United States
Hong KongUnderwriting and risk classification
Underwriting sorts applicants into classes: preferred, standard, substandard or declined. The classification sets the premium, not whether a claim is paid. Texas law limits the grounds an insurer may use, prohibiting refusal or different rates based on race, religion, national origin and other listed characteristics.
Underwriting is the process of deciding what a risk costs. It is not a moral judgment and it is not a claims decision, and confusing it with either is the source of most wrong answers on this heading.
The four outcomes
| Class | What it means | Premium |
|---|---|---|
| Preferred | Better than average mortality expectation | Lowest |
| Standard | Average expectation for the age and gender | The reference rate |
| Substandard (rated) | Higher than average expectation | Higher, or with a benefit modification |
| Declined | The insurer will not accept the risk | No policy |
A rated policy is a policy. It pays claims on the same terms as any other, and the rating is a price, not a caveat. An exam stem that suggests a substandard policy pays less at claim time is offering you a distractor.
Where the information comes from
- The application itself, which is the primary source and is why its completeness matters.
- An attending physician's statement, requested from a doctor with the applicant's authorization.
- A paramedical or medical examination, at the insurer's cost.
- The Medical Information Bureau, a shared database of coded information from member insurers.
- Consumer reports, including investigative reports, governed by the Fair Credit Reporting Act.
The Medical Information Bureau is worth a line of its own. It holds coded flags rather than records, it is a signal to underwrite further rather than a reason to decline, and an insurer that declines on an entry alone has misused it. That is examinable in one sentence and rarely taught properly.
Adverse selection, and why underwriting exists
People who expect to claim are more likely to buy. Left alone, that pushes the pool toward worse risks and forces the price up, which drives good risks out and makes the problem worse. Underwriting exists to interrupt that loop. Every source of information above, and every classification, is a tool against adverse selection.
Say that in a stem and the answer is nearly always adverse selection. It is one of the few pieces of vocabulary on this paper with only one meaning.
What Texas prohibits
A person may not refuse to insure or provide coverage to an individual, refuse to continue to insure or provide coverage to an individual, limit the amount, extent, or kind of coverage available for an individual, or charge an individual a rate that is different from the rate charged to other individuals for the same coverage because of the individual's race, color, religion, or national origin.
Texas Insurance Code, TIC 544.002
The same section extends to age, gender, marital status, geographic location and disability, subject to what the statute allows elsewhere. So classification by mortality expectation is lawful and classification by protected characteristic is not, and unfair discrimination appears in the Texas portion of the outline as a listed prohibited practice.
Insurance is built on discriminating between risks; that is what a rate is. What the law prohibits is unfair discrimination, meaning different treatment of individuals of the same class and hazard. If a stem uses the word discrimination, check which sense it means before you answer.
An applicant's Medical Information Bureau record carries a coded entry the insurer has not seen before. What may the insurer properly do?
- Decline the application on the basis of the entry
- Rate the policy to reflect the coded condition
- Investigate further before making an underwriting decision
- Ignore it, since Bureau entries are not admissible in underwriting
Where it sits
- Section III
- Underwriting, five sub-items, section worth 12 questions
- Section IX
- Field underwriting procedures, 8 questions
- Texas portion
- Unfair discrimination, TIC 544.002, in the 14-question common section
- Related
- Consumer reports and the Fair Credit Reporting Act, its own sub-item
The opinion, and the concession
The distinction worth drilling is between underwriting and claims. Underwriting decides the price before the contract exists. Claims decides payment after a loss. Nearly every plausible-sounding wrong answer on this heading is a claims answer wearing underwriting clothes, and once you are watching for that pattern the questions get noticeably easier.
The concession: what an insurer actually does with a given medical history is proprietary, varies by carrier and changes as mortality data changes. We hold none of it and publish none of it. What we can do is quote the Texas statute that limits the grounds, because we hold the chapter and can point at the sentence.
Common questions
What are the risk classifications?
Preferred for better than average mortality expectation, standard for average, substandard or rated for higher than average, and declined where the insurer will not take the risk. The classification sets the premium. A rated policy pays claims on exactly the same terms as a standard one.
What is the Medical Information Bureau?
A shared database of coded information contributed by member insurers. It holds flags rather than medical records, and its proper use is to prompt further underwriting inquiry. An insurer that declines an application on a Bureau entry alone has misused it, which the exam tests directly.
What is adverse selection?
The tendency of people who expect to claim to be the people most likely to buy. Left unchecked it worsens the risk pool and raises prices, which drives better risks away. Underwriting exists to interrupt that loop, and every information source and classification is a tool against it.
Can a Texas insurer charge different rates by geographic location?
TIC 544.002 prohibits refusing coverage, limiting it or charging a different rate because of race, color, religion, national origin, age, gender, marital status, geographic location or disability, subject to what other provisions of the Code allow. Unfair discrimination is listed in the Texas portion of the content outline.