Table of Contents
- 🧠 The Two Types of Underwriting
- 💵 What Actually Affects Insurance Premiums?
- 📊 Understanding Morbidity (Why Statistics Matter)
- ⚖️ Why Insurers Use Ratings and Exclusions
- 💼 Financial Underwriting: Why Income Matters
- 💸 Can the Applicant Afford the Policy?
- 🩺 Medical Underwriting: How Health Is Evaluated
- 🗂️ The Medical Information Bureau (MIB)
- ✍️ Applicant Authorization
- ✅ Final Takeaway: Why Underwriting Matters
When you apply for disability insurance, critical illness insurance, long-term care insurance, or health insurance, the insurance company doesn’t guess.
Instead, it goes through a structured process called underwriting.
Underwriting answers three key questions:
- ✅ Can we insure this person?
- 💰 How much coverage is appropriate?
- 📄 What should the premium, exclusions, or limitations be?
Let’s break it down in simple terms.
🧠 The Two Types of Underwriting
Insurance companies assess risk in two main ways:
💼 Financial Underwriting
This focuses on money and affordability.
Insurers use it to:
- Verify income
- Determine the maximum amount of coverage allowed
- Confirm the applicant can afford premiums long-term
This protects both the insurer and the client.
🩺 Medical Underwriting
This focuses on health and claims risk.
Insurers evaluate:
- Current health
- Past illnesses or injuries
- Family medical history
The goal is to determine whether the applicant is:
- A standard risk
- A higher-than-average risk
- Or uninsurable at this time
💵 What Actually Affects Insurance Premiums?
Even before underwriting decisions are made, pricing is influenced by broader factors.
🏢 Administrative Costs
Insurance companies have ongoing expenses:
- Staff
- Technology
- Claims processing
- Record-keeping
Higher operating costs = higher premiums.
📈 Investment Returns
Insurers invest premiums to help fund future claims.
- Strong investment returns → lower premiums
- Weak returns → higher premiums
🔁 Lapse Rates
A lapse occurs when a policy is cancelled or premiums stop being paid.
- Higher lapse rates can reduce claims
- Fewer claims may lead to lower premiums
🤕 Morbidity Rates (Risk of Illness or Injury)
Morbidity refers to how often people get sick or injured.
- Higher illness rates → more claims
- More claims → higher premiums
⚠️ Ratings & Exclusions
For non-standard applicants, insurers may:
- Increase premiums (ratings)
- Exclude certain conditions or activities
This allows insurers to offer coverage without denying it outright.
📊 Understanding Morbidity (Why Statistics Matter)
Insurance companies rely on morbidity tables—large statistical models showing:
- How many people of a certain age and gender are likely to become disabled
- How long claims typically last
These tables:
- Work best with large populations
- Are less precise for individual companies
If claims exceed expectations:
- Profits drop
- Future premiums rise
⚖️ Why Insurers Use Ratings and Exclusions
Rather than saying “no,” insurers often:
- Charge higher premiums for higher risk
- Exclude specific causes of claims
This balances:
- Access to coverage
- Financial sustainability
It also keeps premiums lower for standard-risk clients.
💼 Financial Underwriting: Why Income Matters
Disability insurance is based on earned income.
Insurers limit benefits to:
- A percentage of pre-disability income
- All sources combined (government, group, private)
❌ Why Over-Insurance Is Not Allowed
If someone could earn more while disabled than while working:
- Fraud risk increases
- Claims may be prolonged unnecessarily
This is known as anti-selection.
💸 Can the Applicant Afford the Policy?
Insurance companies also ask:
- Will this policy stay in force long enough?
- Is the premium sustainable?
Issuing a policy is expensive.
Insurers often don’t become profitable for several years after issue.
If coverage seems unaffordable:
🚩 Red flags go up.
This applies to:
- Disability insurance
- Critical illness insurance
- Long-term care insurance
- Health insurance
🩺 Medical Underwriting: How Health Is Evaluated
Insurers may rely on multiple sources:
🧪 Medical Exams
Required when:
- Coverage is high
- Applicant is older
- Health history raises concerns
🧾 Attending Physician’s Statement (APS)
An APS is a medical report from your doctor.
It may be requested:
- Automatically (based on age or coverage)
- Due to health disclosures on the application
✔️ The insurer pays for the APS
✔️ Requests are handled directly by head office
Additional tests may include:
- Blood or urine tests
- ECGs
- Paramedical exams
🗂️ The Medical Information Bureau (MIB)
The Medical Information Bureau (MIB) is a shared database used by insurers.
🧬 What the MIB Does
- Stores coded (non-specific) health indicators
- Tracks existing coverage and applications
- Notes prior declines or ratings
🛡️ Why It Exists
MIB helps prevent:
- Undisclosed medical conditions
- Applying to multiple insurers for excessive coverage
- “Shopping around” after a decline without disclosure
✍️ Applicant Authorization
When signing an insurance application, the applicant:
- Authorizes the insurer to collect medical information
- Permits communication with physicians and the MIB
This ensures underwriting decisions are:
- Fair
- Accurate
- Based on complete information
✅ Final Takeaway: Why Underwriting Matters
Underwriting isn’t about denying coverage—it’s about pricing risk fairly.
It protects:
- ✔️ The insurance pool
- ✔️ Honest policyholders
- ✔️ The long-term stability of the insurer
For clients, understanding underwriting means:
- Fewer surprises
- Better expectations
- Claims that get paid when needed most
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