8.1 Underwriting Process, Risk Classification, and MIB
Key Takeaways
- Underwriting selects and classifies risks to prevent adverse selection and set actuarially fair premiums.
- Standard, substandard (rated), preferred, and declined are the core risk classes; table ratings add fixed percentage increments above standard.
- Field underwriting by the producer is the first screen; the home-office underwriter makes the final decision.
- The Medical Information Bureau (MIB) stores coded medical impairments and requires written applicant consent under the Fair Credit Reporting Act (FCRA).
- Adverse decisions based on consumer or investigative reports trigger FCRA disclosure duties to the applicant.
Underwriting is the process by which an insurer evaluates an applicant's mortality risk and decides whether to issue a policy, and at what premium. Its purpose is risk selection and classification: charging each insured a premium that fairly reflects the risk that person brings to the pool.
Why Underwriting Exists: Adverse Selection
Adverse selection is the tendency of higher-risk individuals to seek insurance more aggressively than lower-risk individuals. A person who knows they are seriously ill has greater incentive to buy coverage. If insurers could not screen, the pool would fill with poor risks, claims would exceed premiums, and rates would spiral.
Underwriting counters adverse selection by gathering information and pricing risk accurately so that healthy insureds are not forced to subsidize poor risks at standard rates.
The Two Levels of Underwriting
Underwriting happens in two stages:
| Stage | Who performs it | Role |
|---|---|---|
| Field underwriting | The producer (agent) | First-line screen: completes the application accurately, asks health questions, observes the applicant, avoids submitting clearly uninsurable risks |
| Home-office underwriting | The company underwriter | Reviews application, medical records, lab results, and reports; assigns the final risk class and premium |
The producer is the insurer's eyes and ears. Misrepresentation or omission on the application, whether by applicant or producer, can void coverage during the contestable period. The producer must never alter answers or help an applicant conceal a condition.
Risk Classifications
Underwriters sort applicants into classes based on expected mortality relative to the general population.
| Class | Meaning | Premium effect |
|---|---|---|
| Preferred | Better-than-average health, ideal build, non-tobacco | Lowest premium |
| Standard | Average mortality risk | Average (baseline) premium |
| Substandard (rated) | Higher-than-average risk but still insurable | Increased premium |
| Declined | Risk too high or uninsurable | No coverage offered |
Factors evaluated include age, gender (where permitted), current and past health, tobacco use, build (height/weight), occupation, hobbies (skydiving, scuba), driving record, foreign travel, family history, and avocations. Age is the single largest mortality factor.
Rating Substandard Risks: Worked Numbers
When an applicant is substandard, the insurer can still issue coverage by raising the premium two ways.
Table rating (permanent percentage). Each table adds a fixed percentage above the standard premium, usually in 25% increments:
| Table | Added to standard |
|---|---|
| Table 1 (A) | +25% |
| Table 2 (B) | +50% |
| Table 3 (C) | +75% |
| Table 4 (D) | +100% |
Worked example: A standard annual premium is $1,000. An applicant rated Table 4 pays the standard plus 100%: $1,000 + (1.00 × $1,000) = $2,000 per year.
Flat extra (per-$1,000 dollar charge). A flat extra adds a set dollar amount per $1,000 of face for a specific or temporary hazard. Worked example: A $2.50 flat extra on a $200,000 policy adds (200 units × $2.50) = $500 per year. A flat extra may be temporary (dropped after a few years) for a transient risk such as a recent surgery, while table ratings are typically permanent.
An applicant qualifies for a standard annual premium of $800 but is rated Table 2 because of controlled high blood pressure. What is the annual premium?
Sources of Underwriting Information and the MIB
Underwriters gather data from several sources, all of which carry consumer-protection duties.
- The application – the primary source; representations are the basis of the contract.
- Medical exam / paramedical exam – height, weight, blood pressure, blood and urine specimens.
- Attending Physician Statement (APS) – records requested from the applicant's own doctor for a flagged condition.
- Medical Information Bureau (MIB) – a nonprofit member-insurer database storing coded medical and lifestyle impairments reported on prior applications.
- Consumer / investigative reports – outside firms verify lifestyle, finances, and reputation.
How the MIB Works
The Medical Information Bureau (MIB) does not store full medical records or underwriting decisions — only brief coded impairments (for example, a code indicating abnormal blood pressure). Member insurers check MIB to detect discrepancies between a current application and prior disclosures.
Trap: An insurer may not decline or rate a policy solely because of an MIB code. The code is a flag to investigate; the adverse decision must rest on the insurer's own evidence.
Member insurers also report coded impairments back to the MIB, which is why a discrepancy between a current application and a prior one surfaces. MIB data is retained for a limited period (commonly seven years), and the applicant may contact the MIB directly to review and correct their file.
Consumer Reports and the Fair Credit Reporting Act (FCRA)
The Fair Credit Reporting Act (FCRA) governs the gathering of consumer information for insurance underwriting and protects applicants:
| FCRA duty | Requirement |
|---|---|
| Notice / disclosure | The applicant must be told that a consumer report may be obtained |
| Investigative consumer report | If interviews with neighbors/associates are used, the applicant must be notified in writing and may request the nature and scope |
| Adverse action notice | If the insurer declines, rates, or limits coverage based on a report, it must inform the applicant and identify the reporting agency |
| Right to know / dispute | The applicant may obtain the report's contents from the agency and dispute inaccuracies |
Consent. Submitting information to the MIB and obtaining consumer reports requires the applicant's written authorization, normally signed as part of the application. Without that signed consent, the insurer cannot access the MIB.
An underwriter sees an MIB code suggesting a prior cardiac impairment that the applicant did not disclose. Which action is permitted?