The Health Insurance Underwriting Process

The insurance industry functions by moving the risk of expensive, catastrophic events from individuals, who cannot afford to bear the risk, to the capital markets, which can. The insurance company takes in premiums from customers and works hard to predict its future expenditures, attempting to set premiums, plus whatever the company can earn from its own investment portfolio, above expenditures.

Data Gathering

• The first step in the underwriting process is the gathering of detailed actuarial data. Insurance companies analyze data from government sources such as the Centers for Disease Control, National Institute of Health and the Occupational Safety and Health Administration, from private sources such as the American Heart Association and the American Cancer Association, and their own internal data and claims experience. They attempt to predict, based on past experience, the frequency and severity of illnesses and injuries within their market, and estimate the cost of treatment.

Field Underwriting

• The insurance agent is the primary field underwriter in the insurance industry. The insurance agent frequently meets the prospective customer in person. While the agent is usually selling on a commission basis, he is also expected to use independent judgment and not take applications from people with obvious and severe health problems that would normally disqualify them.

Application

• The customer fills out one or more applications for insurance, with one or more carriers. Each carrier has a list of health and medical-history-related questions. The agent must ask them word for word, and accurately record the applicant's answers. At this point, some applicants may get screened out altogether. For example, it is common for insurance carriers to automatically deny coverage for individuals who have undergone treatment for cancer or other severe illnesses within the last three years. Those with clean medical histories, or who fall into "gray areas," have their applications forwarded to the insurance company underwriting staff.

Medical Records Check

• Life and health insurance companies routinely pull medical history information from the Medical Information Bureau, a national database of health information, set up to prevent insurance fraud. It acts as a check against the consumer's ability to apply for insurance while withholding material information from the insurer. In some cases, the insurance company may request additional records from an attending physician prior making the underwriting decision.

Approval or Disapproval

• Once all MIB information and attending physician information is received, the insurance company may contact the agent or applicant for additional information. Otherwise, the insurance company will approve the applicant as a preferred risk, or assign a lower-risk category for the customer, which typically involves a higher premium, to compensate the insurance company for the risk. If one or more risk factors are unacceptable to the company, the company will decline the application and refund any premiums received.