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Age; Family History; BMI; Claim Records: How Your Insurance Company Underwrites Your Policy

Underwriters try to ensure that premiums paid are fair for your coverage by accurately assessing your risk profile


Insurance mitigates the financial consequence of serious injuries or health problems by giving a payout. This payout can be used to offset medical bills for hospitalisation situations, or to provide benefits to support day-to-day living for critical illness or total & permanent disability, or in the case of life insurance, to help family members cope with the policyholder’s passing. In return, the policyholder pays a fee.

However, if the policyholder is at greater risk of a certain illness or injury, the likelihood that they will need such a payout is greater.

Underwriting is the process of evaluating the risk of a prospective insurance policyholder, in order to determine the insurance premiums to be charged, or if the insurance policy can be granted at all.

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Sustainable Risk-Pooling

When policyholders pay premiums on their insurance, these premiums are contributed to a common pool of funds from which payouts will be given. Since the chance of catastrophic illness is low, it is unlikely that many people will need payouts at the same time. The risk can be shared between people who contribute to the pool, so everyone can collectively pay a small fee, but yet receive a payout if they are hospitalised or need expensive medical treatment. This is known as risk-pooling. This pool is also managed by the insurer.

However, each policyholder’s risk level is different. For instance, people who work in dangerous jobs are more likely to have an accident that renders them physically disabled. Older people are also more likely to fall critically ill and need coverage for hospitalisation.

In order for the risk pool to remain sustainable, each policyholder needs to contribute premiums commensurate to their risk level. Additionally, applicants who have high risk may not be added to the pool if the risk is too high.

Determining the risk level of each person and their corresponding premiums is vital to ensuring that this pool remains sustainable, and this is the job of the underwriter at the point of application.

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Determining Risk

Most people may be familiar with having to fill in long questionnaires when applying for insurance. This is the first step through which information is collected to allow the underwriter to classify the risk of the applicant.

In some cases, the underwriter may determine that more information is needed. This is usually in the case where the applicant has a history of serious illness. The applicant may be asked to undergo a medical examination or disclose medical records to provide the necessary information.

Source: Life Insurance Association

Once the risk has been assessed, the underwriter will generally classify the risk into four categories. The first category is low risk. The applicant will typically receive an offer for standard terms where they pay the regular premium for insurance.

The second category is where there is some risk due to a combination of various factors, so the applicant is offered insurance but with loading (increased premium price) or exclusion (where they are not covered for some things).

The third category is where there is some short-term uncertainty in the applicant’s life such as an upcoming surgery. The applicant may still be reassessed and offered insurance thereafter depending on the outcome.

The last category is for high-risk applicants, where the insurer may decide that the risk is too high to offer insurance coverage for the applicant’s existing condition.

In all cases, rejected applicants or existing policyholders with loading or exclusions may submit fresh medical evidence for reassessment if their medical conditions improve.

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Factors In Considering Risk

An underwriter considers the following when assessing the risk profile:

  • Age
  • Gender
  • Height, Weight and BMI
  • Hobbies/Lifestyle
  • Medical history
  • Family history
  • Claim records
  • Occupation
  • Existing insurance cover
  • Country of residence

Assessments take these data points into account and compare it against research and studies based on historical data, in order to fairly classify individuals’ risk assessments.

Some applicants beyond a certain age and BMI may be asked to undergo a routine medical examination by the insurers’ panel of doctors.

Based on family history, or disclosed medical history or lifestyle, an additional questionnaire may be issued instead. For instance, someone who has a history of an asthma condition may need to complete the “Asthma Questionnaire”, and someone who engages in SCUBA diving may have to complete the “Diving Questionnaire”.

Do note that while the risk factors will affect insurance premiums, an insurance claim can be rejected on the basis of untruthfulness in the disclosures.

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Lifestyle And Personal Choices Make A Difference

Part of the risk assessment takes your lifestyle choices on top of your medical conditions. For instance, while people with pre-existing conditions are likely to either have loading or exclusions, the extent of these loading and exclusions also depends on things like whether they are doing things to improve their pre-existing medical conditions, or whether there are signs of neglect that are likely to further increase the risk.

 

Source: Life Insurance Association

Taking this case study as an example as provided by the Life Insurance Association, this applicant who was treated for lung cancer was treated for lung cancer was advised to stop smoking. However, rather than stopping, he only reduced his smoking from 3 packs to 2-3 sticks a week.

The underwriting notes indicate that he may still have been offered Life Cover and Total & Permanent Disability Coverage with loading had he stopped smoking entirely instead of being declined coverage.

Source: Life Insurance Association

In another case study example, the applicant’s medical report showed signs of neglect for his health. An additional sign of neglect was also the fact that further medical reports were not available because he has not been going for follow-up treatment.

Based on this, the underwriting notes indicates that there is high risk of health deterioration and subsequent complications, resulting in a recommendation to offer Life Coverage with loading, and decline coverage for all the others.

Source: Life Insurance Association

In the last example, while the applicant is fit and healthy, he has a dangerous job which increases his risk of accident or death.

While he might normally be offered full coverage on standard terms, the underwriting notes recommend for Total & Permanent Disability coverage may be declined due to the risk factors in his job. Additionally, given the higher likelihood of injuries, while Hospitalisation and Critical Illness coverage may be offered, it would most likely exclude coverage for circumstances arising from work accidents.

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Insurance Is Only A Safety Net, Not A Magical Cure

Ultimately, when the payouts from insurance come, there is no guarantee that the coverage purchased will be sufficient, and there is no guarantee for quality of life after treatment. Thereafter, insurance premiums will surely be raised given the new existing conditions. While insurance can help ensure a peace of mind, and provide financial coverage for unfortunate circumstances, it still falls to us to take good care of our own health.

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