Underwriting: Back to basics

Dalene Allen, underwriting expert and co-founder of specialist long-term risk cover provider Altrisk, provides a back-to-basics overview of the underwriting process and how underwriting protects the insured and insurer against unmanageable risks.

Insurance underwriters evaluate the risk and exposures of potential clients based on the information they receive from the application as well as the results of any medical tests. The outcome of this evaluation determines whether the risk is accepted, how much cover the client should receive and how much they should pay for it.

The rationale

The underwriter’s function is to acquire business that will ensure the long-term sustainability of the fund and to ensure all clients pay an equitable premium for their cover based on their individual risk profile. Each insurance company has its own set of underwriting guidelines that assist the underwriter in assessing whether to accept the risk and at what rate.

In the underwriting process for life cover, an applicant's health status, age, occupation and hobbies are considered. If the applicant is of average age, does not smoke, has a regular job, no dangerous hobbies and no medical history, chances are they fit the criteria to be accepted without the need for extensive underwriting. For a person with existing conditions or a high-risk occupation/hobby, the application will go through the underwriting process.

The underwriter will seek further information from the applicant, the applicant's doctor or arrange for a medical examination. To manage any anti-selection, underwriters also look at the purpose of the insurance and whether the level of cover requested is justified.

The possibilities

An applicant that presents a low risk will be accepted on the standard rates. Where the underwriting process has identified that an applicant presents a genuine risk, the premium may be loaded or aspects of cover may be excluded.

A deferred application may mean that the underwriter is requesting further investigation, the outcome of which is pertinent to the underwriter making an accurate decision.

An application may be declined if the risk presented is too great, perhaps due to very poor health or an exceptionally dangerous occupation, and the underwriters cannot offer any sort of terms such as exclusions.

Same condition, different underwriting results

Brokers often grapple with the reality that different clients with the same condition receive different underwriting decisions. This is exactly where the true value of a good underwriter comes to bear.

For example, when assessing a diabetic, the underwriter will consider how long the condition has existed, how well it is controlled, and whether any organ damage, or other contributing risk factors such as obesity, smoking, cardiovascular disease, exists. The person’s mental attitude regarding the management of their condition, determined through a questionnaire, also plays a role.

Based on this information, the underwriter can make an assessment based on the applicant’s individual profile. No two diabetics are the same. One may control the diabetes well, be disciplined in medical care and check-ups, respond well to treatment and, as a result, have minimal organ damage. The second applicant may not manage their diabetes as effectively, and as a result, have significant organ damage. These two individuals will have very different underwriting outcomes and rates applied. The same applies to other conditions.

Underwriting is designed to protect the insurance company and, just as importantly, to protect individual policyholders. By applying standards fairly across all applicants, and considering each applicant’s unique conditions, effective underwriting can keep insurance costs as low as possible.