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NONMEDICAL INSURANCE

In citing the medical examiner as a source of underwriting information, the preceding section implies that a medical examination is mandatory with any life insurance application. That is not the case.

A substantial portion of all new insurance is written without a medical examination. For example, neither group nor industrial life insurance ordinarily requires a medical examination. Furthermore, an increasing amount of ordinary life insurance is being sold without a medical examination. While any type of insurance sold without a medical examination might logically be called nonmedical insurance, the expression usually to refers to ordinary insurance sold in that manner.

History of Nonmedical Insurance

Nonmedical life insurance is not a recent innovation. The first life insurance was sold without medical examination. In the early days of life insurance in England, each applicant appeared before the directors of the company, who made their decision largely on the basis of personal appearance. Personal inspection by the company directors was later supplemented by recommendations of the applicant�s friends and associates and eventually a medical examination was introduced. The medical examination quickly established its usefulness and was soon regarded as essential.

In about 1886, companies in Great Britain began to experiment with nonmedical underwriting. To protect the companies against adverse selection, the policies, which were limited in amount, contained liens during the early years of the contract, or they were issued at advanced premium rates. Some companies offered only double endowments on a nonmedical basis.

Nonmedical underwriting as it is practiced today, however, began in 1921 in Canada. The immediate motivation for its development was the shortage of medical examiners, particularly in the rural areas. The desire to reduce expenses on the predominantly small policies issued in Canada at that time was also a strong influence.

Nonmedical underwriting spread to the United States around 1925 after the success of the Canadian experiment seemed assured. It gained increasing acceptance during the 1930s as American experiences proved favorable and enjoyed its greatest growth when a shortage of medical examiners developed during World War II. The practice of nonmedical underwriting is firmly entrenched today in both Canada and the United States.

Underwriting Safeguards

Because nonmedical insurance is subject to higher than normal mortality, at least for the first several policy years, insurance companies have adopted certain underwriting safeguards.

Limiting the Amount of Insurance

Perhaps the most important safeguard is a limit on the amount that will be made available to any one applicant. As explained more fully below, the limit is determined by the extra mortality that can be expected from eliminating the medical examination and the savings in selection expenses that will be available to absorb the extra mortality costs.

In the early days of nonmedical insurance, the limit was placed at $1,000. When the extra mortality turned out to be lower than expected, the limits were gradually raised. Today most companies will provide up to $100,000 on a nonmedical basis, subject to appropriate age restrictions, while many will issue up to $200,000 or $250,000 on that basis. The limit generally varies by age groups; the largest amounts are available to the younger age groups. A few companies are willing to write up to $500,000 at the younger ages.

The foregoing limits are for any one application for nonmedical insurance. Some companies will issue additional amounts, subject to an aggregate limit, after a specified period of time has elapsed. Most companies are willing to reinstate the original limits for any insured who, subsequent to obtaining one or more policies on a nonmedical basis, undergoes a medical examination satisfactory to the company. In other words, all nonmedical insurance issued to the person prior to the medical examination will be disregarded and additional amounts made available up to the applicable limits.

Limiting the Age of Issue

A second safeguard companies impose is a limit on the ages at which insurance will be issued. Studies have shown that the extra mortality resulting from waiving the medical examination increases with age and after a point will exceed any savings in selection expense. The point at which the extra mortality costs will exceed the expense savings is obviously a function of the underwriting age limit, but most companies place it around age 45 or 50. There is usually no lower age limit; most companies offer nonmedical insurance down to age zero.

Limiting Insurance to Standard Risks

A third safeguard is the general limitation of nonmedical insurance to standard risks. As a broad class, substandard risks must submit to medical examinations. Exceptions are commonly made, however, for risks that are substandard because of an occupational, aviation, or avocational hazard.

Relying on Other Sources of Information

A final safeguard, which is more general and pervasive in nature, is the intensive cultivation of the sources of underwriting information other than the medical examiner. Insurance companies place a heavier burden on the applicant, agent, and inspector to offset in some measure the absence of a medical examiner�s findings. The application form used in connection with nonmedical insurance is elaborate, containing all the questions usually contained in an application blank as well as those normally asked by a medical examiner. A urine specimen and blood profile may be required for home office analysis. If the applicant has recently been under the care of a physician, a statement may be necessary from the attending physician (at the expense of the company). If any adverse medical information is revealed by the applicant�s statement, the inspection report, or other source, the company may demand a complete medical examination.

A particularly heavy responsibility is placed on the agent, with great reliance on the agent�s judgment and integrity. Agents may submit nonmedical applications only from applicants who appear to meet the company�s underwriting requirements from a physical, medical, occupational, and moral standpoint. The agent must elicit from the applicant and accurately document most of the information that a medical examiner would seek. A detailed agent�s certificate that records the agent�s underwriting impressions of the applicant is also required. It is understandable that the privilege of submitting nonmedical business is not bestowed indiscriminately on the field force.

Inspection reports are sometimes ordered to supplement the larger nonmedical insurance applications, even though such information would not be requested for medically underwritten cases for the same or larger amounts of coverage.

Economics of Nonmedical Insurance

Several advantages are associated with nonmedical insurance. It lessens the demands on the time and talents of the medical profession, it eliminates the delays and inconvenience connected with medical examinations, and it removes one of the greatest psychological barriers to the sale of insurance. Important as these advantages are, insurers could not enjoy them if nonmedical insurance did not rest on a solid economic foundation. It must justify itself on a dollars-and-cents basis.

As mentioned earlier, nonmedical insurance is subject to a higher rate of mortality than medically examined business. This extra mortality is believed to stem from (1) impairments known to the applicant but deliberately concealed and (2) impairments not known to the applicant that could have been discovered by a medical examination. This extra mortality can be measured and expressed as a dollar amount per $1,000 of insurance.

The procedure customarily used to measure the extra mortality is to compare the mortality experience on nonmedical business with the mortality at the same ages, years of issue, and durations on business that was subject to a medical examination. This does not give a direct answer to the question of what the mortality on the nonmedical applicants would have been had they been selected by medical examination, since the two groups may not be comparable in all respects. For example, they might differ as to ratio of males to females, income level, and size of policies. Nevertheless, this method is the best available and is deemed satisfactory.

Studies reveal that most of the extra mortality occurs during the first 10 years after issue, although some extra mortality is observable up to 15 years after the policy is issued. The disparity between nonmedical and medical mortality increases with age of issue, both in absolute amount and as a percentage of the base mortality rate. This seems to indicate that up to a point at least, the importance and effectiveness of the medical examination grow greater with age. Extra death claims are offset by the savings in medical examiners� fees and incidental home office expenses, less the increase in expenditures for inspection reports and attending physicians� statements. This net saving, it should be noted, is realized on every application that does not involve a medical examination, while the extra mortality is experienced only on those policies that remain in force until they become claims�a much smaller number because of lapses and surrenders. The savings in selection expenses are expressed as an amount per policy and range from $30 to $100.

Once the extra mortality per $1,000 and the expense savings per policy are known, it is a matter of simple arithmetic to determine the proper limits for nonmedical insurance. If at ages below 30, the extra mortality cost per $1,000 is $0.75 and the expense savings per policy is assumed to be $100, the company could safely offer about $133,000 of nonmedical insurance to applicants under 30 ($100 � 0.75 = $133 rounded to nearest whole number). With the same expense savings and an extra mortality cost of $1.50 per $1,000 at ages 30 to 34, the proper limit for persons in that age group would be $67,000 ($100 � 1.50 = $67 rounded). By the same logic, the limit for applicants aged 35 to 39 might be about $30,000. Thus the need for age limits and the equity of variable limits are apparent.

In practice, companies are inclined to offer larger amounts of nonmedical insurance than the above figures suggest. While the amount made available to any one applicant might seem excessive, all applicants do not request the maximum. Since the company�s objective is to break even on its nonmedical business in the aggregate, it may safely set its limits higher than the precise relationship between the expected extra mortality and expense savings would support.

Furthermore, at ages under 30, the absolute rate of mortality is so low and the probability of finding impairments on examination so small that the nonmedical rules can be greatly relaxed. A particular company may also set its nonmedical limits on the basis of its own mortality experience and expense assumptions or in response to competitive factors. The increased use of blood and urine screening tests also allows for increased nonmedical limits.

Special Branches of Nonmedical Insurance

There are certain special situations in which policies may be issued on a nonmedical basis even when the company does not follow a general practice of issuing nonmedical policies. Three of the most common instances are discussed in this subsection.

Policyowner Nonmedical

Most companies are willing to issue insurance up to a stated limit on the basis of the applicant�s declaration of good health if, within a short period prior to issuance�such as 3 to 6 months�standard insurance has been obtained from the company on the basis of a satisfactory medical examination. The reasoning behind this practice, of course, is that the policyowner�s health is not likely to have deteriorated within such a short period of time, and any serious affliction would probably be apparent to the agent.

Some companies have extended this privilege to policyowners who apply for additional insurance within a much longer period, such as one to 5 years. Under such circumstances, however, the applicant is required to bring physical and medical histories up to date, and the case is underwritten on the basis of both the old and the new information. The general experience under this type of nonmedical insurance has not been very favorable and indicates some adverse selection among applicants.

This category of insurance without medical examination goes under the name of policyowner nonmedical, since it is limited to applicants who are already policyowners of the company.

Guaranteed Issue

One of the important contractual agreements under which retirement benefits are provided to superannuated employees is the individual contract pension trust. Under this arrangement, the benefits are provided through retirement annuity contracts or retirement income contracts that are purchased by the employer, through a trustee, for each of the employees who are eligible to participate in the pension plan.

Traditionally if retirement income contracts were used, each employee had to furnish evidence of insurability�a satisfactory medical examination. Current practice, however, includes underwriting such plans on a nonmedical basis. In fact, the arrangement frequently goes beyond the conventional concepts of nonmedical insurance. If the group is acceptable, the insurance company dispenses with individual underwriting and agrees in advance to accept all applications for insurance up to a formula-determined limit. This practice is known as guaranteed issue. There is no underwriting beyond a screening of the group.

A higher than normal mortality is anticipated on these products. The mortality rate is higher than that associated with ordinary nonmedical insurance, not only because of the absence of individual underwriting but also because the age distribution of the employees is likely to be higher than that of normal nonmedical groups.

In order to offset the anticipated extra mortality under guaranteed issue plans, most companies pay lower than normal commissions and separately classify the policies for dividend purposes.

Paramedical Examination

Somewhere between the medical examination and nonmedical evidence is another alternative�the paramedical examination. This examination is conducted by nurses or other medical technicians and consists of securing basic examination from measurements: height, weight, blood pressure, pulse rate and waist measurement.

The chief advantages of paramedical examinations are their reduced cost compared to a physician�s fees and their convenience for the client since most services offer traveling examiners. The paramedical examinations, however, do not include the heart and other detailed reports typically provided by an insurance medical examiner.

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