If a premium is collected at the time of the application, the producer will issue a:

The agent should be familiar with the types of receipts available and be able to explain the differences to the applicant at the time. There are two types of receipts: (1) The conditional receipt and (2) the binding receipt.

The conditional receipt contains two subcategories as well: (1) Insurability and (2) approval.

The insurance agent should collect the first full installment from the applicant at the time of application. The conditional receipt is the most common form of receipt, but it is not a full receipt. This means that the applicant and the company have formed what might be called a "conditional contract" - one contingent upon conditions that existed at the time of application or when a medical examination is completed. It provides that the applicant is covered immediately from the date of application as long as he or she passes the insurer's underwriting requirements. It is the producer's responsibility to explain that the applicant is covered on the condition that he or she proves to be insurable - and passes the medical examination, if required.

A conditional receipt gives the company time to process the application and to issue or refuse the policy. If the applicant were to die before a policy is issued, the company will pay the death benefit but only if the policy would have been issued.

There are also two different types of conditional receipts.

Insurability Conditional Receipt

The insurability conditional receipt is the type of receipt that is the most frequently used conditional receipt and is based on the condition that the applicant proves to be insurable. If the applicant is found to be insurable, the effective date of the policy is the date on the receipt (the date the initial premium payment was received). Even if it takes the insurance company as long as a month to process and deliver the policy, the effective date remains the date of the receipt.

Approval Receipt

The approval receipt states that the effective date of the policy is the date of approval, even before policy delivery. This type of receipt is rarely used today as they are not looked upon favorably by the courts.

What Is an Insurance Underwriter?

Insurance underwriters are professionals who evaluate and analyze the risks involved in insuring people and assets. Insurance underwriters establish pricing for accepted insurable risks. The term underwriting means receiving remuneration for the willingness to pay a potential risk. Underwriters use specialized software and actuarial data to determine the likelihood and magnitude of a risk.

What is Underwriting?

Key Takeaways

• Insurance underwriters evaluate the risks involved in insuring people and assets and establish pricing for a risk. 
• Underwriters in investment banking guarantee a minimum share price for a company planning an IPO (initial public offering).
• Commercial banking underwriters assess the risk of lending to individuals or lenders and charge interest to cover the cost of assuming that risk.
• Insurance underwriters assume the risk of a future event and charge premiums in return for a promise to reimburse the client an amount in the event damage or occurs.

Investment Banking Underwriters

The underwriters of an investment bank often guarantee a specified amount of capital to a corporation during an initial public offering (IPO), an amount which is theoretically provided by investors as the source of capital. The bank acts only as the "facilitator" of the transaction, but they have still taken on an "underwriting risk" by promising to provide those proceeds of the sale to the client, regardless of the success or failure of the sale of its company's shares.

Insurance Underwriters

Insurance underwriters assume the risk involved in a contract with an individual or entity. For example, an underwriter may assume the risk of the cost of a fire in a home in return for a premium or a monthly payment. Evaluating an insurer's risk before the policy period and at the time of renewal is a vital function of an underwriter.

For example, homeowners insurance underwriters must consider numerous variables when rating a homeowner's policy. Property and casualty insurance agents act as field underwriters, initially inspecting homes or rental properties for conditions such as deteriorated roofs or foundations that pose a risk to the carrier. The agents report hazards to the home underwriter. The home underwriter additionally considers hazards that may trigger a liability claim.

Hazards include unfenced swimming pools, cracked sidewalks, and the presence of dead or dying trees on the property. These and other hazards represent risks to an insurance company, which may eventually be required to pay liability claims in the event of accidental drownings or slip and fall injuries.

Inputting a number of factors, which often includes an applicant's credit rating, homeowner insurance underwriters employ an algorithmic rating method to pricing. The system generates an appropriate premium based on the platform’s interpretation and the combination of all data reported from the observations of the field underwriter. The lead underwriter also subjectively considers answers submitted by the applicant on the policy application when arriving at a premium.

Insurance companies must balance their approach to underwriting: if too aggressive, greater-than-expected claims could compromise earnings; if too conservative, they will be outpriced by competitors and lose market share.

Commercial Banking Underwriters

Commercial banking underwriters assess the creditworthiness of borrowers to decide whether the individual or entity should receive a loan or funding. The borrower is typically charged a fee to cover the lender's risk if the borrower defaults on the loan.

Medical Stop-Loss Underwriters

Medical stop-loss underwriters assess risk based on the individual health conditions of self-insured employer groups. Stop-loss insurance protects groups that pay their own health insurance claims for employees rather than paying premiums to transfer all of the risk to an insurance carrier.

Self-insured entities pay medical and prescription drug claims plus administration fees out of company reserves and assume the risk posed by the potential for large or catastrophic losses such as organ transplants or cancer treatments. Underwriters for self-insured entities must thus assess the individual medical profiles of employees. Underwriters also evaluate the risk of the group as a whole and calculate an appropriate premium level and aggregate claims limit, which, if exceeded, may cause irreparable financial harm to the employer.

Fast Fact: Insurance underwriting is a large and profitable industry; according to Business Insider, Warren Buffett used insurance and reinsurance premiums to fund investments at Berkshire Hathaway.

When the first premium is collected at the time of application for a policy the effective date of coverage is?

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