Proposal is declined

It is a situation of refusal to cover a proposed life. This can happen on account of a variety of reasons. The risk on the proposed life may be too high that it cannot be covered through an extra premium, a lien, a reduction in sum proposed, offer of a different Plan and term etc. It is likely that the policy may end up as a death claim during the term of the policy. If on inquiry it is found that the proposer is an alien enemy (with whom no contract is permitted) the proposal has to be declined. Country A is at war with country B then A regards people of B as alien enemies and vice versa. A and B were in good relations   and citizens had free entry to both the countries. During such a situation relations get spoiled on some ground and war erupts. Citizens of the other country who were welcome earlier suddenly become alien enemies. A proposer who could not produce satisfactory residence proof or income proof also gets his proposal declined by the insurer. Declining of proposal depends not only on the risk factors alone but also on account of the legal system of the country where the proposal is submitted. In India for example ‘insurable interest’ is a sine qua non of life insurance. So if the proposal is submitted by some one on another life on whom he has no insurable interest it deserves to be declined [please refer the Post on Insurable interest]. High moral hazard can also lead to declining of insurance proposal.

Consideration of the proposal is postponed

To accept / reject a proposal is a right of the insurer. The insurer may accept it on standard terms or on terms other than those proposed. The insurance company may not accept a proposal now or it may postpone the consideration of the proposal to a future date. Postponement of consideration is done when passage of time reduces risk on a life. Some illnesses may have a debilitating effect on health of the proposer for some time or some illnesses may make a come back within a certain period of time. To skip this period means making an automatic reduction in risk on the life. Take the case of a person who suffered from jaundice. Some insurers postpone his proposal for six months. In another case a pregnant lady proposes for life cover in later stages of pregnancy. Generally insurers in India postpone the proposal to a date three to six months after delivery. When proposal is considered after postponement sometimes the age near birthday of the proposer may go up by one year. In simple terms postponement of consideration of proposal is a self protecting mechanism adopted by life insurers.

Proposal accepted on terms other than those proposed

There come proposals that cannot be accepted on standard rates of the insurer for obvious reasons, viz. higher risk than that assumed on a standard life. Consider these examples (i) a proposer aged 22 years is overweight by, say 5% (ii) a proposer aged 50 years is overweight by 15% (iii) a proposer aged 25 years is underweight by 20% (iv) a proposer aged 50 years is underweight by 5% (v) a proposer has lost his left eye in an accident.

Each of the cases referred to above can be discussed. (i) Being overweight at younger ages is not a bad feature. So he can be considered a standard life if all other features are favourable. (ii) Being overweight at higher ages increases risk, of diabetes/blood pressure/heart ailments etc especially when the family history shows reference to these illnesses. An extra risk may be met through an extra premium or through a reduced term or through offering a Plan with less risk cover. Instead of offering the requested Plan with benefit of  three times the sum assured on death the insurer may offer a Plan with single sum assured on death. Or the insurer may offer a reduced sum assured. (iii) Being underweight at younger age is a bad feature. But being underweight at higher ages is a good feature. In other words this proposer is getting free of extra risk as his age increases. His proposal can be accepted with a reducing lien. A lien on a policy is insurer’s right on a claim (iv) Being under weight at higher age is a favourable feature. If other features of the life are favourable he seems to be a standard life. (v) ‘One eye lost’ is an extra risk factor. This extra risk may be met by charging an extra premium.

The above cases represent simple examples where extra health risk is met through extra premium or terms other than those requested for by the proposer. There are cases where extra risk comes from occupation. Such cases are met through extra premium or by putting an exclusion clause that the insurer will not cover the risk arising out of engaging in one’s official duties.

These are examples of cases where proposals are accepted on conditions other than those that are proposed. Here what the insurer does is making a counter offer (to the proposer). The proposer, by giving his consent, is accepting the counter offer.

Accepted on the company’s standard / ordinary rates

Insurers' premiums are based on mortality tables adopted by them. Mortality table gives  rate of death at each age in a given population. It may be prepared on the basis of Census data or it may be based on mortality experience of insured lives. The mortality experience of insured lives will be better as those lives are selected ones. When a proposal is analyzed to assess the risk on the life if it is found that the life under consideration is likely to face a mortality experience similar to or better than the standard mortality experience (as per adopted mortality table) of the insurer such a life is called a ‘standard life’. A standard life can be accepted for cover on standard rates of the insurer. There is no need to charge an extra premium or impose a lien on the policy or offer different terms while accepting the proposal. While accepting the proposal the underwriter gives his decision as ‘accepted at standard rates or ordinary rates’.

Underwriting*

When the insurance company receives all the requirements enumerated in the Posts 31-40 the company can proceed with underwriting the proposal. From those documents the nationality of the proposer is determined, his identity is ascertained, his place of residence is confirmed    and the source of his income is also known. The insurer registers the proposal in their books assigning a proposal number and date of registration. Within fifteen days of this date the insurer has to take a decision of acceptance or otherwise of the proposal. This is as per the IRDA (Protection of Policyholder’s Interests) Regulations, 2002. If for some reason there is likelihood of delay over the fifteen days the same shall be communicated to the proposer with reason.

Underwriting is the process of assessing risk on the proposed life and deciding whether cover shall be granted or not, and if granted on what conditions and premium. Different companies do have different standards of assessment of risk. Some give more weight to the experience of the underwriter where as methods, like numerical rating, are also used to assess the risk. Companies may devise their own programs on underwriting and use the computer for helping in standardization of underwriting.

If I am to make a broad generalization of underwriting decisions, the following are the most prevalent decisions in underwriting:

(i)                        Proposal accepted on the company’s standard / ordinary terms

(ii)                      Proposal accepted on terms other than those proposed

(iii)                     Consideration of the proposal is postponed, and

(iv)                    Proposal is declined

Each of these decisions shall be discussed in the coming Posts.

*The concept of Reverse Underwriting in life insurance was developed by me and my Paper on this was published in the Journal of the Insurance Institute of India. A link to this Paper is given in the page ‘other publications’.