What underwriting factors are important for life insurance? Which are the next most important factors? I just won an age-group medal in a 10K race, but my application for life insurance was not given the most preferred rating.
Early methods[ edit ] Merchants have sought methods to minimize risks since early times. Methods for transferring or distributing risk were practiced by Chinese and Babylonian traders as long ago as the 3rd and 2nd millennia BC, respectively.
The Babylonians developed a system which was recorded in the famous Code of Hammurabic. This allowed groups of merchants to pay to insure their goods being shipped together. The collected premiums would be used to reimburse any merchant whose goods were jettisoned during transport, whether due to storm or sinkage.
The first known insurance contract dates from Genoa inand in the next century maritime insurance developed widely and premiums were intuitively varied with risks.
Insurance became far more sophisticated in Enlightenment era Europeand specialized varieties developed. Property insurance as we know it today can be traced to the Great Fire of Londonwhich in devoured more than 13, houses.
Initially, 5, homes were insured by his Insurance Office. In the late s, Edward Lloyd opened a coffee housewhich became the meeting place for parties in the shipping industry wishing to insure cargoes and ships, and those willing to underwrite such ventures.
By the late 19th century governments began to initiate national insurance programs against sickness and old age. Germany built on a tradition of welfare programs in Prussia and Saxony that began as early as in the s.
This gave the British working classes the first contributory system of insurance against illness and unemployment. The insured entities are therefore protected from risk for a fee, with the fee being dependent upon the frequency and severity of the event occurring.
In order to be an insurable riskthe risk insured against must meet certain characteristics. Insurance as a financial intermediary is a commercial enterprise and a major part of the financial services industry, but individual entities can also self-insure through saving money for possible future losses.
Insurability Risk which can be insured by private companies typically shares seven common characteristics: Since insurance operates through pooling resources, the majority of insurance policies are provided for individual members of large classes, allowing insurers to benefit from the law of large numbers in which predicted losses are similar to the actual losses.
However, all exposures will have particular differences, which may lead to different premium rates.
The loss takes place at a known time, in a known place, and from a known cause. The classic example is death of an insured person on a life insurance policy.
Fireautomobile accidentsand worker injuries may all easily meet this criterion. Other types of losses may only be definite in theory. Occupational diseasefor instance, may involve prolonged exposure to injurious conditions where no specific time, place, or cause is identifiable.
Ideally, the time, place, and cause of a loss should be clear enough that a reasonable person, with sufficient information, could objectively verify all three elements. The event that constitutes the trigger of a claim should be fortuitous, or at least outside the control of the beneficiary of the insurance.
The loss should be pure, in the sense that it results from an event for which there is only the opportunity for cost. Events that contain speculative elements such as ordinary business risks or even purchasing a lottery ticket are generally not considered insurable. The size of the loss must be meaningful from the perspective of the insured.
Insurance premiums need to cover both the expected cost of losses, plus the cost of issuing and administering the policy, adjusting losses, and supplying the capital needed to reasonably assure that the insurer will be able to pay claims. For small losses, these latter costs may be several times the size of the expected cost of losses.
There is hardly any point in paying such costs unless the protection offered has real value to a buyer. If the likelihood of an insured event is so high, or the cost of the event so large, that the resulting premium is large relative to the amount of protection offered, then it is not likely that the insurance will be purchased, even if on offer.
Furthermore, as the accounting profession formally recognizes in financial accounting standards, the premium cannot be so large that there is not a reasonable chance of a significant loss to the insurer. If there is no such chance of loss, then the transaction may have the form of insurance, but not the substance see the U.
Financial Accounting Standards Board pronouncement number Answers 1. Underwriting is the process of determining the financial risk associated with issuing a policy. For life insurance, this means determining which of. Risk & Insurance covers the people, stories and risks that embody the essential functions of risk management and commercial insurance.
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Not all life insurance policies are underwritten, but because some are it is important to understand what it means.
Underwriting is a term used by life insurers to describe the process of assessing risk, ensuring that the cost of the cover is proportionate to the risks faced by the individual concerned.