Nonmedical insurance-definition, safeguards and advantages

 Nonmedical insurance-definition, safeguards and advantages

. Risk factors evaluated for nonmedical insurance

• Financial risk underwriting and fallouts of over-insurance

• Financial underwriting for individuals and businesses:

• Guidelines, safeguards and limitations

• Medical risk underwriting; medical tests required for life insurance 

• Selection and classification of medical risks using numerical rating system 

• Medical conditions which lead to rejection-decline or postponement of case

5.1 NONMEDICAL INSURANCE

Medical examinations are not required with all life insurance applications. The applications which do not require medical examinations are categorized as nonmedical insurance. The concept of nonmedical insurance originated in UK in the early twentieth century. In the beginning, only young applicants applying for small sums of insurance were allowed nonmedical insurance. Over the years claims experience was seen to be favourable (the number of deaths in the insurance pool was not more than what was assumed) and this practice became the norm in all life insurance companies for wider ranges of age and sum assured. In nonmedical cases, even though medical tests are not required, limited amount of medical information related to the applicant's medical history, family medical history and tobacco or alcohol use, must be furnished. 1

There is a potential risk of likely nondisclosure of health problems in nonmedical cases. Surveys conducted by some life insurance companies have shown nondisclosure of serious medical conditions of around 15%.2 The underwriter has to rely on statements made by the applicant as there is no other source to verify the applicant's statement about his health. In the and labo ratory tests, many health conditions go undetected. Diseases which can occur without overt symptoms such as diabetes or hypertension remain undisclosed as the applican may not know that he suffers from them Sometimes, applicants may also intentionally hide health related facts. To minimize the increased risk of nondisclosure of health conditions, the life insurance companies have put in place certain safeguards for the nonmedical cases.

5.1.1 Limiting the Sum Assured ar the Age for Nonmedical Applican (Nonmedical Limits)

Insurance companies reduce the risk from nonmedical business by limiting the sum assured in the nonmedical category. Some newly formed private life insurance companies offered a sum assured of Rs. 8 lakh for clients less than 35 years of age as nonmedical insurance, initially. Today, most companies provide up to Rs. 15 to 20 for this age group in the nonmedical category. The nonmedical limits were relaxed as the claims experience of the companies was lower than what was expected. Sum assured allowed for nonmedical cases decrease with the increase in the age of the clients. Previous policies that have been taken by the client are added to the sum assured applied for to calculate whether the sum assured falls in the nonmedical limit.

Nonmedical limits are regularly assessed by evaluation of claims data. Claims arising from nonmedical applicants due to diseases that were unknown or concealed at the time of application are weighed against with the cost of medical expenses for those applicants. Figure 5.1 uses a simple example to illustrate the principle behind the devising of nonmedical limits in insurance companies.

5.1.2 Converting a Nonmedical Application into Medical in Case of Substandard Risk

Nonmedical life insurance is allowed only when the client states he is healthy and, therefore, falls in the standard risk category. This is another safeguard to reduce risk of nondisclosure in nonmedical cases. If the client mentions any illness or symptoms in the application form, the underwriter requests for relevant medical tests. Applicants in risk-prone occupations like those working in mines or chemical industries may be sent for medical tests as exposure to harmful and noxious substances for substantial periods of time can cause respiratory problems. Medical tests that are required by underwriters for certain medical conditions are listed in Table 5.1.

TABLE 5.1 Conditions (in Nonmedical Cases) Requiring Medical Tests

Condition stated Medical tests that the underwriter can ask for Medical Examination Report (MER), Fasting Blood Sugar (FBS) Family history of heart disease/ diabetes/stroke in more than two family members (family members include parents, siblings and spouse) Death of family members due to the above diseases before 60 years MER, FBS of age. Overweight client MER, FBS, Electrocardiograph (ECG) Heavy smokers (more than MER, FBS, ECG 10 cigarettes a day) Heavy drinkers (more than 50 ml MER, FBS and Liver Function Tests (LFT) of hard drinks a day) Any disclosed medical problem in MER or/and other relevant tests that the the form other than minor illnesses underwriter thinks necessary Miners and chemical industry workers MER, Chest X-Ray or/and other relevant tests that underwriter thinks necessary

5.1.3 Identification (ID) Proofs

Life insurance companies have a list of acceptable identification proofs as mandatory requirements for all insurance application. The name and the age of the client on the ID proof submitted must match what is stated in the application form. Regulatory guidelines for Anti Money Laundering (AML) and Know Your Customer (KYC) require proper identification documentation before any financial transaction. To prevent fraud, the underwriters examine the ID proof for any signs of tampering or forgery.4

5.1.4 Strict Parameters for Nonmedical Automatic/Computerized Underwriting

Many companies have an automated system for evaluating and issuing nonmedical cases. Nonmedical cases form the bulk of new insurance applications and automation helps in expediting the process. Details of the ap plication are entered into a computer pro gram which automatically issues the policy if the details given in the application form match predefined parameters. In case the ap plicant is found to have any risk element, the computer automatically sends the case to ar underwriter for review. In companies where nonmedical underwriting is automated, the parameters set for issuing a policy are very stringent.

5.1.5 Limiting Insurance on Juveni (Children) Lives

Juvenile cases are profitable due to the relatively lesser mortality risk. Life insurance companies are eager to sell policies to children. However, children do not need to be insured as they do not generate any income or any financial value for the family that would need to be protected through insurance. Life insurance policies sold to children are purely for investment reasons. Life insurance companies put limits on the amount of life insurance for children and certain insurance products such as term insurance are not sold to children.

To avoid any misuse of life insurance cover on children, the applications for life insurance on children are very carefully underwritten. Insurance companies limit the coverage to amounts much smaller than those available to adults, particularly for very young children. They also verify the life insurance on siblings. Equal amount of life insurance on the breadwinner of the family is a prerequisite for juvenile cases. Insurance is not allowed till the child is three months old (some companies do not allow insurance till six months) because death rate is high immediately after the birth due to hazards of natal environment, congenital defects and the delicate physical resistance of a newborn.

The social strata and the financial ability of the family also influence the mortality of a child. This makes it important to enquire about the family's income. Life insurance policies are issued only to healthy infants and children. Health problems reflected in the application form are investigated thoroughly before the issue of the policy. Most insurance companies do not issue policies to children with poor or substandard health conditions.

5.1.6 Advantages and Disadvantage of Nonmedical Insurance for the Lif Insurance Companies

Nonmedical cases can be processed faster. The time required for organizing medical examinations is saved. Facing a doctor for the purchase of life insurance policies is known to be one of the greatest psychological barriers for a customer. By removing this barrier life insurance companies can reach out to more customers.

Claims data for young age groups show only a little difference in medical and nonmedical policies. The differences increase as the age of clients increases. Therefore, under the age of 30 there is a very little probability of finding any disorder based on medical examination.

Nonmedical insurance does have slightly higher rate of mortality than meda ically examined applications. This extra mortality can come from two reasons: one, impairments known to the applicant but deliberately concealed, two impairments not known to the applicant that could have been discovered by a medical examination. Nonmedical business is profitable only till the cost of claims for the insured pool is less than the cost of medical examinations and tests as illustrated in Fig. 5.2. An Equation

Profitability of nonmedical business

= Cost of claims < Cost of medical tests

FIGURE 5.2 Profitability equation for nonmediinsurance.

5.2 RISK FACTORS EVALUATED FOR INSURANCE

Life insurance companies seek detailed information in the application forms to evaluate the nonmedical cases and categorize them methodically in proper risk categories. These significant nonmedical factors for risk assessment are as follows:

(i) Age (ii) Gender (iii) Previous insurance (iv) Adverse medical history (v) Family medical history (vi) Occupational hazards (vii) Residence and travel (viii) Non resident indians (ix) Habits (x) Morals

5.2.1 Age

An individual's resistance to disease and injury decreases as age advances and the body grows older. Mortality tables clearly show that age of the client is the single most important factor for increased mortality. Insurance companies charge higher premiums with increasing age of applicants. Companies do not issue insurance policies beyond a certain age as the risk becomes very high. Maximum age limit for buying an insurance policy in most companies is 60 years. Some may have lower or higher ages depending on the design of the product.

Age is the basic factor that determines the premium a client pays for an insurance. The client has to submit a proof of age with the application. Sometimes an incorrect statement of age is discovered after the policy has been issued; in such cases the sum of the proceeds is reduced in accordance with the mis-statement of age clause. The documents required for the proof of the birth are as follows:

Acceptable date of birth proofs (identification documents)

(i) Passport

(ii) Driving license

iii) PAN card

((vi) High school or equivalent certificate (vii) Employers certificate (government and

(iv) Ration card

(v) Voters identity card

public sector employees)

The documents which cannot be accepted as a date of birth proofs are:

(i) Affidavits 

(ii) Self-declaration

(iii) School leaving certificate

Some companies treat the non-acceptable date of birth proofs as a risk factor and add an extra amount to the standard premium (Rs. 2 per Rs. 1000 of sum assured is added to the premium) for clients who do not have acceptable proof of date of birth. Such applicants are, thus, classified as substandard.

5.2.2 Gender

The mortality rate for women is lower than men and women have longer lifespans. The standard premiums for women are, therefore, lower than men. In spite of that there is an increased risk associated with women. This is due to their unfavourable socioeconomic status in India where sporadic cases of culpable homicide of newly wedded women (dowry deaths) are reported. Underwriting of life insurance policies is stringent for women applicants who are uneducated and unemployed.

Professional, salaried, wage earning and income-generating women are treated at par with men for life insurance purposes. The amount of life insurance allowed for such women depends on their income. By and large, housewives, unemployed and unmarried dependent women are generally only allowed small amount of life insurance. Women who have passive income through rentals or investments are also allowed only small amount of life insurance coverage. Women are not allowed to buy term insurance if they are dependent housewives.

5.2.3 Previous Insurance

The applicant's previous life insurance is taken into account to calculate the total insurance sum assured allowed to him. The total amount of insurance should bear rea sonable relationship to the applicant's needs and financial resources. This is discussed in detail under the Financial Underwriting section. Applicants have to disclose details of any previous rejected or rated (substandard risk) application. A previously rated applicant is investigated for the specific medical condition which might have become worse over a period of time.

5.2.4 Adverse Medical History

The application form contains questions about the applicant's previous illnesses, injuries and surgical operations. Past adverse medical history would prompt the underwriters to request for special/additional medical tests or examinations. In such cases even the personal doctor of the applicant may need to be contacted for medical information.

5.2.5 Family Medical History

The life insurance application form contains a section on family history. Questions are asked on ages and state of health of parents and siblings. Ages at death, and the causes of death, need to be stated if the parents/siblings have died. Family history is considered significant because some health and medical conditions such as coronary heart disease, diabetes, high blood pressure are known to be hereditary.

Some other hereditary diseases arestroke, ovarian, breast and colon cancer, and thallasemia and haemophilia (blood disorders).

5.2.6 Occupational Hazards The International Labour Organization (ILO has estimated the annual figure for work-re lated deaths as 1.1 million people, globally Accidents represent 30% of the total work related mortality while diseases account fo the rest..

Accidents are common in many occupa tions. People working with machines and other heavy equipment are exposed to var ious hazards. Construction workers may suffer serious injuries during construction activities. Miners face the risk of explosions rock falls and fire. Most electrical worker are exposed to the risk of electrocution and some are prone to the risk of falling from high poles, transformers and pylons. Labourers handling heavy material run the risk o: getting crushed under them. Fishermen face the risk of tidal waves and other perils of the sea. Police, military and paramilitary per sonnel have the risk of getting injured and even losing their life in various operations.

People working in industrial plants are exposed to dusts and poisonous gases produced by the operations processes such as grinding, drilling, etc. Contaminants such as silica, metal, textile or wool fibres car cause respiratory problems which adversely affect the lifespan of individuals. The lasting effects of exposure to dust during and after employment in such trade, is an important factor for underwriting. Exposure to asbestos is a proven serious health hazard. Different forms of poison are used in many industries as the raw material for making various products. Exposure to lead in workers associated with the mining and smelting of lead; or those in jobs involving print life insurance cover as standard, but charge the accident rider at substandard rates.

Indicative decisions such as standard substandard or declined for a few occupations as per current industry practices are given in the succeeding paragraphs. If a particular occupation or service is substandard, the ratings (extra premium) are expressed as a flat extra increase per Rs. 1000 of sum assured such as Rs. 2 per mille or Rs. 3 per mille. The rating for accident riders is typically expressed as multiples known as multiplier for example 2x or 4x.2

Pilots

There is no occupational rating (extra premium) or restriction on pilots or crew members flying on regularly scheduled commercial aircrafts. The rating on pilots of private planes, which fly on unscheduled routes, depends on the pilot's age, experience, training and frequency of flying. Applicants are required to complete an aviation questionnaire. This contains full details of the aircraft and the company which owns it.

Rating for pilots of military aircrafts is dependent on the type of aircraft flown. Pilot's age and type of flying missions are also taken into account.

Military and police personnel

Service in the armed forces is regarded as a high-risk job. Some branches in the armed forces such as anti terrorist squads, special action commandos, bomb disposal squads and paratroopers are at higher risks than other army, navy or airforce personnel. Such applicants may be declined life insurance or charged a very high extra premium Naval personnel are considered as standard risks except submarine personnel and nava divers. Air force engineers and administrative personnel are put in the standard category while rating of pilots depends or whether they fly fighter planes or transport planes. Police personnel have lower risks and are usually given standard rates if they are not a part of counterterrorist, commando o bomb disposal operations. Armed forces or Border Security Force (BSF) personnel may be given life cover with an extra premium of Rs. 2 per mille while the accident rider may be declined.

Mining and refineries

People working in mines and oil refineries face risks due to accidents or hazardous inhalants that affect the health and cause longterm chronic health problems. The degree of risk substantially depends on the position and type of work performed by the person. Usually geologists and managers have lesser risk than skilled or semiskilled workers at the site. Applicants in white collar jobs are, therefore, given standard rates if their work is mainly onshore. Engineers on oil rigs or in other such offshore installations are rated at 1 per mille while skilled and semiskilled workers such as welders and foremen are rated at 2 per mille. Accident rider may be rated at 2x for the low risk white collar applicants and rated at 2x for the other higher risk applicants.

Drivers

Drivers fall in either intermediate or low-risk category based on the type of vehicle they drive. For example, truck drivers may be put in substandard category, but taxi drivers can be taken as standard risks.

Construction workers

Risk category of construction workers varies according to the nature of the job and their work deployment. Generally, they fall in high to intermediate grades of risk.

5.2.7 Avocation

People participating in high-risk sporting activities are charged with extra premiums. Racing (car, motorbike, speedboat etc); sky diving; scuba diving; and mountaineering are considered risky for insurance purposes. Depending on the extent of the associated risk, risk-prone avocations have a flat extra rating of Rs. 2.00 to Rs. 10.00 per Rs.1000 of the sum assured.

5.2.8 Travels and Residence

Geographical factors play a major role in determining life expectancy of people in any region. Poor medical facilities, extreme climate and difficult topography increase health related risks. Political and economic conditions of a country are equally important issues both from the point of view of mortality rate and the cost associated with investigating a death claim in a foreign country. Insurance companies decide on the premium depending on the risk category that has been assigned to the country. This depends on the level of crime, social law and order, war and diseases prevalent in that country. The underwriter may also take into account the occupation, profile, exact city or location of residence in their respective country and income of the applicant. Flat extra premiums due to residence risk range from 1 per mille to 4 per mille. Applicants residing in strife torn countries like Afghanistan or Somalia may be declined insurance.

5.2.9 Insurance for NRIs and Foreig Nationals

A Non Resident Indian (NRI) has to sign an application in India, and has to pay the premium in Indian rupees (INR). Only if an Indian life insurance company has an office in a foreign country, it can issue policies to people of Indian origin in that country, and the premium can be paid in foreign currency. People from foreign countries residing in India permanently for extended periods can be insured by the Indian life insurance companies.

5.2.10 Habits

The term habit, for the purpose of underwriting, refers to the use of alcohol, tobacco, drug abuse or addiction to any other intoxicating material. The use of drugs impairs of judgement and weakens reflexes. This increases the risk of accidents and affects the individual's general health. Drug addicts are usually declined insurance. Prolonged use of excessive quantity of alcohol is harmful to health. Nevertheless, insurance companies are not averse to giving life insurance policy to an applicant who uses alcoholic beverages in moderate quantities on social occasions.

A medical test is called for if the applicant discloses his addiction to alcohol, which is higher than what is considered to be occasional social drinking. Similarly, heavy smokers are susceptible to many diseases and the insurance companies are cautious of smokers who claim to have left smoking.

5.2.11 Morals

Insurance companies are interested in the moral conduct of the client. Behaviour patterns which are considered immoral (such as unfaithfulness to spouse) are viewed seriously, because they are frequently found in combination with other types of risky behaviour such as overindulgence in alcoholic beverages, gambling and the use of drugs. Unethical business conduct wherever identified is also taken into consideration while deciding the life insurance application.

5.3 FINANCIAL RISK UNDERWRITIN AND FALLOUTS OF OVERINSURANCE

Financial underwriting, attempts to ensure that the amount of life insurance is in accordance with the applicant's status, assets and income. Assessment of financial risks is equally important as evaluating medical or occupational risks. When large monetary benefits are available from life insurance they may have an undesirable effect. It is not unheard for beneficiaries to kill the insured person in order to obtain the proceeds of his life insurance policy. It may even tempt an insured person when facing a financial crisis to commit suicide in order to secure his family's future. To ensure that there is no overinsurance, speculation and fraud arising out  of the policy, sophisticated financial underwriting guidelines have been put in place by the life insurance companies.

The factors used to determine the adequacy of the insurance amount are a combination of income, material net worth and insurable interest. If there is any evidence of potential fraud, malevolence or over-insurance, the application for life insurance must be denied (declined). There is no mechanism available with the underwriters to neutralize these factors and issue insurance at substandard rates by charging extra premium as done in the case of medical or occupational substandard risks and therefore such applications are rejected out right. The fundamental objective of financial underwriting is to ensure that a person should not be worth more when dead than alive.

Financial underwriting is defined as "the investigation and evaluation of financial data on a risk under consideration in order to determine the acceptability of that risk for insurance coverage."2 Financial indicators such as income, profitability and liquidity provide the insurer with information to analyze the suitable amount of insurance and eliminate moral hazard. Individual

(e.g. family protection, home or personal loan protection, investment or savings) and business (e.g. business loan protection, partnership protection or key person cover) insurance cases are subjected to financial underwriting. Some questions that are asked for underwriting the financial risk in insurance applications are10 as follows:

(i) Appropriateness: Is the application based o a valid insurable interest?

 (ii) Consistency: Are the type of policy applied for and, in particular, the sum to be insured reasonable?

(iii) Affordability: Are sufficient resources available with the applicant to enable payment of future premiums?

5.3.1 Fallouts of Over-insurance

Over-insurance is the insurance in excess of the proportionate loss of income to the policy holder's family in case of his demise. Over-insurance can have extreme effects such as murder or suicide of the insured. Another negative effect of over insurance is the lapse of the policy. Legal and regulatory measures are put in place by life insurance companies to prevent such incidents as discussed further:

Murder

Legal systems in some countries put the onus of preventing misuse of the insurance policy on insurance companies. In the United States several courts have emphasized on insurable interest and an insurer's duty to investigate the financial worth of the applicant before granting life insurance. Negligent issuance of a policy or change of beneficiary could result in murder or injury to the insured by the beneficiary or someone acting on his behalf in an attempt to obtain the proceeds of the life insurance policy. In such situations the insuring company may incur legal liability, and can be sued for adjudication by the relevant court of law as illustrated in the following court case of Life Insurance Company of Georgia vs. Lopezin USA. gruity of paying such high premiums regularly for very long period" u

Most courts assume that if the beneficiary has no insurable interest in the insured's life, murder of the insured is a foreseeable event. The Indian insurance law requires that the applicant/owner of a life insurance policy should have an interest in the continuation of the insured's life insurable interest). Certain close family relationships such as spouse, parent, child or pecuniary interest relationships such as business-key-person or debtor-creditor are presumed to create an insurable interest as discussed in Chapter 1. Even if a blood/family relationship exits, insurable interest is limited to the amount of financial loss expected on the death of the insured.

According to J.D. Ingram, “Policies in violation of the insurable interest rule are not dangerous because they are illegal; they are illegal because they are dangerous. Practically, all courts recognize that an insured is placed in a position of extreme danger where a policy of insurance is issued on his life in favour of a beneficiary who has no insurable interest”. 12

Poor financial underwriting adversely impacts mortality experience of life insurance companies. Many claims studies have shown the correlation between little or poor financial underwriting and increased claims ratio. This has been especially true in the high sum assured category.

Suicide In times of grave financial crisis,  sured life insurance policy holders, may be tempted to commit suicide to pay off their debts or secure their family with the proceeds of insurance. Insurance companies have exclusion clauses13 in the policy which state that insurance money will not be paic to the beneficiary in case of suicide withir a given period of taking the policy. In India, most companies have a suicide clause of one year. In some countries the one year suicide clause period has been found insufficient and has been extended to two years. Japanese insurance companies have increased their exclusion clause of suicide to a three year period due to rise in the suicide cases of people with large insurance covers. 14

Lapse

Regular premium payment on the due date is essential to keep a life insurance policy in force. Clients may lapse the policy for many reasons, unaffordable premium amount being a common one. The risk of lapse is a major risk from life insurance company's perspective. Early discontinuation of policy means that the expenses involved in sourcing the application, the agent's commission, the medical testing and the processing and underwriting costs which account for most of the premium in the first few years of the policy cannot be recouped.

5.4 FINANCIAL UNDERWRITING GUIDELINES FOR INDIVIDUALS AND BUSINESSES

5.4.1 Individuals Financial underwriting ensures that appropriate amount of insurance is given to applicants. Applicants are required to submit documents which are evaluated to make an assessment of the financial and social standing of the applicant before granting life insurance. Underwriters use multiples of income principle to decide the amount of insurance cover allowed. If an individual applies for higher than allowed insurance, the insurance companies send a counter offer to the clients stating the allowable reduced amount. These criteria differ for individuals with earned income and unearned income.

Individuals with earned income

Earned income means compensation from participation in a business, including wages, income from salary, tips, commissions and bonuses. The allowed amount of insurance for different age groups is given in Table 5.2. TABLE 5.2 Sum Assured Guidelines for Individual Applicants

Age Amount allowed as insurance cover 18 to 30 30 to 40 40 to 50 50 to 60 22 to 25 times of gross annual income 15 to 17 times of gross annual income 10 to 12 times of gross annual income 5 to 7 times of gross annual income

Individuals with unearned income

An individual's income derived from sources other than employment such as interest and dividends from investments or income from rental property is referred to as unearned income. The amount generally allowed for applicants in all age groups with unearned income is 5 to 10 times of their gross annual income.

Limiting the sum assured is not sufficient for managing financial risks. To ensure affordability of premium and protect the company against early lapse of policies the premium for the policy cannot be more than a defined percentage of the applicant's income (refer to Table 5.3).

TABLE 5.3 Premium Guidelines for Minimizing Financial Risks

Income range of applicant Percentage of income allowed as premium Income below Rs. 2 lakh Income between 2-5 lakh Income above Rs. 5 lakh 10% 20% 30%

Documents required for determining income

Income is the key factor used to evaluate the appropriateness of the sum assured. Questions about income are a part of the application form but for large amounts of insurance, financial documents are required to verify the income mentioned in the application form. The documents generally required are listed in Table 5.4.

TABLE 5.4 Financial Documents Required for Life Insurance

Sum assured below Rs. 10 lakh Sum assured between Rs. 10 to Rs. 20 lakh Sum assured above Rs. 20 lakh No need of financial documents Financial forms or questionnaires and in some cases income tax returns. Income tax returns for past 3 years/profit loss statement and balance sheets, duly certified by a registered Chartered Accountant.

Undisclosed income

Some business persons have undisclosed income. This is the income which is not de clared through the income tax returns or balance sheets. To estimate the income of such people unconventional income proofs are needed to be used. Car ownership, credit card limit, property ownership, etc., can provide reasonable estimate of such an applicant. Life insurance companies restrict the amount of insurance that can be given based on these documents to Rs. 20–25 lakh. Some of these substitute (nonstandard or surrogate) income proofs are specified in Table 5.5.15

TABLE 5.5 Nonstandard Income Proof for Life

Bank statements

Documents required: Last 6 months bank statement of the applicant's accounts Income: Income taken as the average of monthly account balance for last 6 months * 12 Maximum sum assured that can be given: Income < 10 times (limited to a maximum of

Rs. 25 lakh)

Rent from house property

Income: Income taken as equivalent to the monthly rent x 12 Documents required: Legal rent papers/lease deed Maximum sum assured that can be given: Income x 10 times (limited to a maximum of Rs. 25 lakh)

15. The guidelines mentioned here are indicative. Different life insurance companies have their own variations of the same

Home loans taken from a scheduled bank Business organizations have always used insurance as a tool for risk management. However, this has been restricted to risk of loss from damage to machinery, equipment and tangible assets. Insurance of human capital (the value that human beings bring to the business) is now emerging as an equally important need. Employees, business owners or partners play a key role in creating and sustaining profitability. Loss of these key persons and the associated financial risk in case of their death can have serious consequences for the company. It may even threaten the very existence of the company, particularly small and medium-sized enterprises and family run businesses.

The key employee or the partner contributes to the business results, credit availability and goodwill. Death of a key person may result in decline in sales and profits. Organizations can face difficulty in finding a replacement for such key employees. In case of a partnership firm, the deceased partner's share in business is inherited by his legal heirs. A legal heir who has not been involved in the business earlier may face resistance from surviving partners leading to conflicts and disruption. In such cases a partnership insurance policy can be used by surviving partners to make compensatory payments, and buy the share of the deceased from his heirs.

Key person insurance

A key person is one who significantly contributes to the profits of the company. A key person insurance policy is meant to compen  sate loss from death of a key person. The purpose of key person insurance underwriting is to financially evaluate the appropriate sum of insurance cover for a key person. First of all the underwriter has to establish whether the key person is really the key. The worth of the key person for the business has to be established to avoid potential fraud. Information such as education and work experience of the key person, his role in the company, etc., is gathered by his curriculum vitae (CV) or through a questionnaire.

The insurance amount allowed is calculated by taking into account the annual salary of the key person or the profits of the company. It is recommended that the maximum sum insured should not exceed five times the annual gross profit averaged out over the last 3 years.

As a rule, the underwriter makes an average of 3 years net profit of the concerned company and multiplies it by 5 to arrive at the sum assured that can be given under a key person life insurance policy. This amount is distributed among the total number of key persons who have applied for the insurance. An alternative to this method is to multiply the annual salary of the key person by 10 to arrive at the maximum insurance that can be given. Loss making enterprises are not allowed to take key person policies.

Partnership insurance

Partnership insurance allows surviving business partners to use the insurance proceeds to purchase the deceased partner's share from his heirs. This type of insurance is also called buy-sell insurance. The buy sell clause is added to the original partner ship deed (agreement). The clause specifie: that all the monetary death benefits from the insurance policy be used only for buy ing partners' shares. This buy-sell provisior is made through a supplementary deed or a deed of variation, and is the legal arrange ment designed to provide for an orderly transfer of ownership.

Partnership insurance is useful for both surviving partners and the deceased partner's heirs. It provides funds to purchase the business interest held by the heirs and assures that the control of the company re mains with the surviving partners. It also guarantees that the heirs of the deceased partner sell the shares to the firm, and not to outsiders. Through partnership insurance surviving partner(s) eliminate the possibil ity that the heirs would assume management positions for which they may not be qualified. Any potential emotional conflicts between the heirs and the surviving business owners, if the heirs were to participate in the business, are avoided. Such an insurance cover also removes pressures from the surviving owners to contribute some parts of the profits to the family of the deceased. Partnership insurance is beneficial to the family of the deceased partner as it assures that they get a predefined lump sum payment to the extent of the deceased partner's share in the company.

To determine the amount of insurance that the partners should be given, the underwriter must know the value of each partner's interest in the business and the firm's gross and net profits. The amount of partnership insurance allowed to a partnership firm is five times of the average of last three years net profit of the firm. If a firm decides to obtain partnership insurance, all partners of the firm have to apply for insurance simultaneously. The allowed amount of partnership insurance is divided among all the partners based on their share percentage.

Life insurance companies are exposed to significant financial risk. Large policies on individuals or key persons and partners need to be carefully underwritten to minimize the risk exposure. Statistics show that if applicants are given life insurance policies in excess to what they can afford, the company's mortality experience is likely to be adversely affected. The public at large, sometimes, do not understand the importance of financial underwriting, and question the purpose of furnishing financial documents and income details to the underwriters for obtaining a policy. Information about concepts of antiselection and speculation 16 can help in creating awareness and increase acceptability of underwriting norms and increase the reach of insurance products.

5.5 MEDICAL UNDERWRITING

Medical underwriting is the process of selection and classification of the mortality risk of the applicant based on health conditions. A medical test and examination is conducted by the medical examiners to obtain a complete assessment of the applicant's health. The underwriters decision is based on the results of the medical report. If the health of the applicant is normal, the underwriter issues the policy at standard rates. In case of an abnormal medical report, underwriters refer to an elaborate manual that defines the degree of risk called the Extra Mortality Rate (EMR) carried by each condition. A percentage increase is made on the premium for substandard applicants based on the EMR.

Life insurance companies have a panel of doctors who conduct basic medical examinations and a panel of diagnostic centres for blood tests and other specialized tests. Identi fication document of the applicant are checked before the medical tests are conducted. The medical examinations can be done by a general medical practitioner or a medical specialist. The common medical tests which are required in medical cases are as follows:

(i) Medical Examination Report (MER)

(ii) Urine tests (routine and microscopic) 

(iii) Blood chemistry-fasting blood sugar, liver enzymes tests, kidney function tests, cholesterol levels

(iv) Blood tests for HIV and hepatitis

(v) Cardiac tests - Electrocardiograph (ECG) and Treadmill

5.5.1 Medical Examination Report (MER)

MER is the key source of information in a medical case. The examining doctor has to complete a MER form and send it to the life insurance company. The MER usually consists of two main sections. Section I deals with the medical history and family history of the client. Section II includes record of height, weight, pulse, blood pressure and other medical parameters.

[14:36, 8/30/2021] bjaydev334: The urine sample is examined chemically and microscopically for the presence of albumin, pus, casts or red blood cells. Urinalysis measures the functional capacity of the kidneys, detects infections or other abnormal conditions of the kidneys, and may discover impairments of other vital organs of the body. Urinalysis can be a part of the MER or may be a separate test.

Urinalysis can detect-kidney problems, urinary infections and presence of sugar in the urine (possible diabetes).

5.5.3 Blood Chemistry

Fasting Blood Sugar (FBS)

Fasting Blood Sugar is a common test for life insurance applicants. This test detects the level of sugar in the blood. The normal range of blood sugar is between 60 to 109 mg/dl. A level above this range indicates diabetes.

Liver enzymes (liver function tests)

One of the components of bio-chemical blood examination is liver enzymes. The components of this test are AST (also called SGOT), ALT (also called SGPT), GGT and Alkaline Phosphatase.17 These liver enzymes play an important role in chemical activities within cells. Injury of the liver cells release these enzymes into the blood, elevating their level above normal limits.