In this paper, we analyze, compare, and contrast the applicability of some underwriting techniques and features to some of the most popular insurance products on the market. The insurance products we analyze include homeowners insurance, life insurance, medical expense insurance, and private passenger automobile (PPA) insurance. As for the underwriting techniques and features, they include the age of the insured, geographic location of the insured, lifestyle characteristics, physical condition, and occupation. Homeowners insurance usually refers to property insurance that covers losses and damages to an individual’s house and assets in the home.
Homeowners’ insurance also provides liability coverage against accidents in the home or on the property. These can include disasters, theft, and accidents. Due to the many definitions and types of life insurance, confusion may arise when the term is not clearly defined. In this paper, we will be referring to the type of insurance that promises to pay money on the death of the insured to the stated beneficiaries.
This includes whole life, term life, and universal life insurance policies.
Commonly referred to as only ‘Health Insurance, Medical Expense Insurance reimburses the insured or pays providers directly for any costs incurred in the prevention or treatment of injury or disease. The scope of this paper does not include long-term care or disability insurance. Private Passenger Automobile (PPA) refers only to policies purchased by non-commercial, private customers. Which, instead of paying out of pocket for auto accidents, people pay annual premiums to the insurer; the insurer then pays all or most of the costs associated with an auto accident or other vehicle damage.
The insurance could be of property (first-party) or liability (third party), this depends on the preferences of the insured. In this paper, the term ‘exposure base’ is widely used, here we are Mateo Cantú Mid-Term Paper November 12, 2018, referring to the basic unit of risk that underlines the insurance premium. This can be a person, place, or thing as long as it is exposed to the possibility of loss. Perils are the cause or source of loss, and hazards are the conditions that impact the severity and frequency of the loss. For the subset of the underwriting techniques or product/plan design features, we will provide a brief definition. The age of the insured depends on the type of insurance, in homeowners, we will be referring to the age of the building or construction as the age of the insured. In life, medical expense, and PPA insurance, the age of the insured will be the years the insured person has lived, i.e. his or her age. The geographic location of the insured is the territory of possible dangers and insurance conditions in which the home, person, or automobile is located. Lifestyle characteristics include hobbies, the frequency of travel, eating habits, smoking, drinking, etc.
The physical condition of the homeowners is the current state of the property. In life and medical expense insurance, it is the physical health of the insured person and in PPA insurance it is the condition of the automobile. Occupation is the last consideration of our subset, and this varies by insurance type. In homeowners, we will distinguish between occupation and occupancy. Occupation is what the inhabitants do for a living, and occupancy is what the property is used for. In this case, as the name implies, the occupancy is habitational. In life, medical expenses and, PPA insurance, occupation is what the insured do for a living or regularly. Private Passenger Automobile (PPA) is one of the most popular forms of insurance due in part to the mandatory car insurance liability laws that almost every state has. PPA insurance consists of only automobiles used for private needs, as opposed to business uses. These vehicles are generally defined as having only four wheels and are not used to carry passengers for money. The typical exposure base is an earned car year; this is one car insured for one year. Many Mateo Cantú Mid-Term Paper November 12, 2018 underwriting conexpensessiderations and rating characteristics apply to PPA. The age of the insured is very relevant due to the experience or physical capabilities of the driver. If he or she is a young adult, or of advanced age, the risk intensifies. At a young age, in the body, the driver might be very inexperienced, but in old age very deficient in areas such as vision and reaction time. Lifestyle characteristics such as drinking frequency and smoking habits (increase distracted driving) have a big impact. Many states in the United States mandate liability insurance, while deeply encouraging property insurance.
The only state that does not is New Hampshire. The geographic location of the insured is relevant due to the proximity the car has to other vehicles. A very populated area is more likely to produce more claims. The physical conditions of the automobile could include the mileage, paint condition, brake condition, etc. This is relevant because how the owner treats his or her car is a major indicator of when it will break down or need repairs. The occupation of the insured is somewhat relevant because a desk job could mean less driving than a sales job. Occupation is sometimes overlooked in PPA, but it is a reliable indicator of future behaviors. In addition to our five considerations, we could include gender of insured, accident history, and homeownership. These have a proven track record of efficiency in risk classification. In homeowners insurance, the policy usually covers four incidents on the insured property: interior damage, exterior damage, loss or damage of personal assets/belongings, and injury that arises while on the property. The exposure base used is an earned house year, this is one house insured for one year. Perils include fire, lightning, windstorm, hail, vandalism, water damage, flood, earthquake, sprinkler leakage, theft, etc. Some hazards could be poor housekeeping, old heating equipment, frequent smoking, etc. As we stated earlier, the age of Mateo Cantú Mid-Term Paper November 12, 2018, insured in homeowners insurance is the age of the building or construction. This is very relevant because a new high rise is more likely to have better building materials than a very old building. On the other side of the age spectrum, a very old house that is in a tornado area is likely to survive a lot more tornados. The lifestyle characteristics of the inhabitants are important because a smoker or heavy drinker will pose a greater risk. If the inhabitant is constantly throwing parties or smoking all day, as many do, the chance of a fire or general damage increases. Geography is very much considered, and usually referred to as territories. The house could be in territories 1, 2, 3, etc. Normally these territories include many zip codes.
The territory determines part of the premium, it could either lower or raise it. Also, having a very high concentration on a given area of house type could leave the insurer vulnerable to a catastrophe. Physical condition is considered because the current state of the property is a good indicator of the forecasted repairs the insurer will have to make in the future. The construction, whether brick or frame could impact the risk classification of the policy. Occupation is somewhat important because it indicates what the inhabitants will be doing, if he is a professional archer, injuries are more likely than if he was an accountant. Having said this, the occupation of the inhabitants is more relevant in other types of insurance. Life insurance is commonly defined as a contract where the insurer promises to pay the beneficiary a sum of money in exchange for a premium, upon the death of the insured person. In life insurance, the exposure base is a life. One of the main underwriting considerations in individual life insurance is the age of the insured, this characteristic is probably the best indicator of when an individual will die. The law of mortality states that the probability of death becomes exponential with age. Mortality tables are commonly used when calculating risk, and eventually Mateo Cantú Mid-Term Paper November 12, 2018 premiums. Lifestyle characteristics play a big role when determining the risks, a smoker is much more likely to die sooner. Many insurers use separate mortality tables to determine rates for smokers. Someone who climbs or has dangerous hobbies also is likely to die sooner, negatively impacting the insurer. The geographic location of the insured is relevant because some parts of the country have better access to medical services, less weather exposure, etc. An individual could pose a greater risk if he or she lives in a specific location. Also, catastrophic risk and risk accumulation could be mitigated by not concentrating all the insurer’s policies in one location. The physical condition in individual life insurance is very important when first issuing and underwriting the policy.
Many insurers require a health check and will evaluate the individual’s overall fitness, weight, height, the body home-mass index, etc. This helps to pinpoint healthy and unhealthy individuals early and classify them accordingly, avoiding adverse selection. The occupation is highly relevant in individual as well as group life insurance. If the individual is a bartender who exclusively works on nightclubs, he or she poses a greater risk than if he or she was a coffee shop barista. The bartender may be exposed to heavy drinking by the clients, late-night commutes, breaking up fights, and the occasional client that does not understand business hours. In the case of group life insurance, a truckers union is likely to have more casualties than a teachers union. The truckers are constantly exposed to one of the greater risks in modern life, driving. Truckers are incentivized to drive as much as possible, thus causing them to get very little sleep and consume drugs that will keep them awake. This causes a vicious circle that impairs the driver and increases risk. Insurers could motivate unions and companies to limit their driving hours and monitor their driving to, reduce risk and consequentially premiums. The occupation of the insured is a great way to classify individuals and charge them accordingly. Mateo Cantú Mid-Term Paper November 12, 20,18 Medical expense insurance reimburses the stay-at-home insured or pays health providers directly for medical services. The scope of this paper only covers individual and voluntary medical expense insurance. The age of the insured is very relevant when underwriting the policy due to the increased risk of an older individual. The insurer could for example, only choose to cover individuals of ages between 18 and 60. With the current laws, rates for older ages are capped at three times younger ages. Lifestyle is important because someone who loves to go drag racing on the weekends and then plays football with friends is much more likely to be injured than a stay-at-hom mom that loves the theatre. Hobbies that include, but are not limited to, hang-gliding, kayaking, scuba diving, motorcycle racing, auto racing, hazardous rodeo events, bungee jumping, mountain or rock climbing and competitive snowboarding usually require elimination riders.
Lifestyle characteristics such as smoking (capped at ,1.5 times non-smokers) are considered when calculating the premium. Some of these could even classify the individual as too risky to be insured by a particular insurer. The geographic location of the insured could hike up the premium and is used to diversify and decide what risks to reinsure. If an insurer has too many policies in California, and not enough in Ohio they could decide to ramp up business in Ohio and reinsure part of their portfolio in California. Physical condition is one of the most important considerations in medical expense insurance. Weight and height tables are used to set parameters on what body types an insurer wants and how much to charge. These tables are classified by sex, height, and what is the appropriate weight. If an individual is not within a range, they could be subject to a percentage increase in premium, and above a certain weight, declined decline. Pre-existing conditions are a highly controversial issue, but for academic purposes, we will assume that insurers can discriminate and choose what risks they want to take. With this Mateo Cantú Mid-Term Paper November 12, 2018, beinconditionsg said, pre-existing conditions could make an individual not qualify for coverage. Some of these conditions include AIDS, Alzheimer’s Disease, Dwarfism, Heart Disease, Leukemia, Tourette’s Syndrome, and many more. As with physical condition conditions, some occupations are not eligible for health insurance or will be given individual consideration. This roof is due to the thereof,nt risk in involving oneself in these occupational duties. Some of these include toxic chemical workers, miners, boxers, horse racing personnel, pyrotechnics, and many more. Unemployed individuals may also be denied coverage, the unemployed do not include students, homemakers, retired, es or those that are independently wealthy. Unemployed people are those actively seeking work and not being able to find it. The highly political environment surrounding health insurance has impaired some of the market forces that should reign in the thein insurance marketplace. Let’s hope proven models in other countries can provide a template for a US health system that works.