The role of insurance underwriting

Dr Dominique Stott, Executive: Medical Standards and Services at PPS.

The purpose of life insurance is to ensure that the policyholder has peace of mind in the event of an unfortunate incident that will lead to a claim. Underwriting is the risk assessment which takes place when someone applies for an insurance policy. While many people have heard of this term or gone through the process themselves, they might not fully understand why they have to undergo this type of assessment and how the information is used.

According to Dr Dominique Stott, Executive: Medical Standards and Services at PPS, the reason why insurance companies conduct underwriting is to determine whether or not the applicant can be offered the cover they are applying for and if so, at what terms. “The purpose of the underwriting process for the insurance company, is to determine what the reasonable terms for the policyholder will be, based on the pricing model of the company.”

When it comes to long-term insurance there are two different types of underwriting, either medical or financial, says Dr Stott.

She explains that the medical underwriting process involves an assessment of the applicant’s health against the type of policy they are applying for. Different insurance benefits have different underwriting standards and assessment requirements.

When it comes to medical underwriting, current medical impairments will be weighed up against the likelihood of future claims for these pre-existing conditions. She states that the medical underwriting for life cover will have different standards to disability cover. “A person might not pass away from backache, but backache could be significantly disabling.”

If standard policy rates cannot be offered to the applicant due to a health condition, the insurer can charge loadings with an additional premium or apply policy exclusions. If the risk is too great some insurers could decline the applicant, she says. “The decline rates for most insurers are generally low as companies realise that there is a real need for all types of insurance. It is very important for an applicant to understand the meaning of an exclusion clause as these policy wordings cannot be changed once the policy has been issued.”

All information is treated confidentially by the insurer, she says. “Should information come to light that the client needs to be aware of, the insurance company will ensure this is managed by the general practitioner or other doctor, if required. This prevents a client from ignoring any serious results.”

On the other hand, the financial underwriting process is typically conducted based on the current financial status of the applicant, to either replace lost income or ensure dependants are taken care of. “Financial underwriting will look at the sum the applicant applies for, current income, as well as the reason for insurance, which will be used to establish if the requested sum assured is reasonable. The sum assured refers to the guaranteed amount the policyholder will receive following a successful claim.”

According to Dr Stott, there are limits in place for the maximum sums assured which can be taken out and there are advised limitations to the amount of cover according to the policyholder’s income or standard practice. “For example, it would not be reasonable for a person to have R40 million life cover when their salary is R30 000 per month. This is where the reasons for insurance and financial underwriting will play a critical role.”

Dr Stott explains that underwriting relies on the honesty of clients to openly disclose all their relevant information. “The principle of good faith is expected from all insurance applicants when they complete their application form. Where information is omitted, the insurer reserves the right to reassess that information later. If information was not disclosed and was critical to a specific claim, this could impact the validity of the claim and the insurer could possibly reject the claim. It is always advisable to declare as much as possible and let the underwriter decide what is required.”

“It is important that people educate themselves about underwriting and the contents of their policy document. This will ensure the insurance is used for its intended purpose – to provide cover in time of need and to prevent claim rejections.” concludes Dr Stott.