Underwriting: What is it & how does it work?
The act of insurance underwriting is essentially an exercise in assessing the possible risk associated with providing cover for a specific event and at what cost. The underwriting process is often something that happens behind the scenes once an insurance policy application is submitted, however it is critical step in approving or denying insurance.
Why is underwriting important?
For an insurer, the underwriting process is important because it determines the level of risk regarding a potential client. For the person wanting insurance, it ensures that they're paying an appropriate premium based on the cover they want and their individual circumstances. With underwriting, individuals pay similar rates to those who have similar circumstances and levels of risk, and those assessed as having a greater chance of claiming insurance pay a higher premium.
What factors are considered in the underwriting process?
Underwriting differs between insurers, however, the consideration procedure generally includes factors such as:
- Age: As young people are less likely to make a claim, ages is a critical factor in determining premium rates. 1
- Gender: It is estimated that in 2017, there were about an average of 367 cancer diagnosis every day - and more than half of these cases are for males (54%)2. Males also have a lower life expectancy at 80.4 years, from female's 84.5 years. 3 As a result, females generally attract a lower premium when compared to males.
- Occupation: Individuals who work in a particularly hazardous industry or environment (e.g. asbestos, with or in construction) may be more likely to make an insurance claim and may therefore incur a higher premium.
- Health and Health History: How healthy is the individual? Does the individual have a history of illness/pre-existing medical conditions? Does their family? Is the individual overweight? As a result of this information how likely is it considered that they may develop an illness? Assessment usually requires the applicant to answer a range of medical history questions, and present for blood test and/or medical examinations.
- Smokers: Does the individual smoke? Smoking is one of the largest preventable causes of death and disease in Australia. A smoker can develop a wide range of health conditions like stroke, cancer, heart disease and more. 4
- Lifestyle: Does the individual participate in high risk hobbies (rock climbing, skydiving, hang gliding)? Does the individual live a fairly healthy lifestyle? Do they consume more than the recommended maximum amount of alcohol? Individuals with a high-risk lifestyle run the risk of paying a higher premium or may even be rejected for coverage.
No two situations are the same
If you fear that one or more of the above criteria may be problematic for your situation, don’t worry, underwriting is a very personal undertaking and will differ from person to person and provider to provider.
Are all insurance policies individually underwritten?
ALI Group’s LPP operates a little differently to many other life insurances and requires applicants to only answer some basic health questions. No blood tests or medical examinations are required. Instead, cover is not provided for certain conditions suffered by the insured (or in limited instances, their immediate family) before taking out their policy, and some waiting periods are applied for certain medical conditions. We also provide some types of cover (Death and Terminal Illness, Trauma and Involuntary Loss of Employment) regardless of occupation and hobbies. For more information please read our PDS and watch this short 5-minute video.
For more information about our insurance, speak to your local mortgage broker, or alternatively, request your quote today.
Loan Protection Plan is jointly issued by Hannover Life Re of Australasia Ltd ABN 37 062 395 484 (Death, Terminal Illness, Living and Accidental Injury Benefits) and QBE Insurance (Australia) Limited ABN 78 003 191 035 AFSL 239545 (Involuntary Unemployment Benefit). It is distributed by Australian Life Insurance Distribution Pty Ltd ABN 31 103 157 811 AFSG 226403 (ALI). ALI receives commission for each policy sold. Any advice provided is of a general nature only and does not take into consideration your personal objectives, financial situation or needs. You should consider the Product Disclosure Statement when deciding if this product is appropriate for you.