Underwriting of Life Insurance Policies

Life insurance underwriting has everything to do with risk. When you apply for insurance coverage, you are essentially asking the insurance company to take on the potential risk of having to pay a future claim, should something unforeseen happen to you, for example, death or disability.

Generally, sick people or people taking part in high-risk activities, are more likely to seek insurance. Thus there is a greater possibility of unfavourable risks to the insurer. Underwriters help identify poorer risks and apply more stringent conditions to the policy contract to minimise the risk.

This risk assessment process not only protects the insurer, but it also benefits you. When underwriting takes place at the application stage, and you’ve accurately and truthfully answered all the questions, the chance of your claims being paid is far greater. Just make sure you meet the definition of a claimable event under the policy.

What is life insurance underwriting?

Life Insurance Underwriting can be defined as the evaluation process determining if a person’s application represent risks acceptable to the insurer. Simply put, underwriting is the process used to determine whether or not an insurer will issue a policy to an applicant and if accepted, then determining the premium the applicant will be charged.

Be aware, many of direct insurers have extensive exclusions built into their policies. An exclusion can be defined as a policy provision eliminating coverage to specific conditions, circumstances or situations. For example, when applying for TPD, some insurers might exclude your right shoulder from cover, due to a previous injury.

Life Insurance Underwriting can be defined as the evaluation process determining if a person’s application represent risks acceptable to the insurer. Simply put, underwriting is the process used to determine whether or not an insurer will issue a policy to an applicant and if accepted, then determining the premium the applicant will be charged.

Different types of underwriting

To understand the different underwriting processes, you must first understand the different distribution channels in which a life insurance policy can be obtained.

You can purchase an insurance policy in one of three ways; through a qualified adviser/broker (Retail policy), telephonically or online (Direct policy), or as part of your superfund / employee benefits package (Group policy).

Direct insurance vs. Retail insurance

Direct Policy Retail Policy
Application process Fast, easy and simple telephone conversation or online. 15 minutes to an hour session with a qualified adviser/broker.
Purchasing a policy The cover is bought after the customer calls the contact centre or completes the application online. The application is completed face to face or over the phone and generally after advice is provided.
Underwriting Life insurance without medical underwriting. Limited to no underwriting during the application stage. Fully underwritten during the application stage, medical underwriting included (if required).
Sum insured Limits maximum amount. You choose the cover amount.
Claims 71% higher chance of being declined vs. retail. 71 % less chance of being declined than Direct and 14% lessthan group.
Fully Underwritten: Retail policies undergo extensive underwriting during the application stage. This includes your complete medical history and might include blood tests, medical exams depending on your sum insured, tests requested and any pre-existing medical conditions you might have or had in the past.

Life insurance in Australia can also be sold through direct advertising, where an interested person can call the advertised number and then undergo a simple underwriting process over the phone. It’s faster and easier. However, due to the lower underwriting criteria, premiums can often be more expensive, and as the ASIC 498 report revealed, there is an increased likely hood that your claim might be denied.

Retro underwriting: This type of underwriting occurs when a claim comes in, and the direct insurance company checks your medical file to see if you accurately disclosed your medical history at the time you took out the policy. This type of underwriting is predominantly used with policies purchased direct from the insurer OR where the life insured failed to comply with their duty of disclosure.

The insurer will access your Medicare and PBS data, by requesting the data from your relevant listed medical professional. The underwriter will then review the data and compare it to the information you provided and see if anything material was left out of the application and then consider if they would have issued / accepted the policy had they known your complete medical history.

To ensure your claim is processed as quickly and accurately as possible, we have an in house specialist claims team that can help review your claim documents before they are submitted to your respected Life Insurance Company and guide you through the entire claims process from start to finish.

The ASIC 498 report shows that a customer’s choice of distribution channel has a considerable impact on their claim being accepted or declined.

Life Insurance Claims Statistics in Australia by Distribution Channel 2013 - 2015

Policy Types Declined Accepted in full Accepted in part Withdrawn Undetermined/Unspecified
Non-advised
(Direct)
12% 74% 1% 11% 3%
Retail 7% 76% 3% 12% 3%
Group 8% 77% 1% 9% 4%

Source: ASIC 498 Report

What is the life insurance underwriting process?

This process refers to the determination of a person’s risk of claiming on their life insurance policy. Such an information gathering process generally starts during the application stage. The applicant’s truthful disclosure of their medical history, the sum insured, their age and the insurance product they’re applying for will usually determine the life insurance underwriting requirements.

The underwriter also referred to as the risk assessor, seeks to minimise anti-selection by identifying poorer risks and applying more stringent conditions to the insurance contract as required. The more information is provided, the more accurate their assessment of an applicant’s life expectancy will be.

Possible acceptance statuses:

  • Accepted as is: Application accepted as quoted.
  • Loading: Applicant will pay more for same the cover amount, due to being a higher risk to the insurer.
  • Exclusion: Certain cover, activities or body parts will be excluded from cover, due to increased risk or past medical or family history.
  • Declined: Cover will not be provided. The applicant is too high a risk for the insurer.

The life insurance underwriting process

The life insured truthfully completing their application form.
application
guideline
The Underwriter reviewing the application as compared to the policy Underwriting Guidelines.
The Underwriter potentially requests further medical tests/examinations or clarification of questions disclosed in the application.
examination
report
Any relevant medical tests/doctors reports are completed and returned directly to the insurer.
The Underwriting assessment concerning an applicant’s risk factors is finalised.
finalised
acceptance-status
The Underwriting Assessment Acceptance status is determined: Accepted, Exclusion, Loading or Declined.
An accepted application will automatically be issued with a policy. However, if there is an exclusion or increased premium (loading), a proposed offer document will first be sent to the customer or adviser to consider. If the offer is accepted and all parties are happy to proceed, they agree/sign the documents, and the policy is issued with the relevant amendment to the contract.
accepted-application
declined
If a policy is declined, the insurer will inform the customer/adviser of the outcome.

How long does life insurance underwriting take?

Numerous factors must be taken into consideration when underwriting a policy. Thus it may feel like the process takes a long time. The criteria analysed will typical include your BMI, age, your medical and family history, as well as the type of cover you’ve selected and how dangerous your occupation and hobbies are determined to be.

Height and Weight:

This is very important and must be accurate. Underwriters use your height and weight to calculate your BMI (Body Mass Index). If your BMI is over a certain amount they will require a nurse to draw blood and run some additional tests, for example, your cholesterol and sugar levels.

A long-term high BMI increases your chance of developing diabetes, especially if there is a family history or a predisposition to the disease. Overweight men are also more likely to develop prostate cancer because fat provides a favourable environment for the disease.

Age:

The probability of death increases as you get older, so your underwriter will have to take this into account when assessing your cover. Once your body has shown a predisposition to a condition, as you age there is generally a 95% certainty that the condition will occur.

Personal habits:

Including smoking and drinking. It is especially important that an underwriter knows how many cigarettes, if any, you smoke a day. Smokers tend to have a shorter lifespan, therefore increasing their risk to the insurance company.

Occupational class:

Hazardous occupations, like firefighters and police officers, are exposed to an increased risk of becoming injured, disabled or death.

Medical History:

This section is extremely important in the underwriting process and is designed to provide accurate and honest information concerning your past medical history and current physical condition. The following questions will need to be answered:
  • Date of illness/disease/injury/surgery etc.
  • The cause of above
  • What treatment was/is given
  • How are you currently? For example, fully recovered, still has pain, going for follow-up treatments, etc.

Family history:

Risk assessors need to know which family member, if any, has or had a medical condition that might predispose you to develop the condition in future. For example, some cancers and heart diseases are hereditary and will increase your risk to the insurer.

Activities:

This refers to things like diving, bungee jumping, motorsports, parachuting, cage fighting, etc. Underwriters need to know this information so as to assess your risk of future injury accurately.
Insurers will generally ask for a doctor’s report or for you to undergo a medical or blood tests for a number of reasons:
  1. It may be a mandatory requirement set by the insurer for the level of cover you are applying for. Most insurers will not require medicals or blood tests if you are applying for cover below a certain amount.
  2. If you have or have had a pre-existing medical condition, the insurer may want to gain a better understanding of the condition and your overall medical history.
  3. Additional blood tests may be required if your insurer requires a more up to date reading i.e. for cholesterol or blood sugar level.

Please note:  Medicals may not always be required and the cost of any additional testing needed will in most cases be covered by your insurer.

The benefits of an underwritten life insurance policy

Unlike Advised (retail) policies, non-advised (Direct) policies are generally not fully underwritten at application time, but rather underwritten during claim stage. The detrimental effects you can experience with a non-underwritten contract can lead to worse claim outcomes because they either:
  1. Draft in wide exclusions into your contract, AND/OR
  2. They do the underwriting at claims time, which can lead to a lot of uncertainty regarding a claim being paid out.

Conclusion

Avoid poorer claims outcome, rather find out today if an insurer is willing to pay out tomorrow by ensuring you have fully disclosed all medical information, no matter how irrelevant you might think it is at the time into your application for insurance.

Even though some underwriting processes can be more outdrawn than others, we encourage it because it helps with the certainty that your claim will not be denied and your family will be taken care of financially should anything happen to you.

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Author: Russell Cain
Published: January 31, 2017

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