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Unit 3 Nature of the Industry
The underwriter may also consult the Medical Information Bureau
(MIB). It is a corporation owned by insurance companies. The Medical
Information Bureau maintains records of applications for life, health,
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information on an applicant that was previously reported to insurance
companies. If this information is missing in a subsequent application for
insurance, the MIB notifies the insurer. An underwriter can only consult
the MIB with the applicant’s consent. Also, an insurer cannot deny an
applicant based solely on information obtained through the MIB.
Consumer credit scores are another information resource for
underwriters. A credit score is a numerical value that reflects a
person’s credit history. If you pay your debts on time and do not have
too many sources of credit available to you, your credit score should
be high. Debts include credit cards, a home mortgage, other lines of
credit, and rent. Likewise, your score will be low if you frequently
miss payments or have too much credit available to you. The reason
having a lot of credit available is a bad thing is because people are
more likely to use available credit and increase their debt.
Insurance companies use an applicant’s credit score as the basis
for assigning an insurance score. Why? Research has shown that credit
scores correlate with the frequency of claims. The insurance score is
a numerical value that reflects the risk the applicant represents to the
insurance carrier. The higher the insurance score, the better risk the
applicant is to the insurer. Using insurance scores is controversial, and
some states bar insurance companies from using them.
Role of the Actuary
An actuary uses statistics, math, computer science, and finance to
determine risk for insurance companies. The actuary creates a model of the
probability of accidents or other causes of loss to set insurance premiums.
This model helps determine how much income an insurer needs in order to
pay expected future claims while earning a profit. Therefore, the role of the
actuary is critical to the success of an insurance company.
About 60% of actuaries work in the insurance industry. Others
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Wherever they work, the role of the actuary in assessing risk is a
critical business function.
Ratings Bureaus
Insurance companies look at their own claims and loss history
when determining premiums. But, they can also turn to ratings
bureaus. A ratings bureau collects loss and claims information from
across the industry and sells it to insurance companies. These data
help insurance companies determine what premiums to charge.
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disseminate data to insurance companies in those states. Some states
require insurers to become members of the state’s ratings bureau.