Will you be accepted?: Three years of statistics
Despite their usefulness, generalisations aren’t always entirely reliable, they can often be misleading, and at other times, simply wrong. For insurance purposes, some generalisations are useful to assessing risks, costs and consequences; all other things being equal females will outlive males, tobacco use is detrimental to your health and the probability of death increases with age. But in other cases, relying on assumptions and broad based observations can be counterproductive to positive insurance outcomes.
While generalisations may be useful Life insurers have generally understood their limitations – even generalisations based on the mathematical certainties of mass behaviour won’t necessarily apply to individuals whose specific circumstances distance them from the group they inhabit. The main problem with relying on generalisations, anecdotal findings or “rules of thumb” is that the generalisations can create disconnect. For example, if you are part of a targeted group, for example female smokers, you seldom have the opportunity to demonstrate that the assumptions and generalisations about that specific ‘group’ do not apply to you.
The reliance on generalisations and assumptions is, unfortunately, a key reason why insurance is, for some people, expensive or difficult to get. Certain differences among the population lead some groups to exhibit more favourable mortality than others. Until now you might have thought that insurance was easy to get, you only had to apply and wait for the first debit order. However, this is not always the case.
We have compiled our observation of 3 years’ worth of data from over 5,000 policy transactions to measure Insurability. We have measured Insurability, as the likelihood of a policy going inforce after an application has been submitted to the life insurer. It is measured as a percentage of policies that went inforce over applications lodged.
To help you understand how your insurance policy might be underwritten (risk assessed) and how generalisations, assumptions and different risk factors might affect you, we have created a brief guide outlining some of the factors insurance companies consider when deciding to offer you cover.
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Exposure to risk factors
Insurance companies sell protection to policy holders against many types of risks: loss of income, health and casualties, disability etc. In return for this risk protection, insurance companies receive a premium from the policy holder, which is used to cover expenses and the expected risk.
Life insurance underwriting, also called risk assessment, is an act of risk-based discrimination. It is the process of accepting the application based on the guidelines, assumptions and policies formulated by the insurance company. These guidelines involve the classification of risks affecting the policyholder. Some of these risks can be classified as:
Generally, applicants are assigned to groups according to their favourable or unfavourable health characteristics. Groups consist of other applicants with approximately the same life expectancy or comparable probability of occurrence of disability or illness. Companies require evidence of insurability which may include information regarding your:
- Physical condition
- Physical impairments
- Personal Medical history
- Insurance history
- Family history
The nature of your occupation has an impact on your life style. A hazardous occupation calls for special treatment by the insurer either by charging an extra premium or excluding the risk of death due to such a hazard.
Financial or Moral risk
Too much insurance may lead to a financial risk or moral hazard. Companies therefore need to know how much insurance you have. You will need to provide the insurer with a detailed list of all your current policies so that the underwriter is able to know the total life cover you have taken and propose to take. They may also need to get an understanding of your financial position, in which case you will need to provide them with a breakdown of your liabilities, assets and income.
Why suffer the consequences of ‘the group’?
The answer is simple. One of the greatest threats to the life insurance business is anti-selection. This occurs when a life insurance company is negatively affected because they did not use all the information at their disposal. For example, a man who has elevated levels of Prostate Specific Antigens (PSA), selects an insurer who does not necessarily look for this risk (the insurer did not seek any information or medical evidence for this condition) and accepts this man’s application at standard rates.
These ‘blind spots’ lead to the allowance of higher-risk groups (such as smokers) to purchase life insurance at the same rate as lower risk groups (non-smokers). Underwriting tries to minimise anti-selection by identifying poorer risks (people with a higher probability of becoming ill, disabled etc.) and applying more stringent conditions to their insurance. That is why you are placed in generalised groups.
Insurability over time
Technology may be making it harder for you to get insurance. Due to an increase in insurance claims, the industry had to reassess how and to whom they were willing to offer cover. Gone are the days of the manual review and underwriting process. Instead, it’s been replaced with an electronic alternative – predictive underwriting that is changing how Life Insurers are assessing risks.
Predictive underwriting is the use of data from consumers to reach a view about the applicant’s health status. This is an effective tool for screening applicants, reducing anti-selection, enhancing customer segmentation and improving underwriting accuracy and consistency.
However for consumers it can mean that it is more difficult to obtain cover than it was in the past. This evidence-based underwriting is essential, so the life insurance industry can defend differentiation as a fair reflection of risk, rather than discrimination.
Keep in mind, underwriting automation alone will not transform an insurer’s underwriting process. It is also the underwriting philosophy that will ultimately determine results.
1. Just because one company declined your application, doesn’t mean all companies will do the same. Each company adheres to a different set of guidelines, as is evident below. Based on our data, the leading insurer successfully insured 84.42% of applicants between July 2012 and June 2015, while the lowest was only 70.3% for that same period.
2. Each insurer’s specific set of guidelines may also change overtime. The following statistics show that potentially if a particular Insurer viewed your condition unfavourably at a specific point in time, it doesn’t mean they won’t change their decision later on. For example, one insurer’s insurability rate fluctuated 7.25% over 12 months with the first 6 month period Jan – June 2013 being at 81.25% and July – Dec 2013 being 74%.
Therefore, if you want to get the most affordable price, you need to shop around and even revisit some insurance companies.
Does your gender affect your insurability?
Gender is a socially constructed term referring to roles, behaviours, activities, and attributes placed upon men and women by virtue of their sex. This affects all aspects of their lives and is an important determinant of their health and well-being, which ultimately impacts their decisions regarding insurance.
We know there is a significant difference between males and females. For example, the demand for insurance could vary among men and women based on difference in life time. Following the assumption that insurance demand increased with the probability of death and the fact that men live shorter than women, they will demand more insurance.
However, there are many aspects of women’s and men’s health and wellbeing being influenced by gender, which might ultimately contribute to their success in acquiring insurance. These aspects include:
- Exposure to risk factors.
- Access to and understanding of information about disease management, prevention and control.
- Subjective experience of illness and its social significance.
- Attitudes towards the maintenance of one’s own health and that of their family members.
- The use of available services.
- Perception of quality care.
Above stats, gathered during 2012 and 2015, show a slighter lower number for female acceptances than males. This might be due to their differences in attitudes toward the above listed aspects. For example, in a family dynamic men generally perceive themselves as the “protector”, which might lead them to more persistence in seeking insurance in general than their female counterparts, because they want to ensure their family remains protected and taken care of when they are no longer able to do so.
Life Insurance for Smokers
Every life policy requires an applicant to fill out a smoking status declaration, stating if they are a smoker or not and how many cigarettes they smoke on a daily basis. Smokers pay a higher premium for life insurance due to their increased risk of ongoing health problems and because they have a shorter lifespan than non-smokers, making them more of an insurance risk (see below graph). As the weight of evidence on the effects of smoking on health continues to mount, premiums for smokers will get even higher.
You may be shocked to see that, according to the above stats, female smokers were 5.73% less likely to get insurance coverage than male smokers. A possible reason for this could be that women who smoke are twice as likely to suffer a heart attack as non-smoking women. According to the U.S. Surgeon General report 2014, women who smoke and use oral contraceptives are up to 40 times more likely to have a heart attack than women who neither smoke nor use birth control.
Smoking increases your risk of developing:
- Heart disease: The risk of coronary heart disease increases with the number of cigarettes smoked per day, the total number of smoking years and earlier age of initiation.
- Cancers, especially lung cancer
- Emphysema and
- Other repertory illnesses and complications
When you consider the magnitude of these illnesses and the higher mortality rates they carry, it’s easy to see why insurance companies charge smokers higher premiums.
Does the occasional cigarette count as smoking?
Because the use of tobacco products can greatly affect your health, companies may use nicotine/cotinine testing to evaluate if you use tobacco, by ordering a blood or urine test. If any cotinine is found within your sample, you will be classified as a smoker. Yes, even the occasional cigarette will count as smoking.
When you stop using tobacco or nicotine products, it can take more than two weeks for the blood level of cotinine to drop to the level of a non-tobacco user would have and several weeks more for the urine level to decrease to a very low concentration.
So, basically, if you had a cigarette in the last 12 months, insurance companies will classify you as a smoker.
How long after I quit smoking will the company reassess me?
A smoker that quits will be classified as a non-smoker after a minimum of 12 months of abstinence. This means an insurer may reassess your premium rates only when you have completely stopped using tobacco and nicotine products for a full year.
What about e-cigarettes and nicotine gum?
Therapeutic products claiming to help smokers quite smoking, i.e. e-cigarettes, nicotine patches and gum, still contain nicotine. In the blood, the nicotine level can rise within a few seconds of partaking of any nicotine related product. How much it rises depends on the amount of nicotine in the product, but rest assured even the tiniest amount can be found when testing your blood or urine. Therefore you will still be rated as a smoker and pay a higher premium.
How your age impacts your insurability?
One of the most significant and ever-changing factors that influence your insurance application is age. Since a life insurance policy will only pay out upon your death, the insurance company wants to make sure that it won’t happen too soon.
Every birthday puts you one year closer to your life expectancy and thus, you are more expensive to insure. This is evident in the below graph, where your insurability steadily declines after age 40. All other things being equal, the younger you are the better your chances of obtaining insurance will be. This might be due to younger people having fewer diagnosed and undiagnosed health conditions.
However, you’ll also notice that applicants between the ages of 21 and 25 also experiences a sharp decline of insurability. Most probably due to their increased likelihood of partaking in risky behaviour, inevitably leading to accidents or significant bodily harm.
How cover type could affect your application success rate?
Each type of policy has a different likelihood of your ability to claim on it. This is due to the eligibility criteria you must meet in order to successfully claim on your policy. Therefore, companies have different guidelines for different benefits (Cover types). As you will see below, income protection is the most difficult type of insurance to obtain, because it is the easiest to try and claim on. While funeral insurance is readily available with no medical questions required and the process of claiming is fairly straightforward, with only completed claim forms and a valid death certificate required.
One of the few things we can depend on in life is change. The best way to prepare for change is to plan for it. You now understand how underwriters work and how important it is that you apply for insurance early on in life. With each passing year you are running the risk of decreasing your chances of qualifying for life insurance due to declining health.
So, don’t take it for granted when you are accepted by an insurer and remember to consider shopping around if you weren’t granted the cover you wanted. To ensure you receive the best rates for the coverage you’re seeking obtain quotes from at least 3 to 5 different life insurance companies.
We hope you have enjoyed this article and that it has answered many of your insurance questions. If you require any additional information, please give us a call on 1300 135 205.
Source / Disclaimer:
This data was analysed by Life Insurance Direct Australia Pty Ltd (“lifeinsurancedirect.com.au”) AFSL 473135 from records of over 5000 client transactions with Life Insurance Companies from July 2012 to June 2015. We have measured “Insurability” as the likelihood of a policy going inforce after an application has been submitted to the life insurer. It is measured as a percentage of policies that went inforce over applications lodged (we removed applications where a customer changed their mind during the application process and withdrew their application). Please note we are not underwriters however we are reporting on our observation of the data over the different groups over time. This information is general in nature and is from our experience only and may be different to others. While lifeinsurancedirect.com.au has exercised reasonable care and diligence in compiling and publishing this information it has only been prepared for illustrative purposes. If you identify an error please inform us and we will correct it immediately but, to the extent permitted by law, we accept no liability for a third-party’s reliance on this information. This document contains general advice and personal opinions it is not personal financial product advice and you should not make any decision about financial products in reliance on this document or without considering your own circumstances. Life Insurance Direct Australia is one of Australia’s leading life insurance comparison websites. Although we don’t cover every insurer and every insurance product we do compare a range of major life insurance companies and offer clients comparison reports, education and assistance.
Published: November 30, 2015