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JOHANNESBURG - When it comes to insurance, the pricing of your monthly premium may seem a bit mysterious. Why, for instance, is your premium different from your friend’s? The answer lies in insurance underwriting.

Long-term insurance premiums are calculated through an underlying methodology called underwriting. The underwriters use a wealth of data and predictive models to categorise clients into risk-rating groups according to their likelihood to claim. You can fall into a low-, average- or high-risk category, which will determine the premium you will pay.

Dr Marion Morkel, the chief medical officer at Sanlam, says being an underwriter is like being a tightrope walker. “Essentially, underwriters predict the likelihood and extent of a claims pay-out over a policy’s lifetime. This means constantly balancing potential losses for an insurance company with affordable prices for clients.”

While there are some factors you can control – such as your diet, smoking and drinking habits, and even your hobbies – there are others you cannot. It’s up to the underwriter to determine the probability of an event occurring to each individual client and the magnitude of the resulting loss.

Dr Morkel answers some of the most frequently asked questions about underwriting from the perspective of life and medical insurance:

What factors determine the client’s risk? 

From a life and medical insurance standpoint, we usually look at both your biosocial data and your medical data. The factors considered include:

  • Age. The younger you are, the better the risk generally, as you are considered healthier and less likely to die.
  • Gender. This depends on the benefit type, because one gender may outperform another. For example, claims statistics prove that more young men than young women are involved in motor vehicle accidents.
  • Whether or not you smoke.
  • History of chronic disorders or significant medical events.

Insurers compare the data of your individual case against the data from decades of claims experience and clinically based medicine, to predict your risk compared with the normal population.

How can I build a positive risk profile to pay lower premiums? 

This depends on the type of insurance for which you are applying. Evidence of a healthy lifestyle is always a good risk indicator. Insurers look at factors such as Body Mass Index and cholesterol levels. However, some people have chronic disorders that may affect their risk indicators. They may be under the impression that disclosing such a disorder will create an adverse risk rating. On the contrary, having evidence of a well-controlled disease is a powerful factor for improving your risk profile. Evidence would be supported by regular visits to your general practitioner, and compliance with treatment and lifestyle programmes.

What happens if I accidentally omit information about my family health history? 

It is generally accepted that not everyone will be aware of all the illnesses that have affected their family members. However, it is reasonable to expect you to be aware of significant medical disorders that impacted the longevity of family members in the past, or diseases that may be genetically linked. Not disclosing this becomes problematic when you want to claim.

The insurer will have to consider whether its initial underwriting decision would have differed had you disclosed these key facts in the first place. The outcome of this risk reassessment is based purely on the new information, and it is not punitive. There is no “stricter” or added risk rating for not declaring the history previously and therefore the outcomes could be any of the following:

  • No change in your risk rating;
  • An increased risk rating or exclusions could be added; or
  • The insurer can decline to give you cover.

Dr Morkel provides some advice for building a better risk profile:

  • The better your medical record, the lower your insurance risk.
  • Location counts – the region in which you live directly affects your premiums, in terms of your likelihood to experience crime or flooding, for example.
  • The best policy is always honesty – hiding information upfront can cost you when it’s time to claim.

- PERSONAL FINANCE ONLINE