Filling in forms, we all hate it, but one of the most vital parts of the process of setting up an insurance plan is underwriting and unfortunately this involves completing a paper or on-line application.
So what is underwriting?
In a nutshell it is the process by which an insurer establishes the risk a prospective policy holder presents to them and for some classes of insurance will also potentially affect the pricing of the new plan. As a result of the underwriting process a policy holder may receive normal rates, a loading or medical exclusion or in some cases be declined cover on medical history or current health grounds. It is worth noting that the scope and complexity of underwriting varies by class of product so for example it is easier and quicker usually to underwrite a private medical insurance (PMI) policy as compared to a multi-million pound key person business protection life cover plan.
In the following article we’ll run through some of the common myths that exist around medical underwriting for life, critical illness, income protection and private medical insurance plans.
Myth 1 – I’m never going to get cover at standard rates!
Many people (and indeed some insurance advisers) feel that a very high percentage of clients are likely to be rated (charged higher than standard rates) before their cover ever goes on risk. This might be due to poor medical history or some problem in their disclosed family medical history. In the past advisers working in the life and protection insurance sector had estimated this as being the case in around 25% of all life and protection cover applications. However, survey data last year from insurer Legal and General shows that with modern underwriting methods (including on-line and telephone underwriting) only 12% of people are rated in the final analysis.
So seven out of eight people receive standard market rating for their new life, critical illness or income protection cover.
Myth 2 – I’ll be hanging on for weeks for a decision on my cover!
In the past many people had that experience of applying for cover and it then it taking weeks to hear back from the insurer and then they might need a medical report or some other check to slow things down once more. Obviously this can be a bit of a problem if you need a mortgage policy in place for when you move house or need cover urgently for some reason. Again, the same survey from L & G shows us that now 60% of applicants receive instant acceptance with this stat increasing to over 70% of people aged 35 or under.
So two messages here. Firstly a majority of people are able to go on cover straight way and secondly (and an issue we’ve covered in our news articles before) there is an inherent advantage in looking at protection insurance sooner rather than later. Younger people tend to be in better health and will generally find underwriting simpler and tend to have less issues arising. Clearly it is never too early to review your life and protection cover.
Myth 3 – I will automatically need a medical!
Many people assume that when applying for life cover or medical insurance they are automatically going to be asked to go for a medical with a doctor or at least some kind or medical report will be required. This is not necessarily the case at all, assuming you are in reasonable health it is often possible to apply for life cover or critical illness without requiring any medical evidence. For example one insurer we looked at would not automatically need any medical evidence up up to a sum assured of £ 500,000 for applicants aged 45 and under and even a 60 year old could apply for up to £ 200,000 cover with no automatic medical or report.
These limits will vary by insurer and of course by what information goes onto the health declaration of your form but for many people cover is easy and convenient to put in place.
For private medical insurance, a medical examination is never required.
Myth 4 – I’ll have lots of exclusions on my PMI policy
Let’s start off by understanding that private medical insurance underwriting is fundamentally different to its life and protection insurance equivalents. Regardless of who you are and what medical conditions you might have at the time of application for a new policy you will not be rated nor will you be declined cover. What medical insurers do is seek to exclude pre-existing risks. This means that you will be accepted on normal rates for your age but that you will not be covered for any claims resulting from a pre-existing condition (subject to some exceptions like accidents or child hood ailments, coughs and colds etc).
So whilst it is true that a fully underwritten medical insurance plan would exclude previous medical problems declared on an underwritten application there is an alternative called the ‘Moratorium’ underwriting method. This method involves no health declaration but rather the insurer puts in place a blanket exclusion on any condition suffered in the last five years. New conditions would be covered automatically. Then over time (usually two years) excluded problems can come back into cover permanently if they are asymptomatic with no treatment, medical consultations and repeat prescriptions etc. The beauty of the moratorium methodology is that there is an automatic mechanism for conditions that do not re-occur to come back into cover meaning that over time a policy holder can end up with no exclusions at all assuming any old medical problems remain in abeyance.
Importantly, both full medical underwriting and the moratorium are usually priced at the same level so an adviser like myself will usually discuss which method suits which clients.
As a last note on PMI underwriting, the above applies to new policies. There is also a different underwriting methodology for people who want to move existing policies between different insurers – this is a more complex area and something we will cover in a future article.
Fact or Fiction?
Hopefully the truth about insurance underwriting is actually far more positive than the myths. Application forms can be long and complicated but underwriting is an essential tool for insurers to protect themselves against adverse risk and ultimately effective underwriting helps to keep pricing stable for all current and future policy holders moving forwards.
If you are thinking about new life cover, critical illness, income protection, business protection or private medical insurance please feel free to contact Premier Choice Healthcare and we’ll find the right plan and importantly of course right underwriting for you.