Principles of Life Insurance Underwriting

Principles of Life Insurance Underwriting September 19, 2014 The Gibraltar Life Insurance Co., Ltd. New Business Service Team...

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Principles of Life Insurance Underwriting September 19, 2014 The Gibraltar Life Insurance Co., Ltd. New Business Service Team

Table of contents 1. Participation rate of life insurance in Japan

11.Investigation through policy confirmation

2. Cause of death in Japan (by age)

12. Underwriting of physical risk

3.Flow of life insurance examination

13. Response to physical risk

4.The necessity of risk selection

14. Underwriting of environmental risk

5.Types of risks 6.Types of moral risks 7.Risk selection method 8.Observation by LCs 9.Information collection by selection method

15. Response to environmental risk 16. Underwriting of moral risk 17. Response to moral risk 18. Utilization of reinsurance 19. Next issues

10. Examination by an examiner 2

1. Participation rate of life insurance in Japan Participation ratio of households in Japan Owner Non-owner

Average amount of total death claim by household: ¥ 27,630k

Average number of policies by household: 4.1 policies


Average amount of total annual premium by household: ¥ 416k 100%




80% 60% 40%

Non Owner








Source: Japan Institute of Life Insurance: FY2012 national survey of actual conditions of life insurance



2. Cause of death in Japan (by age) Age

1st cause of death

2nd cause of death

3rd cause of death


Congenital malformation


Malignant neoplasm



Malignant neoplasm

Congenital malformation

- 14

Malignant neoplasm



- 19



Malignant neoplasm

- 24



Malignant neoplasm

- 29



Malignant neoplasm

- 34


Malignant neoplasm


- 39


Malignant neoplasm

Heart disease

- 44

Malignant neoplasm


Heart disease

- 49

Malignant neoplasm


Heart disease

- 54

Malignant neoplasm

Heart disease


55 -

Malignant neoplasm

Heart disease


Source: “2012 Population Survey Report” issued by the Ministry of Welfare and Labour


3. Flow of life insurance examination Policyholder/ Insured


Application form

Application form

・Fill out application form ・Disclose health conditions

HO Application form

・Confirm incomplete documents ・Observe insured’s health conditions

Insurance certificate


・ Confirm incomplete documents ・Assess insured’s health conditions

No condition


Notice of special condition Approve

Insurance certificate


Notice of rejection


Special condition Rejection 5

4. The necessity of risk selection

Life insurance

・ Fairness of risk ・ Uniformity of risk ・ Law of great numbers

Stability of insurance business



Cover-up of medical records

Vocational fraud

× Moral risk

Adverse selection

In order to create an insured group without adverse selection, it’s necessary to appropriately select risk. 6

5. Types of risks

Physical risk

Moral risk

Risk of life insurance

Environmental risk

Medical Underwriting

Financial Underwriting


6. Types of moral risks

Insurance murder

Illegal reception of benefit


Method of murder is diversified: Making death look like a death of disease by using poison/ accidental death/ accident in a foreign country, etc. Applications after a disease is diagnosed in health check and that of voluntary applications by direct mail or on the Internet increases adverse selection. Involvement of doctors cannot be denied in some cases. Suicide exclusion was effective for 1 year in policy provisions of ordinary insurance. However, since there was no end to the number of insured who committed suicide, the suicide exclusion period was extended to 2 years. 8

7. Risk selection method

1st Selection

Observation by LCs

2nd Selection

Information collection by selection method

3rd Selection

Examination by an examiner

4th Selection

Investigation through policy confirmation


8. Observation by LCs

1st Selection

Observation by LCs

Interview・・・Interview is LCs’ responsibility and obligation Observation・・・ Observe complexion / expression/ conversation/ physical disorder/ living conditions. Question・・・Ask about health conditions such as actual symptom/ anamnesis, occupation, and living conditions. 10

9. Information collection by selection method 2nd Selection

Information collection by selection method Medical examination doctor handling Medical check-up notification handling/ thorough medical check-up handling

Health management certificate handling

Non-medical form handling


10. Examination by an examiner Examination by an examiner

3rd Selection

Acceptance/ rejection of applied policies and finalization of conditions

Standard life Substandard life

Insurable risk

Postponable life Rejectable life

Non-insurable risk


11. Investigation through policy confirmation Investigation through policy confirmation

4th Selection Policy confirmation

Confirmation by those who lack interest in insurance sales. Pre-issue policy confirmation

Post-issue policy confirmation


12. Underwriting of physical risk Numerical Underwriting method :This is a method to assess risks by scoring mortality indicators based on Underwriting standard. Underwriting standard

Numerical Underwriting method

Advantage ・ Quantification of risks decreases examiners’ subjective view. Disadvantage ・ Combination of medical impairment requires a viewpoint of clinical medicine. 14

13. Response to physical risk Increasing type risk

Extra premium plan

Everlasting type risk

Extra premium plan

Decreasing type risk

Lien plan

Main special conditions ・ Extra premium plan ・・・A plan to receive extra premium. ・Lien plan・・・A plan to reduce claim at a designated ratio for a certain period of time (up to 5 years) ・ Particular Organ Exclusion Clause ・・・A plan applied to hospitalization protection to exclude specified part from claim payment.


14. Underwriting of environmental risk Selection based on habit Excessive drinking and routine use of drugs/ stimulant drugs are factors that increase mortality rate. Selection based on assets/ income Assets and income are important factors to determine insurance amount. Policy with excessive insurance amount could contain medical adverse selection or moral hazard. Selection based on environment Those who belong to anti-social forces/ those who have no regular employment tend to purchase a policy out of impure motives.


15. Response to environmental risk Limitation on insurance purchase based on contract rule

・Limitation on maximum insurance amount based on issue age ・Limitation on insurance amount based on income/ assets ・Limitation based on overseas traveling destination ・Third party recipient contract Limitation on insurance purchase based on vocation rule

Limitation on insurance purchase

・Limitation on insurance amount by dangerous hobbies ・Money laundering 17

16. Underwriting of moral risk Moral risk: The number of deliberate and intensive insurance frauds is increasing. Items of Note for Underwriting

(1) Motive for application・・・Does a policyholder voluntary apply for a policy?

(2) Policy with excessive insurance amount・・・Is insurance amount excessive compared to age/ job/ income/ assets? (3) Inverse rank policy・・・ Is insurance amount excessive compared to primary wage-earners or representatives of company? 18

17. Response to moral risk Use of policy coverage registration system

Prevention of intensive application

Use of information held by our company

Use of information held at the time of medical examination

Prevention of anti-social forces, etc.

Provision of information from sales teams 19

18. Utilization of reinsurance Diversification of risks of high-value policies and policies with high physical risk Types of reinsurance Automatic ceding ・・・Policies with a certain amount and above are ceded at a certain ratio. This is applied mainly to high-value policies. Arbitrary ceding ・・・Mainly, policies that fall under highly substandard life are individually ceded.


19. Next issues (1) Influence of advanced medical technology

Genetic testing ・Japanese life insurance companies does not utilize genetic testing as examination materials. A famous actress received preventive treatment based on genetic testing, which was recently in the news. Genetic testing has been rapidly recognized in the public. The number of those who use genetic testing may increase. ・If use of genetic testing is legally limited in Japan, like other countries, handling of genetic testing results may be an issue (whether the results fall under declaration, etc.). In Japan, medical check-up notification and thorough medical check-up result are used as examination materials. If genetic testing becomes a required item of medical check-up, it may be needed to review the selection method. ・Preventive treatment based on genetic testing result is not currently considered to be qualified to receive benefit. In the future, however, this could be evolved into a trouble. Whether preventive treatment should be qualified to receive benefit may be examined. Advanced treatment technique As typified by application of induced pluripotent stem cell (IPS cell), life prognosis of diseases, which have been regarded as intractable disease, is expected to be improved as medical technology advances. Accordingly, life insurance companies may expand the underwriting scope. Examination techniques such as revision of the examination standards are required to be enhanced. 21

19. Next issues (2) Response to aging society As the population ages globally, the number of elderly people is also increasing every year in Japan. Compared to young people, many elderly people have combined disorder and were rejected. The issue is to improve examination technique to include elderly people in underwriting scope.

Development of underwriters Development of underwriters, professionals of underwriting, is essential for life insurance companies. It is ideal if medical examiners alone can do examination. It is, however, practically difficult. Therefore, an increasing number of life insurers utilize underwriters with specialized knowledge about examination. “Underwriters Association of Japan” was recently established, and popularizes and develops the underwriter system. Although the underwriter system is not spread in the U.S. that much, it is essential to enhance underwriters’ technique to solve issues which life insurance will face in the future. 22