When it comes to an individual’s formal insurance application, an insurer’s underwriter will assess if there are any identifiable risks in the individual’s circumstances as it relates to their underwriting guidelines.

Please note: In terms of the individual’s circumstances and identifiable risks, this can encompass the individual’s occupational duties, pursuits and pastimes, current health, and medical history (including family history).

When considering the assessment of risk, one way to look at it—from the underwriter (and underwriting guidelines) perspective—can be via the risk probability/impact matrix. The matrix consists of two main parts:

• Probability. Referring to the likelihood of a risk occurring (eg from rare to very likely).
• Impact. Referring to the consequence severity connected to a risk occurring (eg from trivial to extreme).

Upon assessment of the probability and impact of an identifiable risk, the risk is assigned a grade (eg low to high). The below table provides some context as to what the matrix can look like.

With regard to risk management, a low-grade risk is often disregarded (retained). Whereas, a moderate- to high-grade risk is often deemed actionable—in the form of risk reduction or avoidance.

In terms of an individual’s formal insurance application, in certain instances, an underwriter may assess the need to take risk reduction or avoidance action in relation to the individual’s circumstances—this can entail the individual being issued with revised terms.

The revised terms can be a loading, an exclusion or in some instances a restriction/modification* or decline to offer the insurance cover. Sometimes, there can be several loadings or exclusions applied. However, there can be a cut-off threshold in this regard (ie at a certain point, the insurer may decline to offer cover due to the overall risk being too high for the insurer).

*A restriction/modification can entail, for example, the application of a stricter disability claim definition (eg general duties as opposed to any or own occupation) on total and permanent disability insurance cover than what is being sought by the individual.

The implications of a loading or an exclusion being applied generally means the following:

• A percentage, or dollar-based loading, is added to the standard premium rates for the cover.
• A specific circumstance is excluded from being used as a claimable event on the cover.

Common examples of loading applications often include where an individual is a smoker or has a body mass index (BMI) that sits outside of certain set parameters.

However, in certain situations, loadings (and sometimes exclusions) can be removed after the individual has accepted the revised terms and the cover has commenced.

For example, in the case of smoking, if an individual gives up smoking (for more than 12 months after the cover has commenced), they can request an adjustment to their premiums to reflect a non-smoker status.

In terms of exclusions, there can be specific exclusions applied. Common examples of its application can include where an individual has a pre-existing medical condition or participates in a dangerous pastime.

In addition to specific exclusions, many insurance offerings can also have general exclusions, which are applied across the board for cover (ie not due to an individual’s specific circumstances).

For example, when considering income protection insurance cover, depending on the insurer and their insurance offering, the following general industry standard exclusions, may apply:

• Disablement arising from intentional self-inflicted injury, war or an act of war, normal and uncomplicated pregnancy, elective surgery or donor organ transplant surgery (within six months of cover commencement or reinstatement date), and participation in criminal activity or resulting from incarceration.

Other general ‘non-industry standard’ exclusions that may or may not apply can include, for example:

• Disablement arising from drug or alcohol abuse, terrorism, travel to a country with a ‘Do Not Travel’ warning, pandemic illness, and serving in armed forces.

Moving forward

With the above in mind, it’s key to understand that while insurers can have similar insurance offerings to one another, their underwriter’s assessment of an individual’s formal insurance application can sometimes differ*.

*Differences can arise because each insurer has their own specific and distinct underwriting guidelines.

For example, one insurer’s underwriter may assess an individual’s circumstances as a medium-to-high risk. Whereas, another may assess these same circumstances as a low-to-medium risk. The potential outcomes of this could mean the former applies revised terms, while the latter may not.

Notably, these differences can be important to consider in terms of which insurer (and their offering) may be appropriate for you. Therefore, prior to submitting a formal insurance application, it may help to complete a pre-assessment.

Lastly, in instances where revised terms—such as loadings or exclusions—are issued as part of a formal insurance application, it’s important to understand the reasons behind this and its implications for the cover.

If you have any queries about this article, please contact us.