The cost of excess

Are you ever mystified by the decisions made by underwriters or the extra evidence they request on what appears to be a 'clean' application form? There is perhaps an unnecessary element of mystery surrounding the underwriting process and IFAs may not be fully aware of the impact a client's social habits and lifestyle can have on an application for protection such as life assurance or critical illness (CI).

This article aims to give you an insight into the mind of an underwriter ' what they watch out for on an application form; what levels of consumption are acceptable (if at all); medical evidence that they may request and, finally, what underwriting terms they may offer. In essence, the aim is to remove the 'shock element' that many IFAs and clients experience when they receive their underwriting terms or requirements. The four main social habit/lifestyle risks are smoking, drinking, obesity and drug use.

Underwriting smokers

Each company's underwriting department will have certain tolerance levels to smoking. In general, a disclosure of one to 30 cigarettes per day is acceptable and will not lead to a request for medical evidence. Smoking more than 30 cigarettes a day will generally lead to a request for a medical exam. The exam is required so that the doctor can find out if the smoking is having an impact upon the applicant's health.

Most companies already have a smoking differential built into the cost of their products because a strong relationship exists between smoking and extra mortality/morbidity. You can therefore expect no extra premium to be charged if your client discloses smoking 30 or fewer cigarettes per day. For someone smoking more than 30 per day, but who has no adverse signs noted at the examination, an underwriter is likely to charge a small extra premium, for instance, 50% extra mortality/morbidity.

This small extra premium covers the potential problems that high, long-term smoking can bring over the term of the contract. This rating will be increased if the examination shows that the applicant's health is being affected by smoking, for example, reduced lung capacity or hardening of the arteries. If the risk is too great, the application will be declined. This may happen if the client has associated lung diseases such as emphysema or chronic obstructive airways disease.

Turning to the bottle

As with smoking, there will be certain alcohol levels that an underwriter will be happy to accept without obtaining medical evidence. Generally, an alcohol consumption of no more than six units per day will be acceptable without medical evidence. A disclosure of drinking more than six units per day may lead the underwriter to request a General Practitioner's Report (GPR), in the first instance, from the client's GP. This allows the underwriter to ask if the applicant has consulted his or her doctor about alcohol-related matters.

If the GP can provide full details of any alcohol-related problems then the underwriter will try and base a decision on this information (assuming it is up to date). However, in many cases, a GP will have no details regarding a person's alcohol consumption.

In this case, an underwriter may ask the applicant to attend an examination to assess liver function and have a blood test carried out. This allows the examiner to comment on any apparent alcohol-related problems and the liver function test will indicate to the underwriter whether the alcohol is having an impact on the liver's ability to function properly. One thing to bear in mind is that many people who do have alcohol-related problems are likely to underestimate their alcohol intake on their application form and a problem may only come to light if a report is requested from their GP for another reason.

Alcoholism is a complex illness for an underwriter to evaluate. It is difficult to assess true alcohol intake unless it is recorded in a doctor's report and this is rare. For this reason, it is not easy to give an indication of likely ratings. Having said that, if you have a client who is suffering from alcohol abuse and is drinking at the time the application is made, he or she is likely to be declined.

Alcohol abuse will have the biggest impact on an application for income protection (IP). Terms may not be offered for a period of three to five years after full recovery, after which time a substantial loading may be imposed.

The longer your client has been fully recovered, the smaller the loading will be. It is highly unlikely that your client will be accepted at ordinary rates for IP if they have a history of alcohol abuse, no matter when this occurred in their lifetime.

Life and CI cover may not be offered to someone with a history of alcoholism until they have been fully recovered for more than one year, after which they can expect a substantial loading of perhaps +200%.

Again, this loading may be smaller depending on how many years your client has been fully recovered. It may in fact reach a point where ordinary rates can be offered if a full recovery was made more than four years ago with no adverse effects whatsoever. Due to the nature of the illness and because it is a taboo subject, this is one area that clients may receive terms that they do not agree with.

Obesity predisposes people to many impairments such as cardiovascular disorders and non-insulin dependent diabetes. Ratings applied will depend upon the applicant's age, height and weight.

Ratings for CI and IP tend to be higher than those for death benefit due to associated risks such as heart disease and arthritis. For death benefit the range of height and weights acceptable at standard rates is relatively wide, since the extra mortality associated with being overweight in the absence of related risks is small.

Many life assurance companies will not ask an applicant to attend an examination until their weight justifies a rating of more than 50%.

After this, they may be asked to attend an examination to make sure they are not suffering from any associated problems such as raised blood pressure or diabetes. It also allows the underwriter to ensure that the height and weight on the examination corresponds to that disclosed on the client's application form.

In some cases, an underwriter will find that they do not correspond and the client will receive terms that can be much higher than they anticipated. In most instances, the IFA will be able to contact a life assurance company before submitting the application and get a good indication of what terms are likely to be applied.

Taking drugs

Drug use and abuse generally comes to light on a GPR or is disclosed by the applicant at an independent examination. If an underwriter does discover a history of drug use, they may ask the client to complete a drugs questionnaire.

Only rarely will an applicant be asked to attend a drug screening. A routine drugs screening is usually only carried out if the applicant works in an industry which has been linked to drug use, such as the music industry.

As with alcoholism, drug abuse is difficult for an underwriter to evaluate, mainly due to lack of information. Mortality and morbidity among drug addicts is high and as such current drug users ' generally class A, B and most class C drugs ' are generally declined any form of protection. The following terms assume that there has been no relapse and no residual impairments such as depression. An application for IP is likely to be deferred for a period of three to five years after recovery.

After this, terms might be offered, but a substantial extra premium would be charged. As with alcoholism, it is unlikely that someone with a history of drug abuse will be accepted at ordinary rates for IP.

CI cover is likely to be deferred for a period of three to five years after recovery, after which time a permanent loading could be charged. Death benefit is likely to be deferred for a period of two to three years from full recovery, after which a temporary loading may be applied for a number of years.

It is possible that someone with a history of drug abuse may be accepted at ordinary rates for both death and CI cover, but this depends upon when the drug was used, what type of drug was used and confirmation that there have been no relapse or residual impairments.

Worst case scenario

Each of these social habits and lifestyle risks have been looked at individually, but in many instances an underwriter will be presented with two or more at any one time. This means many risks that are acceptable in isolation may attract a higher loading or possibly a declinature when an underwriter looks at the overall risk.

In addition, because the effects of drugs, smoking, alcohol and obesity can manifest themselves in many different ways it is usually impossible to use exclusions.

Exclusions are generally only used where the likely cause of a claim can be clearly identified and defined. Unfortunately, this is not the case when underwriting these risks.