The Long-Term Care Insurance Underwriting Decision

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The Long-Term Care Insurance Underwriting Decision

The underwriting decision begins with an information-gathering process starting with health and medical history questions on the policy application. Information can also be obtained from appropriate third-party sources, typically including medical information bureaus and the applicant’s former doctor(s). A physical examination is almost always required, and frequently a face-to-face interview as well.

Just how does the insurer decide whether or not to offer long-term care (LTC) insurance coverage in any particular case? Every company has a set of underwriting guidelines to follow for its LTC insurance. The underwriters develop these standards after carefully studying the company’s own past claims experience, demographic data, healthcare, and long-term care service utilization patterns, and other information.

The underwriters do not expect to issue policies to only those people who will never file a claim. They simply want to establish and enforce guidelines the company actuaries can use to make an accurate prediction of the number, cost, and timing of the claims that will have to be paid in the years ahead.

The most basic rule of underwriting

It is perhaps the most important principle of all insurance underwriting that the loss to be covered must be accidental or unforeseeable by the party seeking to buy the insurance. Of course, to be in the market for insurance at all, one must foresee the possibility of a covered loss, but the mere possibility is not the same as being foreseeable as to time and place.

As in all insurance, underwriters look for signs that any individual who applies will inevitably need to make a claim—especially if it is likely to be costly or soon. Understandably, people in such high-risk situations are those most anxious to buy insurance. That is why each company has a list of conditions (HIV and Parkinson’s disease, for example) that would be extremely likely to result in a policy claim eventually. Underwriters from all companies decline that kind of business.

Keep the bigger picture in mind

The entire insurance industry is based upon actuarial calculations that would be completely unreliable without the ability to identify, exclude, or charge a higher premium for those who are almost sure to suffer a covered loss.

Indeed, insurers could not take any other approach or they would no longer be selling "insurance." Whether it is long-term care, medical, flood, or fire insurance, issuing coverage to those in extremely high-risk situations would almost be like giving away money.

Insurance is intended to protect against individually unpredictable events. The cost of large losses actually experienced by a relatively few of the insured customers is spread among the many others who pay premiums but make few, small, or no claims.