What Is an Unsolicited Application?

An unsolicited application is a request for life insurance coverage that is made by an individual rather than an insurance agent or broker. Insurers generally scrutinize these applications because of the likelihood of self-selection. Self-selection refers to the probability that individuals with poorer risks will seek insurance on their own instead of through an insurance professional.

Key Takeaways

  • An unsolicited application is a life insurance request that is made directly from an individual, versus an agent or broker.
  • Such applications often raise concerns among insurers, as they tend to be from consumers with higher health risks.
  • This category of insurance seekers is seen as being "self-selected" because they have self-selected into a group, which can then skew the group toward higher risks or higher payouts for the insurer.
  • Some life insurers will refuse self-selected, or unsolicited applications, while others will accept the applicants but charge higher rates to account for the higher risk the applicants pose.

Understanding an Unsolicited Application

A person with a suspected or known health problem, such as heart disease, may try to submit an unsolicited application to purchase life insurance before seeking medical treatment for the condition. These applicants could weigh the insured pool towards bad risks, and as such, the insurers try to screen out self-selection applicants either by requiring higher rates or by denying coverage altogether.

The reason for insurance carriers' extreme scrutiny of self-selecting insurance applicants goes back to a concept in statistics called self-selection bias. Self-selection bias arises in any situation (not just buying insurance) in which individuals "select" themselves into a group, causing a biased sample and abnormal or undesirable conditions in the group. It is closely related to the non-response bias, which describes when a group of people responding has different responses than the group of people not responding.

Self-selection is typically a choice an individual makes when an emergency or sudden need for coverage comes up, therefore making the person a higher risk for an insurer to cover.

Why Unsolicited Insurance Applications Are Undesirable

Self-selection makes determining the cause more difficult, which makes determining risk levels problematic for insurance actuaries. Due to self-selection, there may be a number of differences between the people who choose to apply for insurance and those who are led into it as a course of their life and life decisions. These motivations can vary, but self-selection is typically something a person does after suddenly recognizing they have an urgent need for insurance.

There are significant differences between self-selecting populations and those who aren't self-selecting. An outcome might be that those who elect to submit an unsolicited insurance application have higher-than-normal risks, and this can skew risk pools and throw off the accuracy of mortality tables, for example. A relative measure of 'improvement' might improve the reliability of the study somewhat, but only partially.

Self-selection bias also causes problems in other fields where statistical averages might not follow expected patterns. For example, research about programs or products, in particular, are susceptible to biased evaluations of people who have self-selected to be part of a product research project.