Why do life companies financially underwrite life assurance proposals?

Financial underwriting in life assurance proposals is primarily focused on assessing the applicant's potential impact on the insurer's risk pool. By evaluating financial underwriting, life companies aim to prevent moral hazard, which occurs when individuals take greater risks if they know they are covered by insurance. For example, if someone understands they have significant financial coverage, they might engage in riskier behavior, depending on the insurance to mitigate the consequences of such risks.

This careful scrutiny helps life insurance companies manage their overall risk exposure. By ensuring that only individuals with motivations aligned with maintaining their health are covered, the insurer can protect itself from unsustainable claims. Thus, the process serves as a safeguard against the possibility of insured individuals purposely doing harm to themselves or engaging in behaviors that could lead to higher than expected claims.

While consumer protection requirements and information provision regulations are important considerations in the insurance industry, the core function of financial underwriting is more intricately linked to managing moral risk.