How does Underwriting works in Health Insurance?

Introduction

Whether you call it soccer or football, you know what a referee is, right?

The same goes for cricket fans & umpires!

Irrespective of how some referees and umpires have left us huffing and rioting over the decisions they took (Maradona’s Hand of God goal, Hardik Pandya’s dismissal against New Zealand in 2019, etc.), their decision is still the supreme one.

(Yes, even after the recent perks offered where players can contest certain decisions!)

Well, in the health insurance world, underwriters are the referees/ umpires and so much relies on them (and yet their role is a deliberate mystery.!)

Nonetheless, what is true is that underwriters in health insurance hold a pivotal point of responsibility towards both the insurers and the policyholders. How? Well, we will find out soon enough! Also, we will be answering some unwelcome and controversial questions like - are underwriters a hurdle for potential policyholders? How much of an influence do they hold over deciding the fate of a health insurance policy application? What are their specific roles and responsibilities?

Time to dive in!

What is Underwriting in Health Insurance?

Underwriting in health insurance refers to the mandatory process of reviewing a potential policyholder's medical history in an attempt to -

1. Decide upon whether the policyholder is eligible for the health insurance policy that they have applied for, and
2. Compute the approximate premium for the health insurance plan that they have applied for based on their existing and imminent health complications.

They aim to calculate the financial risk that a potential health insurance policyholder poses to the insurer in question. Thus, naturally, the underwriters are put in their place more as a financial security layer for the best health insurance providers than as a help for the potential policyholders.

So, really what kind of health insurance risk are we talking about? Here’s what we think.

What is Underwriting Risk in Health Insurance?

When we talk about deciding factors that help determine the best health insurance providers, we talk about factors like - Claim Settlement Ratio and Incurred Claim Ratio. These are the factors that reflect their claim settlement capability and their financial standing for the future that would be a long and short-term assurance for potential and existing policyholders.

The underwriting team is the one that helps the health insurance providers stay on top of their game in terms of these ratios. Such is plausible over the risk mitigation conducted by the underwriting team in health insurance.

This underwriting risk in health insurance is a computation of the payout risk that potential policyholder poses based on his/her pre-existing ailments or potential diseases and subsequent hospitalisation chances. If the risks become relatively higher for the health insurer, the underwriting team has two options -

1. Boost the premium to match the financial risk posed, or
2. Reject the health insurance policy application

While this is one of the major responsibilities of a health insurance underwriter, it’s not just the only one. It’s time we take a look at all of the roles played by the underwriting team -

What are the Responsibilities of a Medical Insurance Underwriter?

Please understand this - underwriting and its roles, responsibilities, and contribution in a health insurance plan and its application is mostly kept under the covers. In general, it is only the health insurers who host the underwriting team who know the whole truth about their honest role and the factors that are taken into account for the computation of premiums. This is understandable considering some calculations are trade secrets and so is the process of thorough cross-examination for the health insurance applicant.

However, here are some of the roles assumed by underwriters in health insurance as per the experts (Remember: health insurance underwriters act on two levels - when the health insurance plans are being designed and when a potential health insurance provider applies for a plan) -

1. Assess a potential policyholder’s health risks

You know when a potential policyholder with pre-existing ailments approaches insurers for the best health insurance plans and gets an estimation with a high premium? Well, the underwriting team forms the basis of that.

They go through the medical history of the health insurance applicant and consider pointers like -

1. Pre-existing medical conditions
2. The average number of hospitalisation across the years
3. The average annual cost of hospitalisation
4. The current medications that he/she is on, etc.

-for the actuarial science-based calculation that they would need to compute the risk and the premium.

Based on such pointers, the base retail premium is hiked over added loading charges that mitigate the financial risk for the health insurance provider by balancing the premium paid towards the insurer against the plausible payout over raised health insurance claims.

2.  Compute health insurance premiums

The primary basis of the health insurance premiums is determined by the health insurance underwriting team. This happens twice across the lifespan of health insurance products -

1. First, when the health insurance product is being designed to determine the retail and basic premium.
2. Second, when an applicant’s health insurance form comes through and customised premiums are computed based on existing ailments, impending medical complications, smoking habits, lifestyle choices, and chronic ailments.

3.  Monitor terms of the health insurance policy provided

The terms and conditions and the permanent exclusions that run through the policy wordings of a health insurance policy are the works of an underwriting team in connection with the health insurer in question. It falls in their job description to alter the terms and conditions across a policy if and when required. Such terms also include payment modes, amounts, and many more.

4.  Make evidence-based decisions about offering health insurance plans

Based on the evidence gathered from the medical and lifestyle history of the applicant, the underwriting team decides on whether -

1. The application is accepted/offered,
2. The application is accepted/offered with a spiked premium, or
3. The application is completely rejected.

Considering that they will have to explain their decision to the health insurer and the health insurance applicant, they have to be specific about the evidence that is considered before taking that final decision.

5.  Offer customised health insurance plans with the tweaked changes in terms

Say you are an individual with a mild cardiac condition that has required hospitalisation in the past. Now, the underwriting team analyses that you might require further medical attention in terms of your cardiac condition. So, what do they do? Do they mitigate the insurer’s risk by rejecting your health insurance policy application?

But, here’s the problem - considering our current lifestyle and environmental factors, minor health conditions and pre-existing diseases are, unfortunately, quite common. If underwriters keep on turning away such applicants, soon they will be left with a handful of policyholders that would hamper their business.

So here are two options that they choose -

1. Put on a longer waiting period - The extended waiting period helps with the financial security of the insurer and yet the policyholder is covered for the particular medical condition.
2. Introduce a permanent exclusion clause - The specific health condition that holds the possibility of rendering high claims is put under permanent exclusions, as is coverage for any auxiliary ailments brought forth by the specific ailment in question. Thus, the policyholder has the financial peace of a policy that offers coverage for a majority of health conditions; and the health insurer enjoys the perk of a secure financial prowess over mitigated risks.

Steps Explaining How the Underwriting Team Works in Health Insurance

STEP 1: HEALTH INSURANCE POLICY UNDERWRITING

When a health insurance plan is designed for the retail space, the involvement of the underwriting team is absolute. They

1. compare the existing health insurance plans in the market,
2. take into account the product’s targeted policyholder pool, and then
3. craft Unique Selling points (USPs) of the product based on the insurer’s demands and conception of the product.

The underwriting team also determines the kind of health insurance add-ons that would best serve the target pool and yet wouldn’t overtake the insurer’s financial pool and computes the basic premium for the plan that would be subjected to alterations based on the customised medical requirements of a policyholder.

STEP 2: SUBMISSION OF HEALTH INSURANCE POLICY APPLICATION

When the product’s outlay is designed, marketed, and opened for business, health insurers are ready for the policyholders to avail of the health insurance plan.

STEP 3: REVIEW OF THE APPLICATION

Once an individual applies for this policy, the underwriting team in health insurance again comes into play to decide whether the policy is accepted or rejected and whether the premium is kept at its basic pack or spiked. They cross-check the medical history and lifestyle choices of the potential health insurance policyholder.

 3.1: MEDICAL REVIEW

The health insurance underwriting team goes into detail about the medical history of the potential policyholder by reaching out to his/her past or existing physician and hospital desks. Prescriptions of the applicant are also considered during this review as are his/her hospitalisation invoices, medical processes, etc.

 3.2: ADDITIONAL REVIEWS (answer to the questions asked by the insurer)

When an individual first approaches the health insurers/ health insurance experts and requests to avail of a health insurance plan, they are provided with a questionnaire that is based on their lifestyle choices, customised medical history, BMI, and more. With this perspective, the underwriters of health insurance add the loading charges that would mitigate the financial risk for health insurance providers.

 3.3: PREMIUM CALCULATION REVIEW

The underwriting team in health insurance takes into account all of the collected data of the health insurance applicant, adds the loading charges (if applicable), and then calculates the health insurance premium. While the customised premium is still a chalk draw and is finalised by another team from the insurer, this basic amount is still decided by the underwriters.

STEP 4: DECISION

Based on the aforementioned pointers, the financial risk calculation, and the premium calculated, the underwriting team then takes the final call about the health insurance application and if the individual is offered (with or without the loading charges, longer waiting period, or new permanent exclusions ) or rejected.

What are the Factors that Affect the Underwriting Process?

• Family/Individual health history: The underwriters look into your individual and family medical history (the family health gives them an idea about any future health risks from inherited medical ailments like chronic ailments and other conditions like diabetes) to calculate the kind of financial risks that the insurance provider is about to undertake if they offer the policy.
• Tobacco use: If a potential policyholder has smoked in the last 24 - 12 months or has been involved in tobacco use of any kind, the underwriting team might just reject the health insurance application altogether, even a health insurance plan for smokers wouldn’t be considered. This is suitable considering how smoking fetches multiple health conditions that are detrimental to his/her multiple organs thus requiring multiple hospitalisations and a spiked medical bill.
• Medical questions and exams: Before offering a health insurance plan, insurers require policyholders to answer certain questions about their health conditions and sometimes, even undergo certain tests and provide the test results to the insurers. These answers reflect the existing and imminent health conditions and form the basis of premium calculation for the underwriters in health insurance.
• Lifestyle and hobbies: The lifestyle choices and hobbies of the potential policyholder are taken into consideration by the underwriting team. This is also a health revelation of the applicant that helps underwriters calculate the imminent financial risk posed by the individual considering a majority of the best health insurance plans cover lifestyle ailments.
• Prescription history: The prescription history of the potential policyholder is taken into account for the underwriter to determine the kind of coverage that they were looking forward to in terms of diagnostics and OPD coverage.

What are the Pros and Cons of the Underwriting Process in Health Insurance?

Now, the underwriting process in health insurance is not an optional situation. It is a mandatory process that one has to undergo before an individual gets to avail of a health insurance policy. However, one can still speculate about the pros and cons of the team!

Pros of the Underwriting Process in Health Insurance:

• The team helps determine a proper and suitable premium for the policyholder so that he/she doesn’t go through any sudden premium spikes due to unrevealed health/medical conditions on the part of the potential policyholder.
• The health insurance provider is financially safeguarded against any unreasonable risks that might ruin the insurer’s future stability.

Cons of the Underwriting Process in Health Insurance:

• The process of availing of a health insurance plan is stretched due to a thorough underwriting process.
• Any minor health conditions are also taken into consideration when availing of a health insurance plan, thereby increasing complications of a potential policyholder, sometimes leading to rejections and other times to spiked premiums.

Conclusion

Decades after the introduction of the underwriting teams in health insurance, the verdict is still out about how and if the teams are beneficial for the policyholders. Since the process of underwriting in health insurance is still quite a hush-hush situation, a majority of the health insurance industry is still in 2 minds about its role. However, what is undeniable is that the underwriting in health insurance is largely responsible for mitigating financial risks for insurers and thus keeping up their CSR and ICR!

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