Applying for insurance – I hear you sigh!

By Risk specialist Lynda Taylor. Licensed Financial Adviser FSP 9752

Insurance really is there to provide peace of mind to you, your loved ones and possibly your business partners.  Whilst this sounds cliché, that is the purpose of implementing cover.

In applying for insurance, you are entering into a contract with the insurer – you will pay the premiums, and if one of the insurable events happens, a sum of money will be paid to you or to your estate.

Another key obligation of the one applying for cover is duty of disclosure.  The insurer needs to accurately assess the risk that you pose to them as a business.  To do this, they need to understand about your health today and any historic health issues, as well as family medical history.  Depending on the type of protection being applied for, they may also want to understand your financial position, more about the past-times you participate in, and your occupational duties.

Collecting this data is called the “underwriting process” which is a risk assessment undertaken by the insurer.  Many of our clients have been part of this process by completing medical assessments or paperwork on behalf of your patients for the insurer.

An insurer will manage observed risk with any one of the following tools or a combination of them:-

  • Declining to offer cover – for example, a client with diabetes will likely be declined income protection insurance (unless they have a long-term history of managing their health).  It is difficult in this situation to simply exclude diabetes, as claims due to the consequences of this disease can be so widespread. 
  • Offering cover but applying an exclusion based on disclosure re a specific condition, such as an ongoing lower back issue resulting in a lower back exclusion on income protection insurance.
  • Offering cover but applying a loading – this is a percentage increase in the premium.  It can range from a 50% loading up to 300%.  A loading may also be applied on a per mil basis.  For example, an additional $1.00 charged for every $1,000 of cover offered.

Some of these terms can be removed from the policy subject to disclosure or up to date tests once a certain period has lapsed since inception of the policy. As examples, a client can make a disclosure that they no longer smoke and have been non-smokers for over 12 months which will enable them to review the premium being charged.  Or perhaps a client may have sustained an injury which resulted in an exclusion of the affected area of the body.  Again, after a period being symptom and treatment free, this exclusion may be removed from the policy.

I will always seek to understand why the exclusion has been applied and look at options to get that reviewed going forwards.  There will be some conditions where the exclusion will remain for the life of the policy; for example, ongoing back pain and treatment or diagnosed auto immune diseases, or prolonged mental health issues.  If the exclusion appears to be unreasonable in that it is out of step with market, we have the option to take an application to alternate insurers.  We have agencies with all leading insurance providers.  Whilst this is time consuming, given the long-term relationship you may have with an insurer, and the cost of the cover over the life of the policy, it is a worthy exercise to ensure you get the best outcome at the time the policy is put into force ….and in the event of a future claim.

The process as an applicant can seem intrusive and frustrating.  It is important to consider the following factors:-

  1. The insurer will offer cover to their client, and they are bound  by the policy wordings for the life of the policy.  As such the underwriting process will take a long-term view of the applicant’s health.  Actuarially they will be considering the long-term health implications of the client’s current health and lifestyle.  Hence a combination of risk factors such as BMI, elevated blood pressure and a family history of heart disease may result in a loading on the policy.

As a comparison, a medical professional can make a diagnosis and treatment plan for a patient, and this can be changed and updated depending on how their patient responds.  An insurer is bound by their original offer.

  • This is a contractual obligation on the part of both parties just as if you went to the bank to borrow money to buy a home. In this situation, the bank must capture the full financial picture of the prospective client, so they understand their risk of advancing the loan.  The greater risk the client represents, the higher the interest rate that may be charged.

On a similar basis, your insurer is entering into a contract that may pay out millions of dollars in a long-term Income protection claim, or large lump sums in the event of premature death.  As such, they must accurately assess the risk.  The higher the levels of cover that you are applying for, the more involved the underwriting process. 

Having provided risk advice since 2009 and holding agencies with most of New Zealand’s leading insurers, we can ensure we get the best protection plan for each client’s circumstances.

We will do all we can to take the “sigh” out of the process!