Risk management is one of the most imperative things in financial industry. Recent global credit crisis has happened because of poor risk management practices followed by many global giants. Risk management is a science & an art, as well. It involves looking into the profile of an individual & determines the risk associated with it. Risk management is essential as it measures the paying capacity of a individual & net worth of the person. Risk management is important for all kind of financial institutions irrespective of the kind of products or services they offer.
In life insurance, risk management involves one additional factor i.e. life expectancy of the client. Risk management is mainly done by Underwriters. Underwriting is a process of risk analysis of a life. An Underwriter determines the risk associated of a applicant, classify it & decide whether to accept or reject the life. They are like gate keepers of a life insurance company who are responsible for the safety of the company. If the risk is accepted, then, it is classification as preferred, standard or substandard. Underwriter has to adhere to the company guidelines, follow the rules & regulations of regulator/government.
Risk analysis requires looking into the various aspects of individual’s life. Current & past financial position, family back ground, socio-economic status, medical history, current health condition, nominee etc. These all factors are very important in determining the risk involved in one’s life. Underwriting is a science because it involves analyzing data & an art because risk has to be judged without meeting the client.
Along with underwriting, risk profiling is also a very important tool used in life insurance industry for risk management. Though, it is not used by all life insurance companies because of its extra cost & management related issues, but when used properly, it can be very effective.
Risk profiling is a process through which documents, identity of client & data given by client is verified. Insurance companies don’t do it themselves; they refer the cases to third party organizations for processing. In India, profile check has to be discrete, as per regulations, i.e. client can’t be contacted directly, so, next time, when you apply for a life insurance policy. Don’t get surprised, if you find someone asking questions about you, to your neighbors.
So, while filling a application form, make sure that the data filled in application is accurate & sometime we tend to get lethargic & just sign the form without reading it, so always make sure that form is filled by yourself. Because your application is a legal contract between you & life insurance company & it is very important for you to understand it.
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