently as to indicate a general business practice. [11]
Unfair Life, Accident and Health Claims Settlement Practices Model Regula-
tion. A state law, based on the NAIC model law, which establishes the mini-
mum standards that insurers must meet in handling life and health insurance
claims. [11]
Unfair Trade Practices Act. An NAIC model law that defines certain practices as
unfair and prohibits them when they are committed (1) flagrantly in conscious
disregard of the law or (2) so frequently as to indicate a general business prac-
tices. [2]
Unstructured question. An open-ended question that does not provide specific
answer choices. [10]
USA Patriot Act of 2001. A U.S. federal law designed to strengthen the federal
government’s ability to investigate, prosecute, and seize the assets of terrorists.
[5]
Variable life insurance (VL). A form of cash value life insurance in which pre-
miums are fixed, but the death benefit and other values vary in response to the
performance of the subaccount investments backing the contract. [10]
Variable universal life insurance (VUL). A form of cash value life insurance
that combines the premium and death benefit flexibility of universal life insur-
ance with the investment flexibility and risk of variable life insurance. [10]
Video conferencing. A method of electronic communication in which partici-
pants can see and hear one another. [9]
VL. See variable life insurance. [10]
VOC. See voice of the customer. [10]
Voice of the customer. The in-depth process of capturing customers’ expecta-
tions, preferences, and aversions. [10]
Voice recognition technology. See speech recognition technology. [9]
VUL. See variable universal life insurance. [10]
Waiting period. See probationary period. [7]
Waiver of premium for disability (WP) benefit. A supplemental life insurance
policy benefit that provides that, in the event an insured is totally disabled as
defined in the WP benefit, the insurance company will waive the payment of all
premiums that become due during the period of disability. [6]

Waiver of premium for payor benefit. A supplemental life insurance policy bene-
fit often included in juvenile life insurance policies that provides that the insurer
will waive its right to collect the policy’s renewal premiums if the payor—the
person paying the policy premiums—dies or becomes totally disabled before
the insured child reaches a specified age, usually 21. [6]
W-2 form. An Internal Revenue Service (IRS) tax form used by employers in
the United States to report wages paid to employees and taxes withheld from
employees within a given calendar year. [5]
Wagering agreement. An agreement under which either party to the agreement
may gain or lose depending on the outcome of an uncertain event. [3]
Work division system. A method of assigning cases to underwriters that divides
cases according to the person or group that underwrites them. [3]
Work group. See work team. [9]
Work team. A group that consists of two or more people who work together on a
regular basis and coordinate their activities to accomplish common goals. Also
known as work groups.

Insurance Administration Index INDEX.1
Index
Numbers in italics indicate figures antiselection, 3.16, 3.17, 5.2, 5.3, 5.15
age and, 4.13
——— buy-sell agreements and, 6.15
creditor insurance and, 6.17
A

D2C products and, 6.5
group insurance and, 7.13
abandonment rate, 10.33 guaranteed insurability benefits and, 6.22
absolute assignment, 10.17–10.18, 12.14 juvenile insurance and, 6.4
accelerated death benefit, 6.20, 6.23–6.26, late enrollees and, 7.21
12.22, 12.23–12.24 policy replacement and, 6.18
accidental death benefit, 5.14, 6.20, Apple, 9.5
6.23, 6.26, 12.23 applicant, 1.3
accident hazards, 4.16 application for insurance, 4.4, 6.8
accounting, 1.7 completion and submission of, 3.7–3.9
reinsurance and, 8.16, 8.17, 8.19 as financial information source, 5.7–5.9
ACD. See automatic call distributor financial professionals commenting on, 3.6
acid-test ratio, 6.12 formal, 3.4, 3.5
ACLI. See American Council of Life Insurers good order check on, 3.10–3.11
actively at work provision, 7.15 informal, 3.3–3.4
activities of daily living, 6.25 information included on, 3.4–3.6, 4.4–4.5
actuary, 1.6, 3.29 (kt is actuary on p. 1.6) as personal information source, 4.15
reinsurance and, 8.16, 8.19 processing of, 3.3, 3.14–3.15
structuring premium rates, 3.21 status updates on, 3.10
ADB. See accidental death benefit underwriters’ assignment and, 3.28
address changes, 10.5–10.6 application triage, 3.30, 4.5
ADL. See activities of daily living apps. See mobile applications
administration systems, 2.10–2.15 APS. See attending physician’s statement
administrative services only arrangement, 7.7 ASO. See administrative services only
adverse action, 2.3 arrangement
adverse underwriting decisions, asset-based approach, to business valuation,
communication of, 3.13 6.10
affinity group, 7.11 assets, 5.12, 5.13
age business valuation and, 6.10
misstatement of, 12.18–12.20 assignee, 10.17, 12.24
mortality risk and, 4.13 assignment, 10.17–10.18
nonmedical coverage limits and, 4.4 assignment form, 10.19
age and amount requirements chart, 3.7, 3.8, assignor, 10.17
4.2, 4.5 association groups, 7.11, 7.15
agent statements, as personal information assuming company. See reinsurer
source, 4.15 assumption certificate, 8.4–8.5
alcohol markers, 4.20 assumption reinsurance, 8.4–8.5, 8.6
alcohol use, as underwriting factor, 4.15, 4.16, attachment point, 8.13
4.20 attending physician, 4.8–4.10
allowances, reinsurance and, 8.27 attending physician’s statement, 4.3,
Amazon, 9.5 4.8–4.10, 7.10
American Council of Life Insurers, 11.13 audits
ANI. See automatic number identification reinsurance and, 8.17, 8.19
annual income, 5.14 underwriting and, 3.15
annual report, 5.12 auto-adjudication, for claim processing, 11.9,
annuities, suitability checks for, 3.11 11.10–11.11
automated decision-making systems, 2.13

INDEX.2 Index Insurance Administration
automated underwriting, 3.29–3.30, 4.2 business continuation insurance plan, 6.6–6.7

automated workflow systems, 2.13, 2.14, business continuity planning, 2.18
11.9–11.10 businesses
automatic binding limit, 8.9 financial assessment of, 6.8–6.13
automatic call distributor (ACD), 9.12 financial stress in, signs of, 6.9
automatic deduction plan, 10.23 owners of, financial statements of, 5.11
automatic number identification (ANI), 9.13 valuation of, 6.10
automatic reinsurance, 8.8–8.10, business financial supplement, 6.8
8.12, 8.20, 8.28 business insurance, underwriting of, 6.6–6.17
automatic retrocession arrangements, 8.24 business intelligence, 2.18–2.21
average-age approach, multi-life policies business life insurance, needs met by, 6.6–6.7
and, 6.3 business process management, 2.12–2.14
average hold time, 2.8 business process outsourcing, 2.12–2.13
average speed of answer, 10.33 business rules engines, 2.14, 3.4
aviation activities, underwriting and, 4.15, 4.17, e-applications and, 3.9
4.21–4.22, 12.10 underwriting and, 3.30
avocations, underwriting and, 3.22, 4.15–4.17, buy-sell agreement, 6.6, 6.14–6.16
5.23, 12.10
C
B CAI. See Claims Activity Index
balance sheet, 5.12 call center, 9.8, 9.10, 9.12, 9.18
bankruptcy, as underwriting factor, 5.15 Canada
benchmarks, 2.7, 11.16 discrimination and underwriting in, 3.20
beneficiary, 1.3 policy rescission in, 3.19
change of, 10.15–10.17, 12.13 carbohydrate-deficient transferring tests, 4.20
choosing settlement option, 12.22 case (in reinsurance), 8.2
death of, 12.15 case assignment system, 3.27–3.28, 11.7
designations, 10.16 case files, 3.10
determining, 12.11–12.13 case managers, 3.10
disappearance of, 12.15 cash flow statement, 5.12
disqualification of, 12.15 cash surrender request form, 10.24–10.25
killing an insured, 12.15 cash value, as asset, 5.14
not named, 12.12 catastrophe coverage (cat cover), 8.13
simultaneous death of, with the insured, CCXO. See chief customer experience officer
12.16 CDT tests. See carbohydrate-deficient
benefits transferring tests
customer questions about, 10.3 cede, 8.3
unclaimed, 11.13 ceding commission, 8.27
See also death benefit; policy proceeds ceding company, 8.3
benefit schedule, 7.7 CEM. See customer experience management
benefit transmittal, 7.4–7.5 census, 7.5
BI. See business intelligence certificate of coverage, 10.14
big data, 2.18–2.21 cession arrangements, 8.8–8.11
billing statements, for reinsurance, 8.27, 8.29 cessions, 8.8
blended rating, 7.19 change in health statement, 12.10
block of business, 8.2 charitable contributions, insurance proceeds
blood chemistry profile, 4.11 used for, 5.13
body mass index (BMI), 4.14–4.15 chief customer experience officer (chief
BPM. See business process management customer officer; chief
BPM technology suite, 2.12 experience officer), 1.13
BPO. See business process outsourcing chief underwriter, 3.24–3.27, 3.29
BREs. See business rules engines children, life insurance for, 6.3–6.4
B2B e-commerce. See business-to-business chronic illness benefit, 6.24, 6.25, 6.26
e-commerce churning, 6.18
build, 4.13–4.14 civilian aviation, 4.21–4.22
build charts, 4.14 claim adjusters, 11.4
business-to-business (B2B) e-commerce, 8.20 claim administration, 1.5–1.6

activities in, 11.2–11.3 communications, policy conservation and,

approval authorities for, 11.6 10.28–10.31
efficiencies in, 11.9–11.11 community property laws, 12.18
external evaluation of, 11.17 commuting of risks (in reinsurance), 8.5
internal evaluation of, 11.16–11.17 comorbidity, 3.22
legal and compliance issues with, 11.11 compensatory damages, 11.11
for life insurance, 12.2–12.22 complaints
for supplemental benefits, 12.22–12.24 handling of, 9.19, 10.14–10.15
manuals for, 8.8 information documented for, 9.20
organizational systems for, 11.7–11.8 monitoring of, 10.34
outsourcing of, 11.7 complaint team, 10.15
in the policy life cycle, 11.2 compliance department, 1.7, 1.9, 2.2–2.6
promptness required for, 12.3 reinsurance and, 8.17, 8.19
quality measurements for, 11.16–11.17 compromise settlements, 12.9
regulations governing, 11.11–11.15 computer network, 2.11
reinsurance and, 8.17–8.18, 8.19, computer telephony integration, 9.12–9.13
12.24–12.28 concurrent beneficiary, 10.16
relationship with other functions, 11.8–11.9 confidentiality, MIB information and, 4.8
staffing for, 11.4–11.6 conservation, 10.28–10.30
claim analysts, 11.4, 11.6, 11.8–11.9 consumer data, 4.3
claimant’s statement, 11.4 consumer information, 2.4
claim evaluation process, 11.5 consumer report, 2.3
claim examiners, 11.4 consumer reporting agencies, 2.3, 4.10
claim experience, 1.10, 3.21 contestable period, 3.19, 12.11
claim file, establishing of, for reinsurance, reinsurance and, 12.27
12.24–12.25 contingent beneficiary, 10.16, 12.16
claim forms, 11.4, 12.2, 12.3–12.4 contractual reserve, 8.4
claim fraud, 11.14–11.15 contributory plan, 7.4–7.5, 7.8, 7.15, 7.18, 7.21,
claim philosophy, 11.2 10.12
claim practices, 11.2–11.3 conversion provision, 10.18–10.21
claims customer-centric culture, 1.11–1.13.
conflicting, 12.16–12.18 See also customer-centric philosophy
equitable handling of, 1.15 corporations, buy-sell agreements and,
evaluation process for, 11.4, 11.5 6.15–6.16
fraud and, 1.6, 2.5, 11.6, 11.8, 11.14–11.15 cost basis, 6.19
payments of, fluctuations in, 8.7 coupon plan, 10.22
Claims Activity Index (MIB Group), cover letter, financial underwriting and, 5.9
11.14–11.15 CRC information. See criminal record check
claims processing information
customer service and, 10.31–10.32 credibility factor, 7.19
steps in, 12.4–12.22 creditor-debtor groups, 7.11 NOTE: in text,
claim supervisors, 11.4, 11.6, 12.28 presented as “debtor-creditor groups”
claim turnaround time, 2.8 creditor insurance, 6.7, 6.17
class (for group insurance), 7.4, 7.13, 7.14 credit records, 4.3
class designation, for beneficiaries, 10.16 credits, underwriting and, 5.19–5.23
click-wrap, 3.9 criminal history, as underwriting factor, 4.15,
client administrators, 8.15 4.21
client portal, 9.13–9.14 criminal record check information, 4.18
closed-book business, 2.12–2.13 critical illness benefit, 6.24, 6.26
close notice, 8.24 CRM system. See customer relationship
collateral assignment, 10.18, 12.14 management system
commercial fraud, 6.8, 6.9 cross-purchase agreement, 6.14–6.15
committee underwriting, 3.29 CSR. See customer service representatives
communication channels, 9.5, 9.11, CTI. See computer telephony integration
9.16–9.17, 10.28 current assets, 6.12
communication method, organization by, for current income, 5.14
customer service, 9.8–9.9 current liabilities, 6.12

current ratio, 6.12, 6.13 data visualization tools, 2.9–2.10, 2.18

customer-centric culture, 1.12 data warehouse, 2.15, 2.16
customer-centric philosophy, 1.11–1.13 date of expiry, 8.24
customer contact center, 9.6–9.7 DBMS. See database management system
customer contact system, 9.10 DD benefit. See dread disease benefit
customer experience, 1.8–1.13 death, verification of, 12.7–9
customer experience management, 1.9, death benefit
1.13–1.14 calculation of, 12.18–12.20, 12.21
customer information, protection of, 1.14, denying payment of, 12.28
2.3–2.5 death certificate, 12.2, 12.7
customer journey, 1.11 Death Master File (Social Security
customer journey map, 1.11 Administration), 11.13
customer relationship management system, debits, underwriting and, 4.14, 5.19–5.23
9.10–9.11 debt coverage, 6.7
customers debt-to-equity ratio, 6.11
organization by, for customer service, 9.8 debtor-creditor groups, 7.11
retention of, 1.5 debt ratio, 6.11
customer service, 1.5, 1.9, 9.2 declined cases, 3.27
activities performed by, 9.3 declined class, 3.20, 3.21
benefits of, 9.4 defamation, 11.15
complex transactions for, 10.15–10.27 dependents (for group insurance), 7.5, 7.15
customer experience and, 9.5 descriptive analytics, 2.19
data analysis in, 9.17–9.18 direct billing method, 10.12
expectations of, 9.5 direct-to-consumer sales, 6.2, 6.4–6.5
function of, 9.5–9.9 direct writer, 8.3–8.4, 12.24–12.28
guidelines for, 9.5 disability, 6.20, 6.21, 6.26, 12.22
information sharing for, 9.10 disability benefits, 6.20–6.21
insurer employees involved in, 9.4 disability income benefit, 6.20–6.21, 6.26
legal issues affecting, 9.18–9.21 disaster recovery planning, 2.18
organization of, 9.6–9.9 discrimination, underwriting and, 4.13
quality control for, 10.32–10.35 distribution system, organization by, for
routine transactions for, 10.2–10.15 customer service, 9.8
self-service options for, 9.13–9.14, 9.15 dividend options, 10.21
technology for, 9.6, 9.9–9.18 dividend plan, 10.22
training for, 9.6 divisible surplus, 10.21
cybersecurity, 2.16–2.18 divorce, spousal rights following, 12.17–12.18
DMF. See Death Master File
D document imaging, 2.13
document management systems, 2.13
dashboards, 2.9–2.10 double indemnity benefit, 6.23
data dread disease benefit, 6.24
analysis of, 2.18–2.21. driving history, as underwriting factor, 4.15,
See also data analytics 4.16, 4.17, 5.23
entry of, from applications, 3.10 drop notice, 8.24
interpretation of, 2.18–2.21 drug use, as underwriting factor, 4.11, 4.12,
management of, 2.15–2.16 4.15, 4.16, 4.20
power of, 2.15 D2C sales. See direct-to-consumer sales
protection of, 2.16–2.18 due diligence, 5.6
real-time, 2.20–2.21
security breaches and, 2.18
data analytics, 2.19–2.20, 5.9, 9.17–9.18 E
data backups, 2.18 e-applications, 3.29
database management systems, 2.16, 8.20 earned income, 5.14, 5.15
databases, 2.15, 2.16 ECG. See electrocardiogram
data entry, 3.3 EFT. See electronic funds transfer
data governance, 2.16 EHR. See electronic health records
data mining, 2.16, 2.19 EIRs. See electronic inspection reports
data scientists, 2.21 electrocardiogram, 4.11

electronic application system (e-applications), family income protection, 5.13

3.7, 3.8–3.9 family policies, 12.6
electronic commerce (e-commerce), 8.20 FCRA. See Fair Credit Reporting Act
electronic funds transfer, 10.12 field underwriting, 3.2–3.10
electronic funds transfer arrangement, 10.12 field underwriting manual, 3.6–3.7, 3.8
electronic health records, 4.3, 4.8 financial capacity, 8.7
electronic inspection reports, 5.9 Financial Crimes Enforcement Network,
electronic signature (e-signature), 3.9 5.6–5.7
eligibility period, 7.15 financial professional, 1.4
empathy, 9.2 churning by, 6.18
employee benefit plan, 6.7 commenting on applications for
Employee Retirement Income Security Act, insurance, 3.6, 6.8
7.7, 7.8, 12.3 customer service and, 9.4
employer-employee groups, 7.11, 7.15 as financial information source, 5.7, 5.9
enrollment cards, 7.9 policyowner engagement with, 10.30
enrollment period, 7.15 relationship of, with underwriters, 3.24
entity agreement, 6.14, 6.15 replacement-related duties of, 6.19
equity, 5.12 underwriters’ relationships with, 3.28
ERISA. See Employee Retirement Income financial questionnaires, 5.7, 5.10–5.11, 6.15
Security Act financial ratio analysis, 6.11–6.13
error rate, 10.33 financial risk factors, 3.16, 3.22, 5.18
escalation process, 10.15 financial statements, 6.8
estate, 5.13 underwriters’ use of, 5.11–5.12
estate protection, 5.16, 5.17, 6.2 financial status, 5.7
estate taxes underwriters’ assessment of, 5.14–5.15
estimates of, 5.17–5.18 financial underwriting, 5.2–5.18
insurance and, 5.11 assessing insurance amounts, 5.15–5.18
payment of, 5.13, 6.2 assessing insurance needs through,
ethics, company administration and, 1.14–1.15 5.12–5.15
examining physician, 4.8–4.10 information used in, 5.7–5.12
exception-based underwriting, 2.14 multi-life policies and, 6.3
exclusion, 3.12 risks deterred by, 5.2–5.7
exculpatory statutes, 12.18 FinCEN. See Financial Crimes Enforcement
expected claim experience, 7.18 Network
expense allowance, reinsurance and, 8.27 finite reinsurance, 8.5
expense ratio, 2.8 first contact resolution, 10.33
experience rating, 7.18, 7.19 first-to-die life insurance policy.
experience refund, 7.18 See joint life insurance policy
express claim processing systems, 11.9, 11.10 fixed-amount option, 12.21
extension request, 8.24 fixed-period option, 12.21
external audits, 3.15 flat extra premium method, 5.21, 5.22–5.24
external network, 2.11 foreign citizenship, as underwriting factor,
external replacement, 6.18 4.15, 4.23
extranet, 2.11 foreign death questionnaire, 12.7
extra-percentage table, 5.22, 5.23 Form 4506-T, 5.10
formal application, 3.4
F fraud, 2.5–2.6
claims and, 1.6, 2.5, 11.6, 11.8, 11.14–11.15
fac-ob reinsurance. See facultative-obligatory commercial, 6.8, 6.9
reinsurance CSRs’ identification of, 9.19
fac-ob retrocession arrangements, 8.24 deaths abroad and, 12.7
factor tables, 5.15–5.16 denial of benefits and, 12.28
facultative application, 8.22 determination of, for reinsurance, 12.27
facultative-obligatory reinsurance, 8.8, 8.11, misrepresentation and, 3.19
8.12, 8.20, 8.22, 8.24 STOLI as, 5.5
facultative reinsurance, 8.8, 8.10–8.11, 8.12, suspicion of, 12.11
8.20, 8.22–8.24, 8.28 fully insured group plan, 7.7
Fair Credit Reporting Act, 2.3, 4.10, 4.19, 11.14
family benefits, 6.20, 6.22, 6.26, 12.22, 12.23

G I
gender, underwriting and, 4.13. See also sex IAI. See Insurance Activity Index
GI benefit. See guaranteed insurability benefit ICA. See International Claim Association
GLB Act. See Gramm-Leach-Bliley Act ICR. See intelligent call routing; intelligent
good order check, 3.10–3.11 character recognition
grace period, 10.13 identity theft, 2.3
insured’s death during, 12.5 IGO. See in good order
graded benefits, 6.5 impairment guide, 3.7, 3.8
Gramm-Leach-Bliley Act, 2.4, 11.14 impairments, 3.7, 4.12, 4.14, 4.19, 8.8
group insurance income, potential for, as underwriting factor,
customer service for, 1.5 5.14, 5.16
insurable interest and, 3.16 income-based approach, to business valuation,
group insurance policy, 7.3 6.10
group insurance underwriting income replacement, 5.15–5.16
departments for, 3.27 income statement, 5.12
guidelines for, 3.22 incontestability provision, 3.19
plan design for, 7.15 indemnity reinsurance, 8.4–8.8
post-issue, 7.21–7.22 independent underwriting, 3.28
premium calculations and, 7.16–7.20 individual life insurance
process for, 7.2–7.9 converting coverage on, 10.20
proposed coverage and, 7.15–7.16 financial underwriting for, 5.2–5.18
rating methods for, 7.16–7.20 medical information sources for, 4.2–4.12
risk factors for, 7.9–7.15 medical risk factors for, 4.12–4.15
group insured, 1.3 personal information sources for, 4.15–4.16
group life coverage, converting to individual risk classification for, 5.18–5.24
coverage, 10.20–10.21 risk factors for, 4.16–4.23
group plan, 7.3 individual life insurance underwriting
group policyholder, 1.3 business life insurance, 6.6–6.17
group prospects, 1.3, 7.8 niche policies, 6.2–6.5
age of, 7.12 policy replacements, 6.18–6.20
applying for insurance, 7.2–7.9 supplemental benefits, 6.20–6.26
characteristics of, 7.10–7.15 industry experience, 3.23
claims experience of, 7.14–7.15 in-force experience, 1.10
geographic location of, 7.12 in-force policy report, for reinsurance, 8.26
group types, 7.10–7.11 in-force reinsurance, 8.21
membership turnover and, 7.12–7.13 informal applications (informals), 3.3–3.4
participation level of, 7.13 information
persistence of, 7.14 companies’ collection of, 2.3
prior coverage for, 7.14–7.15 integration of, 1.13
reason for existence, 7.10 protection of, 1.14
sex distribution of, 7.12 information management, 1.8
size of, 7.11 information security, 2.16
work performed by, 7.12 information system, 1.8
group representatives, 7.2, 7.8 reinsurance and, 8.18–8.20
guaranteed insurability benefit, 6.20, 6.22, 6.26 updates to, 2.11
guaranteed-issue basis, 6.5 information technology, 1.8, 1.9
guaranteed-issue policies, 3.31 claim administration and, 11.9
customer service and, 9.6, 9.9–9.18
H investment in, 1.13
in good order (IGO), 3.10–3.11
health declaration form, 10.10 initial premiums, 3.9
health hazards, 4.16 inspection reports, 4.2, 4.10–4.11, 4.21, 5.9, 6.8
Health Insurance Portability and as financial information source, 5.7
Accountability Act, 2.4, 12.11 as personal information source, 4.15
health questionnaires, 7.10 Instant ID, 4.3
HIPAA. See Health Insurance Portability and
Accountability Act
human resources, 1.7, 1.9

insurable interest, 3.16, 3.17, 5.4–5.5, 12.12 irrevocable beneficiary, 10.16, 10.17–10.18,
business life insurance and, 6.6 12.13, 12.14, 12.16, 12.24
buy-sell agreements and, 6.14 IT. See information technology
creditor insurance and, 6.7 IVR system. See interactive voice response
juvenile insurance and, 6.4 system
key-person life insurance and, 6.16
insurance
amounts of, tools for determining, 5.15–
J
5.18 joint life insurance policy, 6.2, 6.3
verification of coverage, 12.5–12.6, 12.9– jumbo limit, 8.9
12.11 junior underwriter, 3.24, 3.25, 3.26
Insurance Activity Index, 4.7 juvenile insurance policies, 6.2, 6.3–6.4
insurance administration, 1.3
areas of, 1.4–1.8 K
customer service and, 1.9 key performance indicators, 2.8–2.9
quality control and, 2.6–2.10 key person, 6.5, 6.6
insurance companies, financial position of, 1.15 key-person life insurance, 5.16, 6.5, 6.7, 6.16,
insurance contracts, duplicates of, 10.13–10.14 6.17
Insurance Data Security Model Law (NAIC), knowledge management systems, 2.13, 2.15
2.17 Know Your Customer, 5.6–5.7
insurance fraud, 2.5–2.6, 11.14 KPIs. See key performance indicators
Insurance Fraud Prevention Model Act KYC. See Know Your Customer
(NAIC), 11.14 [QY: Note different names.
Make text consistent and merge index
entries accordingly] L
insurance in force lab results, 4.3
juvenile insurance and, 6.4 lapse, 5.2, 5.3, 10.23
underwriters’ consideration of, 5.14 lapse notice, 10.13
insurance industry, disruptions in, 1.14 last survivor life insurance policy, 6.2, 6.3
Insurance Information and Privacy Protection late enrollee, 7.21
Model Act (NAIC), 2.5, 4.8 late payment offer, 10.13
insured, 1.3 laws, 2.2
disappearance of, 12.7–12.9 legacy systems, 2.11
reappearance of, 12.9 legal department (law department), 1.7, 3.29
insurer-administered group contracts, 10.5, reinsurance and, 8.16, 8.19
10.6 LexisNexis Risk Solutions, 4.3
insurer-administered plan, 7.16 liabilities, 5.12, 5.13
intangible assets, 6.10 liens, 5.9
intelligent call routing, 9.12 life income option, 12.21
intelligent character recognition, 2.13 life insurance, need for, assessment of, 5.12–5.13
interactive voice response (IVR) system, 9.12 life settlement, 5.4–5.5
interest option, 12.21 life settlement providers, 5.4–5.5
intermediate underwriter, 3.24, 3.25, 3.26 liquidity, 6.12
internal audits, 3.15 liver function tests, 4.20
internal networks, 2.11 living benefit. See accelerated death benefit,
internal replacement, 6.18 6.23
Internal Revenue Service, 5.10, 6.19, 7.15 loan coverage, 6.7
International Claim Association, 11.3 long-term care insurance benefit, 6.24, 6.25,
international residence and travel, as 6.26, 12.24
underwriting factor, 4.15, 4.23 loss rate, 3.21
interpleader, 12.16 lost policy request form, 10.14
intranets, 2.11 LTC insurance benefit. See long-term care
invalid claims, 1.6 insurance benefit
invasion of privacy, 11.15 lump-sum plan, 10.22
investigative consumer report, 4.10

M MVR. See motor vehicle records

mystery shopper, 10.34
mail, returned, CSRs’ handling of, 10.6
manual rating, 7.17–7.18
market approach, to business valuation, 6.10 N
market conduct examinations, 2.6, 11.17 NAIC. See National Association of Insurance
market conduct laws, 2.6, 8.4, 11.11 Commissioners
marketing, 1.6 name changes, 10.4–10.5
reinsurance and, 8.19 NAR. See net amount at risk
master application, 7.3, 7.8 National Association of Insurance
master group insurance contract, 7.3, 7.8–7.9 Commissioners, 2.2–2.3, 5.5
material misrepresentation, 3.16, 3.18, 4.16, Cybersecurity Task Force, 2.17
12.11 Insurance Data Security Model Law, 2.17
medical director, 3.25, 3.29 Insurance Fraud Prevention Model Act,
medical examination, 7.10 11.14
medical history, 4.4–4.5 Insurance Information and Privacy
medical information, 3.4, 3.5 Protection Model Act, 4.8
sources of, 4.2–4.12 model fraud law of, 2.5
medical report, 4.5 Model Privacy Act, 11.14, 11.15
medical risk factors, 3.16, 3.22, 5.18–5.19 model privacy laws of, 2.4
assessment of, 4.12–4.15 Model Privacy Regulation, 11.14
misrepresentation of, 5.3 Replacement of Life Insurance and
medical tests, 4.2, 4.10, 4.11 Annuities Model Regulation, 6.18
member service, 1.5 Unfair Claims Settlement Practices Act,
metrics, 2.7–2.9, 3.15 11.11, 11.12, 11.17
MEWA. See multiple-employer welfare Unfair Life, Accident and Health Claims
arrangement Settlement Practices Model Regulation,
MIB Group, Inc. (MIB), 4.2, 4.3, 4.5–4.8, 4.10, 11.11, 11.12–11.13, 11.17
11.14–11.15, 12.27 Unfair Trade Practices Act, 2.6
military aviation, 4.22 Uniform Disposition of Unclaimed
military status, as underwriting factor, 4.15, Property Act, 12.15
4.22 National Conference of Insurance Legislators,
Milliman, 4.3 5.5
minimum cession, 8.9 natural language technology, 9.12
misdirected calls, 10.33 NCOIL. See National Conference of Insurance
misrepresentation, 3.18, 5.3, 11.8, 12.11 Legislators
misstatement of age or sex, 12.19–12.20 net amount at risk, 8.29, 12.27
mobile applications (apps), 9.14, 9.15 net cash surrender value, 10.23
model laws, 2.3, 5.5 net worth, 5.7
Model Privacy Act (NAIC), 2.4, 2.5, 11.14, as underwriting factor, 5.14
11.15 netting off, 12.28
Model Privacy Regulation (NAIC), 2.4, 11.14 new business, 1.4
model regulations, 2.3. See also National case analysts for, 3.10
Association of Insurance Commissioners insured’s death during processing of, 12.5
money laundering, 5.2, 5.6–5.7 processing of, 3.2–3.13
moral hazard, 3.16, 3.19–3.20, 4.20 quality control and, 3.14–3.15
morbidity, 3.16 new business strain, 8.7
morbidity rate, 3.16 niche policies, underwriting of, 6.2–6.5
mortality, 3.16 NIGO. See not in good order
mortality rate, 3.16, 3.20-3.21 noncontributory plan, 7.5, 7.8, 7.15, 7.21, 10.12
mortality risk, 3.20–3.21 nondiscrimination, underwriting and, 3.16,
accidental death benefits and, 6.22 3.20
family benefits and, 6.22 nonmedical application, juvenile policies and,
premium rates and, 5.19–5.23 6.3
scoring of, 5.19 nonmedical information, 3.4, 3.5
motor vehicle records, 4.3, 4.16 nonmedical limit, 4.4
multichannel service, 9.16 nonmedical supplement, 4.4, 4.5
multi-life policies, 6.2–6.3, 12.6 nonproportional reinsurance, 8.13
multiple-employer groups, 7.11 nonpublic personal financial information, 2.4
multiple-employer welfare arrangements, 7.11

nonpublic personal health information, 2.4 per stirpes beneficiary designation, 10.16
not in good order (NIGO), 3.11 pharmaceutical databases, 4.2, 4.12
notice of expiry, 8.25 pharmacy benefit managers, 4.12
number of blocked calls, 10.33 PHI. See personal history interview
numerical rating system, 5.18–5.21 physical abuse, as underwriting factor, 4.15,
4.20
O physician reports, 4.2, 4.8–4.10
placement (of reinsurance), 8.21, 8.25
obligatory reinsurance. See automatic plan administrator, 7.8
reinsurance policies
occupation, as underwriting factor, 3.22, 4.15, applicants’ acceptance of, 3.24
4.16–4.17, 5.23 assignments of, 10.15, 10.17–10.18,
OCR. See optical character recognition 12.13–12.14
Office of Foreign Assets Control (OFAC), 5.7, contestability of, 12.11
11.15 conservation of, 10.28–10.32
omnichannel service, 9.17 delivery of, 3.13
online shopping resources, 1.8 features of, customer questions about, 10.3
online sites, underwriting information found reinstatements of, 10.15, 10.25–10.27
on, 4.19 terminations of, 10.15, 10.23–10.25
open claimants, 7.6 policy change report, for reinsurance, 8.27
optical character recognition, 2.13 policy changes, 10.6–10.11
oral specimen (saliva) test, 4.11 underwriters’ assignments and, 3.28
outsourcing, 2.12–2.13, 11.7 (already policy conversions, 10.15, 10.18–10.21
introduced as “business process policy dividends, 10.15, 10.21
outsourcing” in ch. 2) – see p. 4 for reinsurance, 8.27
overinsurance, 5.2, 5.14, 5.17 policy exclusions, 12.9–12.10
owner’s equity, 5.12 policy exhibit, for reinsurance, 8.27
policy grace notice, 10.13
P policy issue, 3.3, 3.13
pain point, 1.11 policy life cycle, 1.2–1.3, 11.2
paperless processing, 2.13–2.14 policy loans, 10.15, 10.21, 10.22–23
paramedical exams, 4.5 policy proceeds, calculation of, 12.18–12.20,
paramedical report, 4.4 12.21
Part I, 3.4 policy replacements, underwriting of,
Part II, 3.4, 3.5 6.18–6.20
partial loan repayment plan, 10.22 policy reserve, 8.4
participating policy (par policy), 10.21 for reinsurance, 8.29
partnerships, buy-sell agreements and, policy riders, 3.12, 4.22, 6.26, 12.10
6.14–6.15 policyowner, 1.3
passive income, 5.14 policyowner service, 1.5
Patriot Act. See USA Patriot Act of 2001 pooling, 7.20
payee, policy proceeds payable to, 12.11–12.12 portfolio reinsurance. See assumption
PBM. See pharmacy benefit managers reinsurance
per capita beneficiary designation, 10.16 post-issue underwriting, for group life
percentage-of-income rule, 5.16–5.17 insurance, 7.21–7.22
performance dashboard, 2.9–2.10 postponed risk class, 3.21
performance measurement, 2.7 predictive analytics, 2.19, 3.30, 11.9
performance standards, 2.7, 11.16 preferred class, 3.20
permanent flat extra premium, 5.23 preferred risk, 5.19
persistency rate, 5.3 premium rates
personal history interview, 4.2, 4.10, 4.11 customer questions about, 10.3
personal information equitability of, 3.23, 5.21, 7.20
confidentiality of, 11.14 regulatory monitoring of, 3.23
sources of, 4.15–4.16 risk related to, 3.20–3.21, 3.23
personal questionnaires, 4.16, 4.17, 4.18 for substandard risks, 5.21–5.23
personal risk factors, 3.16, 3.22, 5.18–5.19 tobacco use and, 4.19
assessment of, 4.16–4.23 premium receipts, 3.9–3.10, 3.15, 12.5, 12.9

premium refund, 7.18 reflexive questions, 3.8–3.9

premiums, 3.9 reflexive tests, 4.10
overdue, 10.12–10.13 regulations, 2.2
payments of, changes in, 10.11–10.13 for claim administration, 11.11–11.15
preplacement (in reinsurance), 8.21–8.25 consumer complaints and, 9.19
prescription drug database, 4.3, 4.12 privacy, 9.21
prescription histories, 4.12 reinsurance and, 8.4
prescriptive analytics, 2.19 regulatory compliance, 2.2–2.6
presumptive death certificate, 12.7–12.8 reinstatement, 10.25–10.27
pretext interview, 11.14 insured’s death during, 12.5–12.6
primary beneficiary, 12.16 suicide exclusion and, 12.10
primary underwriting, 8.24 reinsurance, 1.4–1.5
privacy, 2.3–2.5 accounting and, 8.17, 8.19
claim administration and, 11.13–11.14 actuarial function and, 8.19
CSRs and, 9.21 administration of in-force business,
financial questionnaires and, 5.10-5.11 8.25–8.29
Privacy of Consumer Financial and Health auditing and, 8.17, 8.19
Information Regulation (NAIC), 2.4 capacity for, 8.6
probationary period, 7.8, 7.13 case files for, 8.22, 8.24
problem resolution team, 10.15 claim administration and, 8.19,
processes completed, 10.33 12.24–12.28
productivity, metrics for, 3.15 compliance and, 8.19
product life cycle, 1.10 information systems and, 8.18–8.20
products, organization by, for customer legal and, 8.19
service, 9.7 life cycle of, 8.21
professional association groups, 7.11 marketing and, 8.19
profitability, 6.12–6.13 new business administration for, 8.20
profit and loss statement, 5.12 placement of, 8.25
proof of loss, verifying, under reinsurance, processing coverage changes for, 8.28
12.26 purposes of, 8.4
proportional reinsurance, 8.12, 12.27 regulation of, 8.4
proposal for insurance, 7.2, 7.3, 7.7 shopping for, 8.22
proposed insured, 1.3 status codes for, 8.22, 8.23
punitive damages, 11.11 termination of, 8.21, 8.29–8.30
purchase experience, 1.10 underwriting and, 8.19
reinsurance account executive, 8.16
Q reinsurance administration, staffing and
systems for, 8.14–8.20, life cycle for 8.1
qualitative performance measurement, 2.7, reinsurance agreement, 8.2, 12.26
10.33–10.35 reinsurance analyst, 8.15
quality control, 2.6–2.10 reinsurance arrangements, 8.2–8.3
new business and, 3.14–3.15 reinsurance certificate, 8.25
quality rate, 10.33 reinsurance company. See reinsurer
quantitative performance measurement, 2.7, reinsurance department, 8.1
10.32, 10.33 reinsurance information systems, 8.18–8.19
queries, in a DBMS, 2.16 reinsurance intermediaries, 8.18
quick liquidity ratio, 6.12 reinsurance marketing officer, 8.16
quick ratio, 6.12, 6.13 reinsurance premium, 8.5
reinsurance specialists, 8.15
R reinsurance treaty, 8.2
rated cases. See rating reinsurer, 8.3–8.4
rated policies, 4.17 audits by, 3.15
rating, 3.11–3.12, 3.13, 3.27 expertise of, 8.8
ratio, 6.11 remote applications, 3.7–3.8
real-time data, 2.20-2.21 renewal underwriting, 7.21–7.22
real-time underwriting, 3.31
recapture of risks (in reinsurance), 8.5

Replacement of Life Insurance and Annuities security risks, 2.17, 2.18

Model Regulation (NAIC), 6.18 self-administered plan (self-administered
Replacement requirements, 6.19 group contracts), 7.16, 10.5, 10.6
“Report of Death of an American Citizen self-directed team (self-managed team), 9.7
Abroad,” 12.7 self-insured group plan, 7.7
reporting party (in reinsurance), 8.25 self-service, for customer service, 9.13–9.14,
request for coverage, 8.22 9.15
request for proposal, 7.2–7.6 semiautonomous team, 9.7
rescission, 3.18–3.19 senior underwriter, 3.24, 3.25, 3.26
reserved capacity, 8.21 service complaint, 10.14–10.15
reserve listing, for reinsurance, 8.28 service level, 10.33
responsive web design, 9.17 service recovery, 10.14–10.15
resting ECG, 4.11 service request, organization by, for customer
retention limit, 8.7, 8.9 service, 9.9
retrocedent, 8.3 settlement agreement, 12.11
retrocession, 8.24 settlement options, 12.20–12.22
claims and, 12.26, 12.28 sex, misstatement of, 12.19, 12.20
retrocessionaire, 8.3, 8.23 shopping experience, 1.10
retrocession claim file, 12.26 simplified-issue policies, 3.30–3.31
return-on-equity ratio, 6.13 simplified underwriting, 3.30–3.31
revenue per policyholder, 2.8 simultaneous death act, 12.16
revocable beneficiary, 10.16, 12.13, 12.14, 12.16 single-employer groups, 7.10
RFP. See request for proposal single-premium life insurance policies, 10.11
riders, 3.12, 4.22, 6.26, 10.11, 12.10 SIU. See special investigative unit
right of recommendation, 12.26 social media, 4.3, 9.16
risk underwriting information found on,
forms of, discrimination among, 3.20 4.18–4.19, 5.8–5.9
premium rates related to, 3.20–3.21, 3.23 sole proprietorships, buy-sell agreements and,
risk acceptance, equity in, 1.14 6.14
risk assessment, 1.4, 3.16–3.20 solvency, 6.11, 6.12
factors for, in group insurance, 8.12 solvency analysis, 6.11
facultative reinsurance and, 8.23–8.24 solvency laws, 8.4
guidelines for, 3.23–3.24 special investigative unit, for fraud, 11.6, 11.14
risk classes, 3.20–3.21 specialized medical questionnaire, 4.8, 4.9
risk classification, 1.4, 3.20–3.21, 5.18–5.24, specialized personal questionnaire, 4.17, 4.18
12.19 speculation, 5.2–5.6
guidelines for, 3.23–3.24 speech recognition technology, 9.12
risk factors, 3.16–3.20 split-dollar life insurance plan, 6.7, 6.17
for group underwriting, 7.9-7.10 standard class, 3.20, 3.21
risk selection, 1.4 statement of cash flows, 5.12
risk-sharing arrangements, 8.11–8.13 statement of changes in owners’ equity, 5.12
risk-taking capability. See underwriting statement of owners’ equity, 5.12
capacity Statement of Principles (ICA), 11.3
ROE ratio. See return-on-equity ratio statistical modeling, 2.19
routine customer service transactions, 10.2 status codes, for reinsurance, 8.22, 8.23
step rating, 7.20
S stock redemption agreement, 6.15
STOLI. See stranger-originated life insurance
sales channels, nontraditional, 3.31 straight-through processing (STP),
sales intermediary letter, 7.6–7.7 2.14–2.15, 3.29
SAR. See Suspicious Activity Report stranger-originated life insurance, 5.5–5.6
scorecards, 2.9–2.10 stress ECG, 4.11
screen pop, 9.13 structured questions, 10.32
second-to-die life insurance policy.
See last survivor life insurance policy
Section 1035 exchanges, 6.19–6.20

submission stage (for reinsurance), 8.25 treasury operations, 1.7

substandard class, 3.20, 3.21 triage approach, 3.30, 4.5
substandard risk, 5.18 trial apps, 3.3–3.4
premium rates for, 5.19–5.23 trip insurance, 4.23
table ratings for, 5.21 trusts, as beneficiaries, 5.6, 10.16, 10.17
suicide exclusions, 12.9 turnaround time, 10.33
suitability requirement, 3.11 twisting, 6.18
supplemental benefits, 6.2, 6.4

claim administration for, 12.22–24
underwriting of, 6.20–6.26
U
surplus, 8.7 unassigned policyowners, 10.31
surplus relief, 8.7 unclaimed benefits, 11.13
surplus strain, 8.7 undeliverable, 3.24
survey, 10.32 underwriters, 1.4, 3.24–3.27
survivorship clause, 12.16 quality control and, 3.14–3.15
Suspicious Activity Report, 5.7 relationships with financial professionals,
3.24, 3.28
T work division system for, 3.28–3.29

underwriting, 1.4, 1.9
table rating method, 5.21–5.22, 5.24 adverse decisions, 3.13
tangible assets, 6.10 audits of, 3.15
tax documents, as financial information authority levels in, 3.25–3.27
source, 5.7, 5.10 automation of, 3.29–3.31, 4.2
tax returns, 6.8 business rules engines for, 2.14
team underwriting, 3.28 case authority levels, 3.26
technology, for protecting against security decisions on, 3.3, 3.11–3.12
risks, 2.17, 2.18 documentation for, 3.14
tele-app, 3.4 efficiencies in, 3.29–3.31
telephone conversations, quality checklist for, equity in, 1.14
10.35 job positions in, 3.24–3.25
teleunderwriting, 3.3, 3.4, 4.5 medical experts involved in, 3.25
temporary flat extra premium, 5.23 organization of, 3.24–3.29
temporary insurance agreement, 3.9, 3.10, 12.5 policy coverage changes and, 10.8–10.11
terminal illness benefit, 6.24, 6.26 principles of, 3.16–24
territory, organization by, for customer service, prohibited criteria for, 3.20
9.8 reinsurance and, 8.16, 8.19
third-party administrator, 7.16, 11.7 workflow organization of, 3.27–3.29
third-party insurance, 6.6 underwriting capacity, 8.6–8.7
third-party policy, 1.3, 5.4–5.5 underwriting guidelines, 3.21–3.24
TI benefit. See terminal illness benefit underwriting manager, 3.24, 3.25
TIA. See temporary insurance agreement underwriting manuals, 5.20–5.21, 8.8
time for delivery requirements, 3.15 underwriting philosophy, 3.6–3.7, 3.8,
time to underwrite case, 3.15 3.21–3.24
time to underwriter, 2.8, 3.15 underwriting trainee, 3.24, 3.25
tobacco use underwriting worksheet, 3.14, 5.20
questionnaire for, 4.19 unearned income, 5.14, 5.15
as underwriting factor, 3.20–3.21, 4.15, Unfair Claims Settlement Practices Act
4.19 (NAIC), 11.11, 11.12, 11.17
total disability, 6.21 Unfair Life, Accident and Health Claims
total time to issue, 3.15 Settlement Practices Model Regulation
total turnaround time, 3.15 (NAIC), 11.11, 11.12–11.13, 11.17
touchpoints, 1.4, 1.9–1.11 unfair trade practices, 11.11
TPA. See third-party administrator Unfair Trade Practices Act (NAIC), 2.6
trade associations, 7.11 Uniform Disposition of Unclaimed Property
traditional indemnity reinsurance, 8.5, 8.6 Act (NAIC), 12.15
traditional team, 9.7 unstructured questions, 10.33
training and development, 1.7 urinalysis, 4.11
transaction report, 8.27 USA Patriot Act of 2001, 5.6
TransUnion TrueRisk, 4.3

V
valid claims, 1.6
variable life insurance, 10.27
suitability checks for, 3.11
variable products, administration of, 10.15,
10.27
variable universal life insurance, 10.27
video conferencing, 9.14
VL. See variable life insurance
vocation. See occupation
voice of the customer, 10.34
voice recognition technology, 9.12
VUL. See variable universal life insurance
W–Y
wagering agreement, 3.17
waiting period (for group insurance), 7.8
waiver of premium benefit, 10.9
waiver of premium for disability benefit, 6.20,
6.21, 6.26, 12.22
waiver of premium for payor benefit, 6.4, 6.20,
6.21, 6.26
weight, underwriting and, 4.14–4.15
work division system, 3.28–3.29, 11.7–11.8
workflow organization, underwriting, 3.27
work teams (work groups), 9.6, 9.7
WP benefit. See waiver of premium for
disability benefit
W-2 form, 5.10
Z
Zappos, 9.5

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Insurance Administration

ONLINE COURSE PORTAL

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Statement of Purpose: LOMA Educational Programs Testing and Designations

Examinations described in the LOMA Education and Training Catalog are

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LOMA Education and Training

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Module 1: Overview of Life Insurance Administration

Chapter 2: Considerations for Insurance

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The Power of Data..................................................................................... 2.15

Chapter 3: The New Business Process and Underwriting

Module 2: Life Insurance Underwriting (Chapters 4 – 7)

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Chapter 5: Individual Life Insurance:

Chapter 6: Underwriting Specialized

Chapter 7: Underwriting Group Life Insurance................. 7.1

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Risk Factors for Group Underwriting.......................................................... 7.9

Module 3: In-Force Policy Administration

Chapter 9: Effective Customer Service............................... 9.1

Chapter 10: Customer Service Practices........................... 10.1

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Administering Premium Payments..................................................... 10.11

Module 4: Claim Administration (Chapters 11 – 12)

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Chapter 12: Claim Administration Practices.................... 12.1

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LOMA 301 Text Review Panel

The following individuals participated in every aspect of this text development

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Using the Test Preparation Guide

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Insurance Administration and

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 The Customer Journey 

Figure 1.1. The Policy Life Cycle

Underwriting Policy In-Force Claims

Birth Life Death

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Figure 1.2. Life Insurance Terminology

Applicant The person or entity that submits an application for individual

Insured The person whose life, health, or income is covered by an

Group The person or organization that decides what types of group

Group An individual covered by a group insurance policy.

In an insurance contract, a single individual or entity might assume more than

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Another important role to remember is the financial professional, which—

Insurance Administration Areas

Primary Administration Functions

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Other Insurance Functions

 Calculate premium rates for insurance products

 Determine legal reserve liabilities

 Conduct research on trends in mortality rates, policy lapses, policy loans,

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Accounting and Treasury Operations

Calculate premium rates for insurance products

Determine legal reserve liabilities

Conduct research on trends in mortality rates, policy lapses, policy loans,

Represent the company or supervise outside attorneys in any litigation involv-

Helps select qualified employees

Administers employee benefit programs

Maintains employee records

Gathering customer feedback to determine the quality of customer interactions

Modifying internal processes and procedures with the customer in mind

Continuously searching for opportunities to optimize the customer experience

Process improvements and administrative system upgrades lead to faster

Industry disruption. Start-up companies, both inside and outside of the

Secure authorization to collect information when required

Use only accurate information

Requires insurers to provide customers with written notice of their informa-

Prohibits unfair discrimination in setting premium rates

Requires insurers to keep records about complaints, claims, ratings, and

Make positive or negative comments about the insurer to other people

File complaints about the insurer

Bring (or threaten to bring) legal action against the insurer