How do life insurance companies determine premiums based on life expectancy?
The premium rates that are payable for life insurance policies are determined by the level of risk that the applicant is perceived to carry by the insurer. Each provider will have their own set of criteria for determining premiums, which is applied throughout the underwriting process. Some general indicators that will be assessed include age, gender, smoking status, alcohol consumption and occupation. Applicants that have pre-existing medical conditions may need to undertake further medical underwriting to allow the insurer to assess the condition and determine an appropriate premium rate. The applicants' characteristics will be used in addition to the sum insured and policy features and structure to find the premium to be charged.
What is life insurance underwriting?
Each insurance company will have its own underwriting division to determine whether or not and on what basis the life company will take on the risk to cover an applicant. Life insurance underwriters work with actuaries to certify premiums based on mortality rates. The underwriter will assess each applicant based on the information that has been provided in the application form. Based on the details provided, the underwriter may require more information to be submitted through medical underwriting. At this stage the underwriter is still relying on the applicants honesty in providing correct details.
What are the consequences of the applicant lying to secure a more competitive premium?
Through applying for the their life insurance policy, the applicant is undertaking what is known as a Duty of Disclosure whereby they are required to disclose all known conditions that may influence the insurer's decision to provide the cover and on what grounds. In the event that a claim is made, the insurer will undertake the necessary investigations to ensure that no misrepresentation was made during the application stages. If it is found that the applicant was not honest in their application the policy can be rejected or the benefit reduced to an amount reflective of the insured's risk.
What types of evidence may the provider require?
- Medical questionnaires specific to conditions or other significant lifestyle indicators
- Medical examination report from a certified medical practitioner
- A report from the applicants medical attendant
- Any additional reports detailing checks and treatments of specific conditions
How do insurance companies determine life expectancy?
The numerical rating system
Insurance underwriters use a process known as the Numerical Rating System whereby applicants are given a standard mortality rate, which has been determined using statistical mortality rates. Applicants are then given either debits (unfavourable factors) or credits (favourable factors) based on extra mortality. The final mortality assessment is determined through the sum of each credit and debit. There are some circumstances where the combination of two debits will actually outweigh two debits calculated separately. This is the case for impairments that when combined present a greater risk i.e. excess weight AND high blood pressure. Based on the rate received, the underwriter may apply appropriate policy terms and conditions. It is the role of the actuary to determine appropriate premiums based on mortality rates.
What factors may be considered by insurers?
There are a number of key risk indicators that underwriters will consider in the policy application. These are details that the person will (or should) note on their policy application. Some key indicators include:
- Family History: Many conditions are considered to be hereditary and so have relevance in insurance underwriting. It is important to note that it is extremely rare for family history to be considered exclusively and an insurance underwriter will only consider it in conjunction to other impairments. In addition, a family history showing good health may be able to give the applicant policy “credits”.
- Smoking: Smoking has been inextricably linked to deaths due to ischemic heart disease, malignant neoplasm and chronic obstructive airways. An insurance underwriter may request additional medical underwriting to assess if there is any signs of circulatory or respiratory disease. Enquiries may be made for ex-smokers to find out reasons that they stopped i.e. it may have been on medical advice. Applicants that smoke will generally pay as much as double in premiums to non-smokers.
- Alcohol Consumption: An underwriter will request the applicant to undertake further medical examination if they perceive the applicant is a heavy drinker. This may be determined by physical symptoms or history indicating alcohol abuse i.e. driving convictions and accidents.
- High Blood Pressure: An underwriter will assess hypertension in terms of whether it is untreated, unresponsive to treatment or if it is malignant. In this instance an underwriter will generally require the applicant to submit further medical evidence. High blood pressure will usually be considered along other conditions when determining if the policyholder presents extra mortality.
- Heart Disease and Heart Attacks: Any submission that the applicant has suffered from heart disease or heart attack will require extensive investigation and will usually have a premium loading applied.
- Chest Pains: An underwriter will carry out investigations to assess whether the pain may stem from a developing or undetected condition.
- Lung Disorders: Extrinsic or allergic asthma that is generally found in childhood are not usually of concern to underwriters due to the low level of risk for people in later stages of life. Intrinsic or late-onset asthma is found in adults and can bring quite severe attacks. Both cases of asthma will generally require additional medical examination.
- Bronchitis: Chronic bronchitis (often associated with emphysema) may lead to the medical attendant requesting additional underwriting from the applicant.
- Chronic Indigestion: An underwriter may request further medical examination if the applicant notes that they suffer from chronic indigestion. Chronic indigestion can be mistaken for an ulcer. While an ulcer may not be cause for additional mortality an underwriter may request further medical evidence to assess if it is occurring in conjunction with other medical ailments.
- Type 1 and Type 2 Diabetes: If the applicant suffers from either Type 1 or Type 2 Diabetes an underwriter will require medical examination and a certified medical attendants report. In some cases an ECG and chest X-Ray may be required. An underwriter will assess the risk by finding out if there are any other related conditions that the applicant is suffering and by the insulin dosage and medication the applicant is required to take.
- Malignant Tumours or Cancer: An underwriter will need to assess the type of tumour and its staging. Results of checks and any treatment will be considered in addition to medical examination, attendants report and medical questionnaire. An insurance provider may offer revised terms depending on the duration since the tumour was removed.
- Hepatitis: There are various forms of hepatitis, each with varying levels of severity for applicants. If the applicant has made a full recovery from the attack they may be able to receive standard terms on their policy. Any submission by an applicant that they suffer from hepatitis will require additional medical underwriting.
- Mental Illness: It can be difficult for underwriters to assess different cases of mental illness as it may occur in many forms with various levels of severity and duration. There is a growing awareness of life insurance companies for the need to account for cases of mental illness and each company will have different criteria for assessing applicants.
It is important to note that the competitive nature of the insurance industry has seen insurers become more flexible around how applicants are classed in terms of risk and mortality. Underwriters will only request additional medical information if they believe the insured poses a significant risk and it is rare for many conditions to be considered exclusively. In fact, many insurance companies will revise the policy terms to allow cater for applicants that do present an extra level of risk.
What are life insurance mortality tables?
First developed by some of history's most renowned mathematicians including Sir Isaac Newton and Edmond Halley, mortality tables have been used by actuaries to measure the probability of death occurring within a defined period of time. Probability of death is low in the earlier stages of life and rises later in life as the chance of mortality increases. There is an interval where there is a slight rise and fall in the table to account for males aged between 20-25 that are statistically more prone to accidental death. Essentially mortality tables can provide an estimate for the rate of deaths within a defined period. Obviously, this estimation can never give a completely true representation and there will be fluctuation. Insurance companies account for this fluctuation through maintaining the solvency standard. The solvency standard is enforced by the Australian Prudential Regulation Authority and ensures that each company has enough in its statutory fund to pay for all liabilities at one time.
Use of tables to determine frequency of disablement
Actuaries have now developed tables to give an estimate of frequency of disablement. As disablement can come in many different forms, it provides more of a representation around how often a claim will be made. Calculations that use the mortality table must relate to the population of the mortality being measured, with considerations made for the average number of deaths over the past 3 years. This enables for random rises in mortality (i.e. outbreak of disease) to be accounted for. Essentially, mortality tables are used to assist actuaries in determining an appropriate premium for an intended contract of insurance. The insurer will assess each applicant and determine who it is willing to carry the risk for at a price that has been determined by the actuary.