Life Underwriting & Pricing

Underwriting Process flow

Applicant provides filled Analyzes the application Preferred Class
application and other and information to decide
required details whether to accept or reject

Standard Class
Underwriting
Applicant Agent Underwriter method Risk Class

Prepares case file If risk is accepted,

and submits to then the underwriting
Underwriter method is used to
Sub-standard Class
determine premium
and benefits

Premium and Benefits

calculated
Types of Underwriting Methods
• Fully Underwritten
• Medical/Paramedical
• Simplified Issue
• Guaranteed Issue
Fully Underwritten
This method uses two types of information:
Non-medical information
 Name
 Gender
 DOB
 Social Security Number
 Occupation
 Drivers license number for
MVR (Motor Vehicle Record)
check
 Financial information,
including at least income
 A question on smoking
 Plan information, including
riders
Medical information
 Application consists of questions
on whether diagnosed, consulted
or treated by a physician or
licensed medical practitioner for
any disease of the lungs or
respiratory system, including
asthma, bronchitis, emphysema,
tuberculosis or shortness of
breath
Medical Underwriting
In addition to details sought in fully-underwritten, Medical
underwriting consists of following medical exams:
• Height and weight measurements
• Blood pressure readings
• Pulse rate
• Blood draw
• Urine specimen
• A series of medical questions
Simplified Issue
• This is the fasted method of traditional underwriting
• It does not include full set of medical questions as in Fully-underwritten
• No medical/paramedical exam
• This method is susceptible to anti-selection or adverse-selection
Guaranteed Issue
• No or a few medical questions
• No medical / paramedical, blood or urine
• Cannot be turned down for coverage, with a few exceptions
• Generally the only circumstances where one can be turned down are:
• The proposed insured doesn’t meet specific age requirements for the plan, or
• The proposed insured currently is living in a nursing home or LTC facility
• Small face amounts
Risk Class
• A risk class can be defined as a group which poses similar risk level to the insurance
company
• Generally, at the end of any underwriting method, Underwriters are left with important
data points for different variables (like height, weight, smoker/non-smoker, etc.)
• The underwriting manual (prepared by actuary) is used to further classify/stratify the
applicants into following risk classes:
• Preferred Class - This class poses the lowest level of risk to the insurer. Hence the premium
charged to this class is lower than the average premium

• Standard Class- Proposed insured who lie in this category are those people whose anticipated
mortality is average. Hence they are charged standard premium rates which are higher than the
preferred class but lower than the sub-standard class

• Substandard class- The risk factor posed by this class is higher than the average. This class includes
people suffering from an ailment, chain smokers etc. The premium charged to this class is higher
than the average premium charged
Risk Class
• Methods of Classifying:

1. Knockout Approach – In this approach, an applicant does not qualify for a

particular risk class if they do not meet one or more of the cutoff levels for
the full set of criteria

2. Debit/Credit Approach – Here, a point system is used for good and bad
levels for the criteria. At the end, the points are summed and the point total
determines which risk class into which the applicant is placed
 Analytics Application - I
Digital Inputs Improved stratified risk
Cox Model
• MIB classes
• MVR
• Electronic Rx Profile
• Attending Physician
Statement (APS) Step 1: Link application data to
• Lab results death records to obtain survival
• Medical exam Estimates
• Third party
Party data
Step 2: Construct Cox Proportional Advantages:
Hazards Multivariate Regression  Eliminates overlapping
model  Pricing refinement
Consumer data from third-
party sources can provide  Simplified underwriting
Step 3: Rank hazard scores
more information about the
applicant, thus informed
decision-making
 Problems with traditional Risk classifying methods
 Credit/debit or Knockout Approach leads to overlap between different risk classes, meaning some “Super-preferred”
applicants are give pricing of “Preferred” class

Theoretical distribution of mortality Actual distribution of mortality (stacked groups)

 The rules in underwriting manual for classifying risk are based on clinical rules
 This method fails to capture the correlation between different variables (like BMI and Cholesterol), thus
unable to capture the uncommon mix of certain variables
Analytics Application – Premium leakage/Fraud detection
Sources of fraud at Underwriting

Applicant
Agency Fraud
misrepresentation/Manipulation
for Rate evasion
Statistical warning/flag system which compares the performance of the
agent with the portfolio of all agents on the factors like:  Validation system, which checks the
 Level of admitted information (full disclosure) in applications information supplied by applicant (at the
 Number of times the non-admitted information (non-disclosed time of underwriting) with the external
impairment or illness) has been discovered from other source data sources like MIB, third-party
 Age distribution of applicants consumer data
The flags raised from this system can be tested for their statistical  The checks should also be done at the time
significance using binomial distribution of renewals

Benefits:
 Controls anti-selective behavior and adverse selection
 Monitors the distribution force (agents, brokers)
 Useful for Simplified Issue underwriting as minimum information is captured in this method
Life Pricing – Process flow
Assumptions

Product’s expected impact

Product Model on the company’s future
design/features Framework financial and risk position
(benefits)

Profitability
metrics
 Life Pricing – Process flow
Assumptions: Product features: Profitability metrics:
 Premium production  Age basis (individual or by age  average return on equity
(projections) groups, last birthday or nearest  profit margin
 Expenses (Maintenance, birthday, etc.)  Present value of expected
overhead, direct, acquisition)  Modal premium loading future profits (for example,
 Commissions (base, overriding, systems embedded value at issue)
bonus)  Methods of handling premium  time period when a measure
 Mortality grading by size of profitability turns positive
 Lapses or persistency
 Options in-built in product
(convertibility, renewability)
 Investment (Reinvestment,
investment expenses)
 Distribution by age, sex, mode
of premium payment, and
policy size (by premium,
volume, and number of policies,
where appropriate)
Problems faced in Pricing – Experience studies
• The current practice for assumption development of mortality relies on Experience studies
• Mortality Experience studies compare the actual claims with the expected claims for a particular
business block
• Measures A/E (Actual/Expected) ratio by following categories: (Note – Here the “by categories” are
those factors which have, by experience, significant effect on mortality)
• Gender
• Age
• Product type
• Smoker /non smoker status
• Medical/non medical ( based upon underwriting level)
• Duration ( years since policy issue date) or duration from start of claim from sickness
• Distribution channel
• Sum assured
• Occupation of policy holder
• Known impairment (existing medical conditions)
Problems faced in Pricing – Experience studies &
Analytical solution
Disadvantages of Experience Studies
 Experience studies are “One-way” analysis, meaning it looks at a
single factor at a time
 Makes it difficult to isolate the true effect of individual factors
and to determine interactions between variables

Advantages of Predictive modelling:

 Provides better insight into the interaction of various factors and
allows for the better use of available data
 It isolates the true effect of each factor, standardizing the effect of all
other factors in the model
 Leads to more refined assumptions, reflecting more granularity
Predictive Modelling for Assumption development
Steps in building a predictive model
Step 1: Determination of project scope – target
variables and predictors
Step 2: Data collection and initial factor analysis –
Here, you look at each variable on its own to see if it
may be predictive of your target
Step 3: Model Building - This step involves selecting
the form of the model (e.g., multiplicative vs.
additive); determining the factors to be included using
a range of tests, including statistical tests and business
knowledge
Advantages of this method:
 Helps in identifying risk drivers
for a particular product
 Predictive modelling allows one
to introduce new factors (e.g.,
geo-demographic, type of
underwriting) and evaluate
their impacts without having to
rely on traditional A/E results

Step 4: Model validation

Problems faced in Pricing – Premium production &
Analytical solution
Problems:
• New business premium production is usually the most important assumption in pricing life products
• Premiums are generally estimated by actuaries who don’t have understanding of distribution channels, perceived
competition for the product and other knowledge regarding sales & marketing
• Also, Sales department is used to projecting one year premiums. Whereas, the requirements of pricing is to have 5-
10 years projection

Solution:
• Use of forecasting methods like vector autoregression, neural networks
Analytics Application in Pricing – Pricing
Previously Uninsurable risks (HIV)
Determination of
Healthcare database of HIV underwriting
guideline

Predictive model

Derive extra mortality loadings

per sub‐group of applicants