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Insurance Underwriting: The process and what to expect

For many of our insurance clients it is often appropriate for us to recommend new insurance policies following our initial discovery session and development of the advice; with that comes a new application process. A significant part of that process is called underwriting, which has elements such as medical, financial, occupational and pastimes.  Many people are initially unaware of this process and the possible outcomes.

Personal insurances that insure death, disability, income protection and critical illnesses work a little differently to health insurance. It’s not simply a right to apply and be granted insurance – insurance companies that offer personal insurances have the right to assess you as a risk (to them) of making a claim, and it’s important to have a good understanding of the process and possible outcomes to avoid what could otherwise become a very frustrating process.

Think of your car insurance, when asked about ‘at fault’ accidents, or your home and contents insurance when asked about the material your home is built with, or whether you have deadlocks on all doors etc. Answers to these questions can impact the price of your insurance but not necessarily the ability to obtain the insurance.

The financial element of underwriting is to justify the types and levels of insurance one applies for. Does the person earn enough to justify the amount of income protection they want? Do they have the assets, liabilities and/or dependents to justify millions in life insurance coverage? This becomes more complicated when protecting people within a business but, financial underwriting is relatively straight forward when using insurance for personal and family protection.

A person’s occupation is considered and does impact the cost depending on the perceived risk of performing that occupation. For instance, a person doing a manual trade would pay a higher premium for income protection than somebody sitting at a desk.

Pastimes also come into play if the person takes part in activities that may make them more likely to get seriously injured. The insurer may be reluctant to insure them for those specific activities.

However, I want to focus more on the medical side of underwriting, because this is where we often run into issues with new applications and where frustration can set in if the process isn’t explained well upfront.

The application stage is the one opportunity for the insurer to assess you as risk prior to offering you insurance. A personal statement questionnaire is required which asks very detailed information regarding your health history, including some family health history. It will include past injuries, surgeries, illnesses or conditions you may have.

The answers within the personal statement will often lead to further questions being asked, whether from you, your doctor, specialist, or having you complete a medical check/blood tests to get up to date details.  

There are basically four outcomes of this process:

  1. Standard rates are offered – this basically means the insurer doesn’t consider you a higher risk to the norm, and they insure you on the standard premium rates.
  2. Loadings – this is when insurance is offered, but with a premium loading. That is, you will pay a higher than the normal rate which is usually listed as a percentage. The insurer has concluded that you present a higher risk of claim. Things that would typically lead to a loading are the likes of high cholesterol, high blood pressure, weight or a specific illness/condition you suffer from.
  3. Exclusions – an exclusion may be offered where the injury or condition is isolated or limited to a specific part of the body. It may not impact the cost – you still pay standard rates, but a part of the body or illness is excluded from the insurance. For instance, common exclusions are for back or neck pain and mental health. The insurer may decide to offer you full coverage, but not pay you for disability as a result of pre-existing conditions of the cervical spine. That is just one example.
  4. Decline – the insurer is not comfortable to offer insurance on any terms. An example of this is an individual applying for total and permanent disablement insurance, income protection or trauma insurance with diabetes type 1. Or it might be a combination of past injuries or illnesses that combined, rule the person out.

As you can appreciate, the process of obtaining all relevant or material information can take some time. Whether its appointments for blood tests, getting medical reports back from various doctors or having to have follow up tests – they can all delay the process. Patience is sometimes required, as well as cooperation in providing information that is requested.

The outcome or terms eventually offered can be frustrating. For example, when niggles we consider minor end up attracting an exclusion on the policy. We might also find the outcome a bit confronting, bringing our own health into question. But regardless of how minor we might think something is, the underwriting decisions are all based on statistical data over time. Unfortunately, obtaining these policies is not an entitlement, but more so a privilege. Part of my role is to work with insurers and underwriters to identify who we might get the best outcome with, but also to manage expectations. Sometimes there might not be a lot of choice and we need to consider what alternatives are available (for instance if there is existing insurance in place that can be utilised to some extent).

Whatever the outcome, wealth protection is an important component to your overall financial plan and if that means accepting insurance with an exclusion and/or loading, it is likely to be a better outcome then not having insurance at all.     

If you’re ready for an Insurance Health Check, I’m happy to chat.

Hewison Private Wealth is a Melbourne based independent financial planning firm. Our financial advisers are highly qualified wealth managers and specialise in self managed super funds (SMSF), financial planning, retirement planning advice and investment portfolio management. If you would like to speak to a financial adviser on how you can secure your financial future please contact us 03 8548 4800, email info@hewison.com.au or visit www.hewison.com.au

Please note: The advice provided above is general information only and individuals should seek specialised advice from a qualified financial advisor. The views in this blog are those of the individual and may not represent the general opinion of the firm. Please contact Hewison Private Wealth for more information.