Why do companies have different underwriting approaches?

Underwriting is how insurers decide how much you need to pay for them to insure you. It groups similar people together to ensure they all pay a fair price.

All insurers must underwrite fairly and consistently within their organisation. They cannot favour a particular individual or medical condition. Insurers can choose to differ by the amount of detail they ask, and by how they evaluate the information they receive.

Different insurers have different approaches to underwriting. Some insurers want tightly defined groups of very similar people and some insurers are happy to have quite broad groups. In practice today this means that some insurers will accept people with medical conditions like diabetes that others choose to decline cover to.

We’ll go through how this works using smoking and three entirely fictitious insurers as an example – but the same also applies to the approach for medical conditions, occupations, travel and hobbies.

The Relaxed Insurance Company does not ask any questions about whether you have smoked or not. They are happy to group smokers and non-smokers together and charge them all £20 a month and given them insurance.

The Binary Insurance Company asks one question about smoking – “have you smoked cigarettes or used any nicotine related products in the last 12 months?” If you say yes it charges you £25 a month. If you say no it charges you £18 a month.

The Detailed Insurance Company asks flowcharts full of questions about smoking. If you have smoked in the last 12 months it asks how many cigarettes you smoked, how long you have smoked for and if you have any related medical conditions. If you haven’t smoked it asks in the last 12 months it asks if you have ever smoked, and if so when and how much and how you gave up. It charges £17, £18, £20, £22, £24 or £30 depending on your answers.

The risk for Relaxed is that they only get smokers applying for their cover – and then they will not be charging enough to pay all the claims expected. The risk for Detailed is that people will choose not to complete the process at all with so much complexity. The risk for Binary is that their process isn’t as slick as Relaxed or as cheap as Detailed.

These dangers fade away where the product, underwriting and target market are in synch and the underwriting fits in with the client and adviser expectations. The risk is magnified where all companies are competing in the same space with similar products on price alone. In that situation the natural route to follow is to introduce more and more detailed underwriting to ensure that you get the healthiest part of each group.

As important as the amount of questions is what you do with the answers. The health impact of e-cigarette use is a live case study in how research and evidence can be interpreted in different ways by different insurers (as well as by different governments, doctors and newspapers!)

In these situations insurers need to seek advice from medical and sociological experts to anticipate both the medical impact and the likely trends around this now and in the future.  Insurers have to take a long term view whilst also making certain that they do not unfairly discriminate against people just because they haven’t got up to date information.

As an adviser you need to understand an insurers underwriting (as well as their products, pricing and claims approach) to ensure there are no unpleasant surprises for them or you along the IP journey.