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Underwriting is the first step in the total process of insuring health risks. The basic purpose of health insurance underwriting is to minimize the problem of adverse selection. Adverse selection involves the fact that those most likely to have claims are those who are most likely to seek insurance. An insurance company that has sound underwriting guidelines will avoid adverse selection more often than not.
In health insurance, field underwriting is far more important than in life insurance. The basic purpose of health insurance underwriting is to minimize the problem of adverse selection. Note that the specific underwriting requirements will vary by insurer.
Moral hazard is a significant factor in health insurance underwriting because of the possibility of malingering, and it is the agent, not the home office underwriter, who actually has personal contact with the applicant. It is the responsibility of the agent to ask the applicant questions clearly and precisely and to record the answers accurately.
A producer's function as the field underwriter is to gather credible information from an applicant that would assist the underwriter in screening marginal or unacceptable risks before taking an application for an insurance policy.
A producer is the company's field underwriter.
An application for insurance begins with a form provided by the company and completed by the agent as questions are asked of the applicant, with the applicant's responses recorded. This form — often called the "app" — is then submitted to the insurance company for its approval or rejection. The application is the applicant's written request to the insurance company to issue a policy or contract based upon the information contained in the application. If the policy is issued, a copy of this application is stapled in the back of the policy, and it becomes part of the entire contract.
A notice to the applicant must be issued to all applicants for health insurance coverage. This notice informs the applicant that a credit report will be ordered concerning their past history and any other health insurance for which the applicant has previously applied. The agent must leave this notice with the applicant.
The agent must take special care with the accuracy of the application in the interest of both the company and the insured. Because the application is often the main source of underwriting information, it is the agent's responsibility to make certain that the application is filled out completely, correctly, and to the best of the applicant's knowledge.
It is the agent's responsibility to make sure that an application for insurance is complete and accurate to the best knowledge of the applicant.
Every health insurance application requires the signature of the proposed insured, the policyowner (if different than the insured), and the agent who solicits the insurance.
Because the application is so important, most companies require that it be filled out in ink. The agent might make a mistake when filling out the app, or the applicant might answer a question incorrectly and want to change it. There are two ways to correct an application. The first and best is to simply start over with a fresh application. If that is not practical, draw a line through the incorrect answer and insert the correct one. The applicant must initial the correct answer.
Any changes on the application must be initialed by the applicant or insured.
Under the terms of the insurability conditional receipt, the insurance coverage becomes effective as of the date of the receipt, provided the application is approved. This receipt is generally provided to the applicant when the initial premium is paid at the time of application.
An insurance company or an agent cannot disclose any personal or privileged information about an individual unless any of the following occurs:
Additional information that may be required from the applicant for health coverage, if the application reveals certain health conditions or other risk exposures, is as follows:
Genetic characteristics means any scientifically or medically identifiable gene or chromosome that is known to be a cause of a disease or disorder, and that is determined to be associated with a statistically increased risk of development of a disease or disorder. Examples of genetic conditions include Tay-Sachs, sickle cell, and X-linked hemophilia.
Insurers cannot require a test for the presence of a genetic characteristic for the purpose of determining insurability (except in policies that are contingent on testing for other diseases or medical conditions). Whenever a genetic characteristic test is conducted, the insurer must first obtain the applicant's written consent. The insurer must also notify the applicant of a test result directly or through a designated physician.
Once the underwriters have collected and reviewed all the necessary information on the applicant, they will make a decision to either accept or decline the applicant for insurance. Applicants who have been accepted will fall into one of 3 categories: preferred, standard, or substandard.
Preferred risks reflect a reduced risk of loss and are covered at a reduced rate. Nonsmokers would be an example of preferred risks.
Standard risks reflect average exposures and may be insured at standard rates and premiums.
Substandard risks are those that reflect an increased risk of loss. These applicants may be able to obtain health insurance coverage but at an increased premium. An applicant could be rated substandard for a poor health history or a dangerous vocation or avocation.
Alternative options available to the underwriter for substandard risks of applicants include:
At any time during the sales process, there can be a misunderstanding or misrepresentation that could lead to legal action being taken by the insured. Agents should document everything: interviews, phone conversations, requests for information, etc. The sales interview and the policy delivery are the most common occasions for errors and omissions (E&O) situations to occur that may result in providing inadequate coverage or failure to maintain and service coverage.
The underwriter's function is to select risks that are acceptable to the insurance company. The selection criteria used in this process, by law, must be only those items that are based on sound actuarial principles or expected experience. The underwriter cannot decline a risk based on blindness or deafness, genetic characteristics, marital status, or sexual orientation.
When underwriting health insurance policies, the prime considerations are age, gender, occupation, physical condition, avocations, moral and morale hazards, and financial status of the applicant.
An accurate and thorough application is imperative to the insurance company.
Only the agent/producer is involved in completing the agent's (producer's) report. It asks questions about the length of time that the applicant has been known to the agent, an estimate of the applicant's income and net worth, and whether the agent knows of any reason that the contract should not be issued. The agent's statement does not become part of the entire contract.
If the underwriter deems it necessary, an attending physician's statement (APS) will be sent to the applicant's doctor to be completed. This source of information is best for accurate information on the applicant's medical history. The physician can explain exactly what the applicant was treated for, the treatment required, the length of treatment and recovery, and the prognosis.
When an attending physician's report reveals a condition that requires more information for underwriting purposes, and if this information is not available from that physician, then the insurer can require that the applicant be examined by a physician of the insurer's choice and at the insurer's expense.
An investigative consumer report includes information on an applicant's character, general reputation, personal habits, and mode of living that is obtained through investigation. For example, this report could include interviews with associates, friends, and neighbors of the applicant. Such reports may not be performed unless the applicant is clearly and accurately informed of the report in writing. The consumer report notification is usually part of the application. At the time that the application is completed, the agent will separate the notification and give it to the applicant.
MIB, Inc. (formerly known as the Medical Information Bureau) is a membership corporation owned by member insurance companies. It is a nonprofit trade organization that receives adverse medical information from insurance companies and maintains confidential medical impairment information on individuals. Reports on previous insurance information can be obtained from MIB, Inc. Members of MIB can request a report on an applicant and receive coded information from any other applications for insurance submitted to other MIB members. MIB information cannot be used in and of itself to decline a risk, but it can give the underwriter important additional information.
Medical examinations, when required by the insurance company, are conducted by physicians or paramedics at the insurance company's expense. Usually such exams are not required with regard to health insurance, thus stressing the importance of the agent in recording medical information on the application. The medical exam requirement is more common with life insurance underwriting. If an insurer requests a medical examination, the insurer is responsible for the costs of the exam.
If an insurer requires an applicant to take an HIV test, the insurer must first obtain the applicant's written consent for the test. The consent form must explain the purpose of the test, and inform the applicant about the confidentiality of the results and procedures for notifying the applicant about the results. Underwriting for HIV or AIDS is permitted as long as it is not unfairly discriminatory. An adverse underwriting decision is not permitted if based solely upon the presence of symptoms, but only if HIV is confirmed in relation to the symptoms. Insurance companies must maintain strict confidentiality regarding HIV-related test results or diagnoses.
The following are guidelines to help insurers avoid unfair underwriting for the risk of HIV/AIDS:
From an ethical and nondiscrimination standpoint, no insurer or its agents may consider the individual's gender, sexual orientation, marital status, living arrangements, occupation, zip code, or other such related demographic characteristic in determining whether to take an application, provide coverage, or perform any medical testing. Insurers cannot ask if the insured has been tested before, unless it was for insurance purposes. None of this information should be either on the application or implied. This is so the underwriter can make a clearly unbiased determination and avoid overt or apparent discrimination. The only allowable criterion that a company may use to determine whether to test for HIV is the amount of insurance the applicant has applied for at certain age ranges.
Negligently disclosing confidential results or underwriting information to unauthorized third parties may result in a civil fine of up to $1,000 plus court costs. The fine may go up to $5,000 plus costs for willful violations. If the violation causes economic, bodily, or psychological harm to the other party, the penalty may include a misdemeanor charge, one year in jail, and/or a fine of up to $10,000.