The concepts of insurance and insurance underwriting are not new; insurance for commercial ventures existed in some form by the Middle Ages, and life insurance had appeared by the 17th century. Private medical insurance, usually for catastrophic illnesses, was available in the 1800s.1 Within the past 100 years, there has been an explosion in the amount of life and health insurance available and in the diversity of insurance products.
Ultimately, the purpose of any type of insurance is to provide for financial relief in the event of significant economic loss. In this chapter, we will be referring to those types of insurance products related to life and health insurance (Table 113–1). Insurance, essentially, is a contract, a legal agreement between insurer and insured, specifying those losses that are to be covered and the agreed-upon benefit or reparation. To classify an event as an insurable risk demands specific requirements (see Table 113–1). Once satisfied, though, and assuming that a large number of insurable individuals are being considered, these requirements permit the actuarial prediction of the total amount of loss over some defined period of time.2 Employer-sponsored health insurance relies on this "law of large numbers" to determine group premiums without the need for medical evaluation. For life insurance and private health insurance, however, an analytic process termed insurance underwriting serves to transform these large-group data to identify the need for insurance as well as the potential risk of loss for each individual to be insured. The ultimate premium charged is a complex calculation that varies by company and insurance product but will be proportional to the risk assumed by the insurer, allowing for an equitable distribution of economic spread over large groups of people (see Table 113–1).
Table 113–1. Insurance Frequently Asked Questions (FAQs) |Favorite Table|Download (.pdf)
Table 113–1. Insurance Frequently Asked Questions (FAQs)
|Major types of insurance|
- Life insurance (individual and group)
- Whole life
- Variable life
- Universal life
- Universal variable life
- Term life (10-y, 20-y)
- Non–life insurance
- Property and casualty
- Automobile owners insurance
- Homeowners insurance
|Health insurance (individual and group)|
Government-sponsored health plans
Health maintenance organizations (HMOs)
Preferred provider organizations (PPOs)
Insurable risk: Definition
The risk is definable by amount of loss and duration of coverage.
The amount of insurance does not exceed the actual financial loss.
The insured loss occurs by chance, not by intent such as suicide or homicide.
The loss occurs within a sufficiently large population at risk to allow for application of the laws of probability.
The beneficiary of the insurance must have an insurable interest, a genuine concern for the continued well-being of the insured.
The components of the insurance premium
Excess risk of death
|Present value of ultimate benefit|
Company expenses to develop and administer the product
Physicians serve as resources for and, ultimately, rely ...