From statistical and actuarial information, a life company will know that for a risk group, a certain number of people are expected to die each year. If this is higher than for the general population, the risk group is said to have higher or extra mortality.
The extra mortality is an additional risk to the life company as the possibility of an early claim is too high. A loading or exclusion will, therefore, be added to people from that risk group.
There are three possible outcomes to the underwriting process:
In most cases, proposals for risk insurance are accepted at standard rates.
The quoted rates and exclusions need to be refined in which case a counter offer letter is issued.
The proposal may be declined, or a deferred decision may be given.
Counter Offer Letters
A letter is issued to the applicant stating that there either needs to be a loading in the rates which were quoted, or that exclusions may need to be added to the contract. The process is fully transparent, and the applicant is made fully aware of the revised terms. It is then up to the applicant to accept or decline risk cover under the revised terms.
The non-standard (high risk) applicant has a right to ask for the terms offered to be reviewed. However, any additional assessment required will have to be paid for by the applicant. The non-standard applicant may also accept the revised terms and premiums and may ask these to be reassessed later.
A loading can be thought of as an additional premium which is required to cover the additional risk (extra mortality). This may be preferable to not being covered at all. For example, ordinary rates offer a premium of R 100 per month for a given level of cover. Underwriting on a high-risk applicant indicates that an extra premium (loading) of 1.5 is required to cover additional risk, such as smoking. The high-risk life would have to pay an additional R150 per month (R250 in total) for the requested risk cover.
Loadings can be categorized according to the following types of additional risk:
- Avocation (i.e. hazardous pursuits or hobbies)
In some cases, it is not possible to cover the additional risk, in which case specific exclusions may be added. This is often based on the type of benefit. Where, for example, an applicant requests life cover, but has a history of severe depression, suicide may be excluded. If the application is for disability cover, but the applicant suffers from severe back problems it may be excluded and claims resulting from back problems will not be paid.